[T]he panel that sets Vermont’s official economic forecasts moved Monday to increase the state’s projected tax revenue by $56 million over the next two years.
Vermont’s Emergency Board, which is made up of the governor and the chairs of the Legislature’s budget and tax committees, accepted the forecast put forth by state economists who anticipate that the U.S. economy will see slower, but continued growth in the coming years.
The economists’ forecast Monday marked a departure from their projections in January, when they believed Vermont’s revenue growth would soon halt. They said that as soon as fiscal year 2021, the nation’s long period of economic recovery and growth could start to reverse.
But those economists said Monday they no longer believe a downturn is imminent.
A report presented by Jeffrey Carr, the Scott administration’s economist, predicts “current national and State economic upturns will continue,” adding it is “difficult to include a forecast of a recession over the next 24 months.”
Carr said that’s largely because of changing policy at the Federal Reserve. In 2017 and 2018, the Fed hiked interest rates on seven occasions, which worried economists. The Fed raises interest rates to slow economic growth to sustainable levels and prevent inflation.
Tom Kavet, the Legislature’s economist, has said that the “primary recessionary threat” stems from “excessive Federal Reserve monetary tightening.”
However, this year, the Fed reversed its pattern of frequent rate hikes — which drew the ire of President Donald Trump — and is now poised to cut rates for the first time since the recession in 2008.
“It’s more positive than it was in January and it’s largely because of that Fed move,” Kavet said of Vermont’s latest revenue projections in an interview Monday.
“It’s not earthshaking, but it’s good news. The economic externals are positive. The economy’s humming along, we’re getting more revenue from that.”
In response to the economists’ recommendation, the E-Board hiked revenue projections for fiscal year 2020 by $20.3 million and fiscal year 2021 by $26.4 million.
At the end of the 2019 fiscal year, which concluded on July 1, officials determined the state had brought in tax revenue that was about $50 million above the target set by the E-Board in January.
Personal income tax revenue alone was up by about $50 million. In a report written by Kavet, he estimates that the revenue likely stems from income growth of those in Vermont’s highest tax brackets.
Kavet and Carr told the E-Board that increased capital gains, as well as transactions involving real estate, businesses, and other assets, may have driven the revenue boost.
Corporate taxes were also up by about $11.7 million, which the economists attribute to the continuing trend of repatriation: companies bringing funds held overseas back to the U.S. and paying a tax on that transfer.
The federal tax law passed in December of 2017 temporarily offers a lower tax rate for corporations moving their money back home. States receive a portion of the repatriation dollars.
The large increases in corporate and personal income taxes offset some revenue losses. The estate tax for example, brought in $6.4 million less than economists had expected.
While economists softened their warnings of a recession on Monday, they said it is still likely that what has become the longest period of economic recovery in U.S. history is bound to be followed by some cyclical downturn.
“It is likewise is no longer likely that the U.S. economy and the Vermont economy will proceed completely through the next five State fiscal years without experiencing at least some economic difficulties—if not an outright period of economic recession,” Carr’s report stated.
After Monday’s E-Board meeting, Gov. Phil Scott told reporters he was glad to hear that economists didn’t believe a downturn would strike in the next two years.
“Having them soften in some respects to say that we don’t see that in the next couple years is a relief in some ways,” Scott said.
“But at the same time, we have to prepare,” he added. “We never know what’s going to happen next.”
