Editor’s note: Jon Margolis is VTDigger’s political columnist.
[H]ere’s a cure for Vermont’s fiscal woes: the state just has to persuade its citizens to drive more, so that they buy more gas, and also convince them to smoke more cigarettes.
Vermonters are simply not buying enough gasoline and cigarettes. That’s why revenue from those taxes is hardly growing at all, noted Stephen Klein, the head of the Legislature’s Joint Fiscal Office.
Well, OK, maybe encouraging more driving and smoking is not the wisest policy. But the slow growth in those revenue sources helps illustrate an interesting, potentially significant, and little-noticed reality about the state’s fiscal dilemma. What ails Vermont is that state spending is growing faster than state income (mostly, though not entirely, tax revenue).
It is not, according to a recent study by the Joint Fiscal Office, that state spending is growing faster than the state’s economy.
It isn’t, according to this study, which shows that for most of the last decade “all state appropriations” have risen at either about the same percentage as the state’s economic and income growth, or slightly less.
The study, “Annual Vermont State Appropriations compared to 1) Vermont Gross Domestic Product, 2) Personal Income, and 3) In-state Adjusted Gross Income,” is available on the JFO web site.
The study found that state appropriations did rise faster than the state’s economy from Fiscal Year 2012 to Fiscal Year 2014 (the Vermont Fiscal year begins July 1), in part because the state’s GDP actually fell from FY 2012 to FY 2013, and rose only modestly the following year.
But since FY 2014, GDP has grown faster than all state appropriations, the study found. Its totals for FY 2016 and 2017 are estimates because FY 2017 is less than half over, and not all the 2016 data have been compiled.
One page of the study is a line graph measuring all state appropriations as a percentage of GDP, personal income, and Adjusted Gross Income (AGI) from FY 2007 to the present. All three lines are relatively flat. State spending was slightly less than 12 percent of GDP in FY 2007, dipped from 2010 through 2012, then returned to just about where it had been in FY 2007. The share of personal income followed almost exactly the same course. State spending was slightly less than 18 percent of Vermont AGI in FY 2007. It rose from FY 2009 through FY 2012, then began dipping, ending up at just under 18 percent of AGI.
The distinction between growth in the overall economy and growth in state revenues is often ignored, or perhaps just not noticed. A central theme of Lt. Gov. Phil Scott’s campaign for governor, for instance, is his pledge that he “will not allow the state budget to grow more than wages or the economy did in the previous year.”
But the budget has not been growing faster than wages or the economy. For many reasons, it has been growing faster than tax revenue, and the relative decline in cigarette and gas tax revenue help explain why.
Revenue sources are static. The Legislature sets a tax rate and then goes home.
People and societies are not static. They are constantly changing. Folks these days drive and smoke less.
They don’t buy less, but they aren’t buying the same way. Klein said the state’s two major revenue sources are the income tax and the sales tax. Income tax revenue is growing at a healthy rate, he said, while sales tax revenue merely creeps up.
Rep. Mitzi Johnson, the South Hero Democrat who chairs the Appropriations Committee, said consumption patterns have shifted, with more money being spent on services which are not subject to the sales tax, less on goods which are taxed. That could explain why sales tax receipts have lagged even as the economy grows. Some of that money people used to spend on taxed gasoline and cigarettes perhaps has been diverted to untaxed streaming services for more TV bingeing.
House Speaker Shap Smith said he thought that “the way income is realized does not always track the growth rate of the economy The nature of income may be changing. Is it wages, or is it capital gains (which are taxed at a lower rate)?
One official who has not confused economic growth with revenue growth is House Minority Leader Don Turner, a Milton Republican. Turner called the JFO data “helpful,” but said, “I stand by what I’ve been saying” in arguing that state spending should be restrained.
“Spending is exceeding revenue,” he said, noting that a $60 million to $70 million budget gap looms for the next fiscal year. “This is the cycle we’re in and we can’t continue to do it. Vermont can’t continue to do the same things year after year.”
Turner is obviously correct when he says spending is going up faster than state revenues. Otherwise, the Legislature would not have had to raise taxes and fees – by more than $95 million over the last two years, Turner said – to balance the budget.
Not all Republicans – witness Phil Scott’s campaign pledge – have been as scrupulous as Turner in maintaining the distinction between revenue growth and economic growth. Over the years, some Republican lawmakers and candidates have claimed that the budget was growing faster than the economy. The new JFO study indicates that this is not the case.
Shap Smith said he rarely tried to refute those Republican claims because “there are so many numbers, and you can cherry pick whatever numbers you want. So you start to have those kinds of arguments, and it’s just noise.”
Mitzi Johnson said she did sometimes try to object to what she called the Republican habit of “not letting facts stand in their way of an interesting sound bite.”
Johnson said “I have talked about getting state spending down to be in line with (the economic growth rate) for years. We have worked resolutely hard to bring down spending.”
The legislature did resist several of Shumlin’s spending (and taxing) proposals, and reduced the projected growth rate of several programs to “bring down spending.”
That doesn’t mean spending came down. Spending went up. But according to the data in the JFO study, it went up no faster than Vermont’s economy or Vermonters’ incomes.
According to Turner, the state has four choices: reduce spending, increase taxes, get the economy to grow faster, or “re-allocate” its obligations and its spending.
It can and perhaps should do some or all of that, though nobody really knows how to get the economy to grow faster, and what with the need for more spending on combatting opiate addiction and providing mental health services, budget cuts present a formidable challenge.
But the state could also try to make its tax structure more relevant to the way the world actually works, basing it on the economic activity of today rather than on how people spent money 20 years ago. The result would not be higher tax rates. It might be lower rates over a broader base.
Or the state could just get people to buy more gas and cigarettes.