From top left, Economist Jeff Carr, Senator Ann Cummings, Economist Tom Kavet, Representative Janet Ancel, Senator Jane Kitchel, Governor Phil Scott, and Representative Kitty Toll. Screen grab.
by Timothy McQuiston, Vermont Business Magazine The good news as far as state tax revenues are concerned is that the strong 2019 economy coupled with tax changes resulted in a windfall of revenues. The bad news is nearly everything else going forward. The three major funds (General, Transportation and Education) are expected to generate about $274.5 million less (-11.2 percent) than anticipated.
Economists Jeff Carr on behalf of the Scott Administration and Tom Kavet on behalf of the Legislature presented their updated, consensus state revenue projections to the Emergency Board Wednesday afternoon via Zoom.
For those looking for some silver lining, they expect modest population growth and a noticeable increase in home prices, as out-of-staters don’t exactly zoom to Vermont but at least social distance themselves here to some degree permanently.
The good news for state revenues was presented by Finance Commissioner Adam Greshin, who said -- sticking with the meteorological theme – that the FY20 personal income tax revenues are letting the state enter the FY21 budget process with “the wind at our backs” given the unexpected level of payments that came in by the end June.
While Governor Scott lamented as to “what could have been” record revenues, Greshin pointed out that the state’s significant surplus heading into the new fiscal year is about $130 million.
Greshin said this was aided by a carry-forward of $60 million of unspent funds, which was about three times what the state otherwise might expect. The state spent less on everything from state parks being closed to travel being limited.
Greshin also mentioned that the state took early action during the pandemic with a budget adjustment that raised $84 million to help offset losses.
The revenue impacts of the current forecast relative to January 2020 forecasts is usually updated in July. But because of the pandemic and the institution of a “skinny” first quarter budget, the economists were instructed by state leaders to take an extra month. The E-Board is comprised of the governor and the heads of the four “money” committees in the Legislature.
Carr said that even with the extra month, “There is no less uncertainty.”
The economists stated that while revenue expectations are slightly higher than prior June estimates, the potential losses remain massive: About $182.4 million in the General Fund in FY21 and $100 million in FY22, about $29.3 million in the Transportation Fund in FY21 and $15 million in FY22, and Education Fund losses of about $62.7 million in FY21 and $40 million in FY22.
There are about 40,000 Vermonters still receiving unemployment insurance.
And the COVID-19 pandemic (the disease caused by the SARS-CoV-2 virus) creates both health and economic uncertainty.
Although Russia announced a vaccine yesterday and “warp speed” development efforts are under way in many countries, there is still no firm date that a safe, fully-tested vaccine may be widely available.
Viral uncertainty represents the largest single risk to the forecasts herein. Given its central link to economic conditions, Kavet said, "We are constantly tracking the best available information about the virus and the COVID-19 disease it engenders with State officials and other experts and linking this information to potential economic and revenue impacts as we learn more."
Vermont has arguably done better than any other state in the nation in controlling the disease to date. Following a brief initial surge in cases coincident with a regional New York and New England outbreak, new confirmed infections, hospitalizations and deaths per capita are now all the lowest or among the lowest in the nation.
This is attributable in part to the exceptional social compliance with the state shutdown directives, as measured by mobility data during the period from late March through early May and acceptance of science-based guidance from State leadership. Unlike many other states, the measured reopening of the economy in Vermont has not caused a rise in any of the critical COVID metrics to date.
This good fortune has prompted many second homeowners to “socially distance” in Vermont since March and some to stay as “residents” – at least for the time being. It has also caused a surge in real estate sales from out-of-state buyers seeking a safe haven from more urban areas in which socially distancing is more difficult. This will add to the steadily strengthening residential real estate market in Vermont – and related property transfer tax revenues, as well as personal income and other tax revenues from both residents and non-residents working from Vermont.
The state’s stellar health status, however, is highly vulnerable, given the increasing regional flows of people and business across state lines.
With schools and colleges reopening, tourism attempting a gradual resumption of commerce and the perceived safety of vehicular over air travel, there will be increasing inter-state flows and our health statistics are likely to more closely resemble the region at some point in the future. It would only take a few outbreaks to completely change this positive narrative and with the amplification of the national press, cast the state in a very different light.
Until there is a widely available vaccine, it is likely that there will need to be varying containment measures taken at selected geographic levels within the State as new outbreaks occur. This, in turn, could affect economic activity across a wide range of sectors.
The economists fear “the dreaded double-dip recession” if health and therefore economic conditions do not improve.
Vermont, and every state, is in need of federal funding to shore up state and local government budgets.
Federal Fiscal and Monetary Policy Issues
Federal fiscal and monetary policy have responded with extraordinary speed and magnitude in attempting to offset the negative economic and health impacts the virus has precipitated. More than $4 trillion in federal spending (and more, depending upon how some Federal Reserve actions are quantified) has been unleashed, with a share disproportionate to our population landing in Vermont.
With about $1.2B in PPP aid, $1.25B in CARES Act funding, more than $625M in supplemental unemployment assistance, and about half a billion in direct cash payments, the State has experienced its largest inflow of federal transfer payments ever. The effects of this have been myriad and are still playing out, but include critical basic needs income for those unemployed, much higher savings rates, diminished credit card debt and defaults, increased spending on motor vehicles, home improvements, electronics and internet connectivity, internet-based vendors of all kinds, and grocery store purchases (both taxable and otherwise).
While the unemployment benefits and significant portions of the CARES Act aid were clearly targeted to those most in need, the PPP funds and direct cash payments were not – with a low bar to qualify for PPP funds and none for direct cash payments. This resulted in many businesses most in need (especially in the restaurant, retail and lodging sectors) not receiving PPP funds and others qualifying despite being minimally impacted.
The beneficial impacts from these programs will linger in some sectors, but will dissipate quickly among those most in need. Accordingly, there have been measures offered in Congress regarding further funding since mid-May, but nothing enacted. With an election looming in November and prior congressional compromises on this issue, most expected agreement on a new round of funding prior to the expiration of the supplemental unemployment insurance payments on July 31. Instead, much less impactful Presidential executive orders were issued and congressional agreement on additional funding is now in question. Without significant further federal action, a second recessionary decline is probable.
The uncertainty surrounding future federal fiscal policy – including who is elected President in November - is another critical component of the uncertainty in the economic and revenue forecasts herein.
• Changes in total revenue by fund groupings and year between the current August 2020 forecast and the prior January 2020 forecast are outlined below. Every major revenue category is at risk for substantial decline in FY21 and FY22 relative to prior forecasts, due to pandemic-related impacts. Across all three major funds, FY21 losses could approach $275M and about $160M in FY22.
• Personal Income tax revenue had a stellar year in FY20, benefitting from several enormous tax events and a strong economy in tax year 2019. Deferred filings recorded in July exceeded all expectations and closed the year about $30 million above target. This strength, however, is backward looking, with tax year 2020 likely to generate significantly less taxable income. FY21 PI revenues are expected to drop by double digits, but will post a slightly smaller percentage loss (-9.7%) due to a large internal transfer from Corporate to PI of about $40M expected in August associated with activity in FY20.
• This same transfer will exaggerate the reported decline in Corporate tax revenues in FY21 (-68%), with an adjusted decline of about 20%, as corporate balance sheets in the most highly affected industries bleed red ink and others close. Despite some corporate winners in this environment, many large corporate taxpayers have experienced large production reductions, reduced global demand and higher expenses involved in protecting workers and customers. Few other revenue categories are capable of such drastic year to year revenue swings, as carry-forwards dry up estimated payments, and refunding abounds during fiscal year filing periods.
• Sales and Use tax revenues benefitted from the vast federal transfer payments to the State in the fourth quarter of FY21, but still closed the year about $9M below target. New revenues from internet retailers associated with the Wayfair decision (including Amazon affiliates), however, contributed more than $35M, leaving FY20 4.8% above FY19 levels. The pandemic underscores the huge and growing benefit in having virtually all internet sales as a part of the S&U tax base. Internet sales now represent more than 11% of all S&U revenues, with huge gains in the fourth quarter of FY20. Although total revenues are expected to drop 3.6% in FY21, internet sales will continue to grow dramatically in this environment.
• Meals & Rooms revenues have and will experience the most pronounced and lasting impacts from the COVID crisis. Seasonally adjusted M&R revenues dipped below $115M (at annual rates) in both May and June, closing the year more than 18% below January projections and 10% below FY19 (on a comparable adjusted base). FY21 will show further losses as no quick recovery is likely, despite State reopening policies, until all visitors – including the critical older demographic cohort - feel safe traveling again.
• Cigarette and Tobacco tax revenue was unaffected by the pandemic – and the vaping tax yielded more than four times the revenue expected, generating about $3.5M in FY20. This good/bad news, along with little visible sales impact from the higher legal purchasing age, will raise projected revenues slightly over the entire forecast horizon.
• Transportation Fund revenues experienced across the board declines in FY20, as both local and tourist travel dwindled in the fourth quarter of the fiscal year. FY20 Gasoline revenues plunged almost 9% below FY19 levels as both price and demand declines converged. A continuation of these conditions through much of FY21 will lead to further declines of about 4% before recovering some ground in FY22. Diesel revenues dropped 3.5% in FY20 and will probably register slight declines in FY21 as overall economic activity slows.
Motor Vehicle Purchase and Use revenues declined 5.7% from FY19, despite a solid sales month in June and a very strong July 2020. The temporary federal transfer payments have boosted a wide range of large consumer purchases, but this support will likely dissipate in favor of more targeted assistance in FY21. An FY20 depositing error about $1.3M in civil fine revenue that should have been in the T-Fund Other Revenue category but ended up in G-Fund Fines, overstates the FY20 Other Revenue decline by about 4 percentage points and is the only reason FY22 shows growth.
Sources: Economic & Policy Resources, Williston; Kavet & Rockler, Brookfield. 8.12.2020