Vermont’s revenues are in boom times, state economists announced Tuesday, as public coffers are buoyed by what economic adviser Jeff Carr called “epic, unprecedented, off-the-charts” federal money — for now.
Those same economists predicted the state’s general fund revenues will drop nearly 9% in the fiscal year that begins July 1, a drop that would outpace even the 2009 downturn during the Great Recession.
The 9% decrease, which excludes health care revenues, is “without the assumption of a full-blown recession,” and assumes the Federal Reserve can achieve a “soft landing” for the national economy, Tom Kavet, the Legislature’s economist, told the panel of officials who typically meet twice a year to receive the state’s fiscal forecasts. The group, known as the Vermont Emergency Board, is composed of Gov. Phil Scott and the four legislators who chair the Vermont House and Senate budget and tax committees.
While the projected decrease is striking, it’s also expected, board members noted. Any reduction in revenues is a decrease “from a very high point,” said House Appropriations Chair Diane Lanpher, D-Vergennes — “artificially high” even, due to the windfall of federal money during the Covid-19 pandemic. The downturn during the Great Recession was different, Lanpher noted, as it was a reduction from normal, base-level spending.
Federal Covid relief money over the past couple of years has delivered about $10 billion to Vermont, roughly $16,200 per Vemonter, according to the Joint Fiscal Office.
Even with a 9% drop in revenue in 2024, the general fund would still rake in far more than past projections in net dollars, Kavet said. Economists have dialed up the FY24 prediction by $37 million since their last forecast, published in July 2022.
The state’s general fund, its largest pool of state tax dollars, is expected to bring in $120 million more this fiscal year than last projected. Economists expect the education fund will bring in an additional $29 million more this fiscal year, compared to July’s prediction.
But inflation complicates the good news, Kavet warned, especially in the years ahead. While there are more dollars, those dollars now buy “15 to 30 percent less,” he said.
“Every line item in the budget is going to be stressed in the coming years,” Kavet said.
Tuesday’s fiscal forecast describes inflation as a double-edged sword: Higher incomes and higher prices mean the state’s cut from payroll and sales taxes also went up, growing the general fund. But the state’s expenses also increased, whether through higher wages for public employees or higher construction costs for housing, roads or bridges.
Economists emphasized that a lot remains unknown, especially as the Fed attempts to rein in inflation.
“I wish I could tell you what happened the last time the feds rained $10 billion down on the Vermont economy,” said Jeff Carr, president and senior economist at Economic & Policy Resources, the firm that assists the Scott administration with economic forecasts.
After Tuesday’s meeting, Scott expressed confidence that Vermont’s economy and strong labor market could weather a national recession, especially with the buffer from federal funding.
“There’s no playbook on this incredible growth in revenue,” Scott told VTDigger. “But I think the point was well made that this is one-time revenue. This isn’t sustainable.”
Scott restated his oft-repeated argument that one-time federal money must go toward one-time expenditures.
Carr and Kavet presented other notable data points during Tuesday’s board meeting. For one, first-time tax filers in Vermont have not noticeably increased in number over the pandemic, but their incomes have dramatically increased, nearly doubling since 2019. First-time filers don’t necessarily mean new residents, but they do indicate new income that is taxable by the state.
Vermont’s labor market remains strong, with unemployment at 2.5%. Vermont’s unemployment rate remains the fifth-lowest in the United States, and the lowest among New England states, according to Tuesday’s report.
Construction spending in Vermont has also reached a record high, the economists reported. New construction from November 2021 to November 2022 totaled more than $1.3 billion. Construction of new single-family homes slowed significantly, dropping about 24%, but new apartment construction grew by the same percentage and made up for that decrease.
Sarah Mearhoff contributed reporting.