State tax revenues lag as economic caution ramps up

by Timothy McQuiston, Vermont Business Magazine Personal income taxes, the most important General Fund revenue source, as well as corporate and the sales tax, all underperformed in March, according to Secretary of Administration Kristin Clouser. She released Vermont’s revenue results today.

Clouser said she is uncertain whether a second straight month of disappointing personal income tax revenues was a trend foreboding a weakening economy, or whether it was a blip on the screen. The tax return season can result in uneven revenue results until the close of the fiscal year at the end of June.

Meanwhile, the unemployment numbers, also released today, remained strong.

As for taxes, for the sixth month in a row, both the General Fund and the Transportation Fund ended with revenue above consensus expectations. The Education Fund, however, missed its target by just under $1.6 million.

Year to date, only the Education Fund is lagging its respective target as adopted by the Emergency Board at its January 17, 2023 meeting.

Revenue collections for the month of March 2023 have been compiled. The State’s General Fund, Transportation Fund, and Education Fund receipts were a combined $241.6 million, or (0.3%), below monthly consensus expectations. Cumulative results through the third quarter of fiscal 2023, however, continued the trend of the first six months of the fiscal year, where combined revenues across all three funds were 6.3% above the consensus target set at the July 2022 Emergency Board meeting.

General Fund revenues collected in March totaled $164.0 million, $0.7 million or 0.4% above the monthly consensus cash flow target.

For the second month in a row, Personal Income Tax receipts failed to meet their consensus target, missing by -$7.2 million in March. Monthly revenues in the Corporate Income Tax also posted negative results for the first time since October of this fiscal year, missing its monthly consensus target by -$2.8 million. Monthly revenues in the Liquor Tax and Estate Tax also missed their individual monthly consensus targets for a combined -$0.3 million miss.

The largest offset to those downside pressures was a $5.7 million ahead of consensus target performance in the Other Revenues category. As in the prior month, this performance was due to the General Fund’s uncharacteristically large cash balances and favorable interest environment propelling monthly G-Fund Net Interest revenues to over $7.0 million for March.

Monthly revenues in the Insurance Tax exceeded their consensus monthly target by $2.9 million and monthly receipts in the G-Fund portion of the Property Transfer Tax also exceeded expectations by $1.4 million—another effect of the unexpectedly large amount of recent mergers and acquisitions activity.

Finally, monthly receipts in the Health Care taxes-revenues component (at $0.5 million higher than consensus expectations) and revenues in the Meals & Rooms Tax (at $0.4 million higher than consensus expectations) also performed somewhat better than expected during March.

Revenues in the Transportation Fund were essentially “on target” last month, bringing in $25.0 million in March and beating monthly consensus expectations by $0.1 million or 0.3%. Year to date, cumulative receipts have exceeded consensus expectations by $1.6 million, or 0.7% through the third quarter of fiscal year 2023.

The month of March saw a rebound in gasoline tax receipts as the $0.2 million better than expected performance last month more than offset the -$0.1 million miss in Diesel Tax receipts relative to their respective consensus monthly targets.

Education Fund revenues last month were -$1.6 million, or -2.9%, below the $54.1 million monthly consensus cash flow target, having collected only $52.6 million during March.

Although all other reported sources exceeded their respective individual consensus cash flow targets by a combined $0.7 million, it was not enough to overcome the -$2.2 million miss by monthly revenues in the Sales and Use Tax.

Revenue data for the first nine months of the State’s fiscal year continue to show positive results in the aggregate.

According to Secretary Clouser: “It is still unclear if March’s revenue results are a one-time anomaly or if this signals slower economic activity in response to the Federal Reserve’s actions to stem inflation. However, the fact that this is the first time this fiscal year the State has failed to meet its cumulative target across all funds, and that the General Fund’s positive results were only due to uncharacteristically large investment earnings that are not sustainable over the long-term, the Administration restates the need to exercise prudence and caution as the fiscal year 2024 budget discussion continues.”

Source: 4.21.2023. Montpelier, VT - Secretary of Administration