State News
July 26, 2017

Lawmakers consider cuts after $28.8 million revenue downgrade

By Anne Galloway and Erin Mansfield, VTDigger

Economists told lawmakers on Friday, July 21, that revenue for the state’s base operating budget will come in $28.8 million lower than expected this fiscal year.

Tom Kavet, the economist for the Vermont Legislature, and Jeffrey Carr, the economist for the Scott administration, downgraded fiscal year 2018 revenue to the general fund, which is used for miscellaneous expenditures including health care, human services, and running state government.

About $16.3 million of the downgrade is the result of anticipated refunds that the state needs to issue on corporate income taxes starting in October.

Additionally, Kavet told lawmakers to expect fiscal year 2018 tax revenue that goes to the transportation fund, which funds roads, to go down by $3.5 million. Education fund revenues for public schools are expected to go down by $2.2 million.

Kavet said the continuing series of revenue downgrades over the past several years has been caused by a softening in corporate and personal income taxes, which have been volatile. The tax base is not growing as quickly as the state needs revenue, he said.

Growth has been occurring, Kavet said, but “the growth isn’t as fast as has been expected.”

“We’re not seeing a decline, a downturn in the economy,” Kavet said. “It’s just that the rate of growth has not been as fast as anticipated.”

Economic growth was anticipated to pick up as a result of “Trump bump,” Kavet and Carr said, but lower tax rates and increased spending on roads and other infrastructure, promised by the president have not materialized. Meanwhile, other factors, including uncertainty about immigration policies that would affect millions of low-wage workers.

The Trump administration’s “lack of clarity” on key policies, such as international trade, reform of Obamacare and tax policy, have had a “negative” impact on the economy, Kavet said.

Still, the two state economists said an anticipated recession has been moved out to 2021, according to forecasts from Moody’s. If growth continues through fiscal year 2019, the economic expansion period will be the longest in history, albeit at a much smaller rate of growth than the booms of the 1990s and the 1960s.

Since 2010, Vermont has experienced low unemployment rates and just this year has finally recovered real estate values. Chittenden County market values are now 6.1 percent above the peak sales rates in 2008; meanwhile housing prices in other parts of the state have stagnated. Another factor? Skier visits in Vermont have peaked over the past few years, while the rest of New England ski areas have struggled.

In the meantime, the economy will continue to experience slower growth. State receipts have grown by about 2 percent a year since the recovery from the Great Recession began.

State spending, meanwhile, has continue to increase. The Scott administration and the Vermont Legislature attempted to bend the curve in the current budget and it appears that belt-tightening exercise will need to continue for some time to come.

The $28.8 million downgrade this year is part of an ongoing prediction of lower tax receipts in fiscal year 2019, as well.

Adam Greshin, the commissioner of the Department of Finance and Management, said the state would likely be able to make up the difference for the $16.3 million in corporate income tax refunds through one-time money available through other sources. The remaining $12.5 million will be made up in rescissions, or cuts, to the current year’s budget, he said.

State budget reductions are worrying to lawmakers, especially with expected federal cuts on the horizon.

“That really concerns me as we look to the future,” said Sen. Dick Sears, D-Bennington. “I think it only points to the difficulty we’re facing ahead if and when federal budget cuts come.”

Rep. Janet Ancel, D-Calais and chair of the House Ways and Means Committee, said quick action may make cuts less painful. “When we’re making cuts in ongoing programs, the sooner you cut, the less you have to cut,” she said.

The committee will meet Aug. 17 with the Department of Finance and Management to discuss long-term cuts, called rescissions, to the already-approved budget. The committee will then hold a public hearing on the issue on Aug. 18.

Revenues were almost exactly on target for fiscal year 2017, which ended June 30, according to Kavet. The state’s general fund ended with a $10.4 million surplus, which will be put into a reserve fund. Kavet said the projections for fiscal year 2017 were the closest they have been in 20 years.

Greshin said half of the surplus will be used to make up the corporate refund payout and the remainder will be held in reserve for the budget adjustment process, which begins in December.

The Scott administration also plans to use surpluses in several special funds to help fill the budget hole, including pharmacy rebates and the hazardous material fund. A new office supply contract with W.B. Mason will result in $1 million worth of savings, Greshin said. In addition, $1 million of unencumbered funding for the Vermont Housing and Conservation Board will be transferred to the General Fund.Gov. Phil Scott said the plan is a “good move” that will head off deficit spending.

Medicaid caseloads have stabilized and spending has been below the previous year’s levels, largely because the state has resumed eligibility testing.

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