Editor’s note: Art Woolf recently retired as an associate professor of economics at the University of Vermont. He served for three years as state economist for Gov. Madeleine Kunin beginning in 1988.
[H]ow’s the state economy doing? Pretty well, according to a variety of sources. The state just released its end-of-fiscal year revenue numbers, and Vermont’s general fund revenues exceeded expectations by nearly $60 million and came in about 7% above last year’s tally.
Most of that $60 million was due to better than expected revenues from the corporate and personal income taxes. Corporate income taxes are notoriously hard to predict, and most come from the fortunes of a handful of large businesses.
Healthy personal income tax revenues mean Vermonters’ incomes grew nicely, but that revenue growth is probably also due to the 2017 federal income tax changes that reduced the ability of high-income taxpayers to deduct state and local tax payments from their federal income taxes. That means they paid more in federal and state taxes than they otherwise would have. Good news in the short run, but it also gives high income taxpayers a good reason to move to states with lower property taxes and lower, or no, state income taxes. Like Florida or New Hampshire.
We don’t really know how much of the higher income tax revenues are due to the tax law changes or from higher income growth. At any rate, state personal income tax collections were up more than 5%. And the personal income tax raises nearly $900 million for the state, almost two-thirds of all general fund revenues.
A good chunk of that revenue growth is probably due to Vermonters’ income growth. Unemployment remains at a record low, just over 2%, and although employment growth is weak, wages have been growing at a healthy rate of more than 3%.
Combine a low unemployment rate where just about anyone who can breathe can get a job, with healthy wage growth and good income growth and we should find that Vermonters are spending money. And they are.
We don’t track total spending by Vermonters, but the sales and use tax measures how much we (and tourists and businesses) spend on taxable items. That was up 3.7% from last year. And we, and tourists, are also spending money eating out and staying in hotels. The meals and rooms tax was up a healthy 5.1% compared to last year.
We are also feeling good enough to spend more money on wine, beer and liquor, which no doubt makes us feel even better. The liquor and wine tax was up 8.1% and 6.9% for the beer tax. We don’t see those taxes because they are embedded in the price. But we also pay Vermont’s 6% sales tax on top of those gallonage taxes when we buy beer or wine at a store, and the 10% tax on alcohol in bars and restaurants. So we’re actually taxed twice when we buy alcoholic beverages, it’s just that one is more visible than the other.
State revenues tell us that the economy is doing well. Most people, including legislators and policymakers, are more concerned about balancing the state’s books. They are, sort of, as long as you ignore promises and commitments policymakers have made.
In a broader, and more realistic view, Vermont’s revenues are not sufficient to pay for our current and future expenses. We are, for example, required by the U.S. Environmental Protection Agency to spend about $2 billion over the next 20 years to clean up Lake Champlain. That’s $100 million per year.
Another: The state has promised teachers and state employees pension and health care benefits when they retire but those promises are not fully funded. It will cost another $100 million annually to adequately fund those promises.
So fiscal year 2019’s books were officially balanced, and the state will probably announce a $50 million-$60 million surplus. But when we add in the expenditures we need to make to fulfill the promises we’ve made to state and local employees and to meet the EPA requirements, fiscal year 2019 came up at least $200 million short.
Instead of worrying, maybe I’ll just have another glass of wine.
