Legislative Financial Preview
Rep. Anne Donahue
December 20, 2022
Every December, new and returning legislators get the opportunity to hear a preview of the state’s financial status in anticipation of starting work in January. Our state economist and principal economic advisor, Tom Kavet, shares his best estimates of what the economy is looking like, and what we might be facing in the year ahead. That includes the second half of fiscal year 2023 -- which ends in June -- and fiscal year 2024, which starts this July and will be the budget we construct over the months ahead.
I usually try to send out a summary, but this year, his opening bullet points do a far better job than I could in summing up the situation that led him to open by saying, “Two opposing forces are now colliding and shaping the national and state economics – and affecting state revenues.”
I’ll start with his concluding point, and then go in order from the top:
- A good start to the fiscal year 2023 revenues, but the second half of the year will be more challenging and fy ’24 could be ugly.
Here’s why:
- Total [state] revenues through November (General, Transportation and partial Education Funds [referencing the non-property tax portions]) are about 6.5% above targets (about $76 million on a base of about $1.2 billion), with revenues particularly strong in the first quarter of the fiscal year and slower in the second.
- The revenue strength in the first five months of the fiscal year was concentrated in Personal and Corporate income taxes. With asset prices and corporate profits still at elevated levels, demand remaining resilient and prices rising, income tax liabilities have risen accordingly.
- Almost all other revenue sources were close to or slightly above year-to-date targets, including the large consumption taxes, with rooms and meals 1.8% above target, motor vehicle purchase and use up 2.3% and sales and use, up 3.2%.
- With one foot still on the gas and the other now slamming on the brakes, federal fiscal and monetary policies are generating opposing forces that will both confuse and control the state economy and revenues in coming years.
- While direct pandemic health effects have receded from prominence, their legacy of vast federal spending, shifting consumer preferences, supply chain disruptions and reduced labor force participation continue to resonate loudly.
- With viral mutations continuing and geo-political instability from war in Europe added to the mix, the outlook continues to be extremely volatile and unpredictable.
- Despite all the current risk, fy 22 and fy 23 revenues to date have benefited from the vast federal spending which has been coursing through the Vermont economy in the past 2 years.
So there you have it: we’re in great shape right now. The words “volatile and unpredictable” are scary ones.
What is the basis for the unpredictability? Here are some of Cavet’s other points, abbreviated:
- The extraordinary federal deficit spending to offset the pandemic blunted its impact but was probably more than what was needed.
- Vermont received a disproportionate share, in excess of $10 billion. [This is due to the “small state minimum” formula.]
- The Inflation Reduction Act may reduce inflation in the long run but includes further spending that will delay any immediate effects.
- We are experiencing the highest inflation in 40 years because of a combination of factors: the spike in consumer demand, plus supply constraints caused by lower labor force participation, bottlenecks in China due to its zero-COVID policy, and Russia’s invasion of Ukraine.
- Inflation hasn’t impacted spending significantly because of savings that were retained during the pandemic, but now, many are beginning to increase their debt levels again.
- The Fed is trying to reduce demand through interest rate increases and will continue to do so until it believes the economy has slowed to the goal of 2 to 3%.
- However, interest rate increases can’t affect the supply chain issues, and the Fed may overshoot with a rapid drop in consumption… If it does, a recession will be likely.
Of note in terms of Vermont employment: our losses during the pandemic totaled 65.8 thousand jobs, a decline of nearly 21%. Since then, it has recovered 51.9 thousand jobs, still 4.4% below its pre-pandemic peak. It would still need to add about 14 thousand jobs to return to pre-pandemic levels. Yet, our unemployment levels are a record lows in terms of the ability to fill jobs. Our workforce crisis continues. And I just learned that not a penny of the investments my Health Care Committee put towards healthcare workforce development last spring has gotten out the door yet; it’s still caught up in administrative processes.
Those of us in the last legislative session already were being warned that fy 24 could look bad, from a budget perspective. On top of that, there is the issue of the expectations created while we had massively more federal money coming into the budget. It is much harder to give and then take away, than to give a little bit less from the start. As the surplus COVID money ends, no one will remember it was temporary funding for a temporary program; they will say services are being cut.
In addition, the new Democratic super-majority is seeing its veto-proof position as an opportunity to proceed on a number of new initiatives simultaneously: expanded childcare support, additional housing funding, paid family leave, and climate measures. Many of those don’t require an “in-your-face” tax increase. Paid family leave will be employer-employee funded; fuel consumption for heat will be cut through fuel prices, etc – hidden tax increases. I agree with the social good of many of these initiatives but have yet to see where the money will come from. If the economy is not vigorously expanding (and look back at Tom Kavet’s status report), it can only come from new taxes or added economic burdens on individuals.
The Vermont League of Cities and Towns has a sobering reminder in its annual preview for the year ahead: “In 2020, Vermont ranked second in terms of total state tax burden per capita, and fifth in terms of state and local property tax burden per capita. Thus, how we fund government at the state and local levels – and how the legislature determines its priorities – affect Vermonters in their pocketbooks every day.”
One thing that has been growing at record levels has been housing prices: in Vermont, the past two quarters reflect a highest-ever year-over-year growth. That puts the legislature in the glorious position of being able to cut the education property tax rates. Don’t be fooled by those headlines. The rates can go down because the value of property is up. You will pay the same or more depending upon how much spending goes up (and school boards have inflation to deal with as well) and whether or how much we return the excess taxes we raised this past year – a surplus that will be tempting to spend. But it also means that our crisis in housing affordability will continue to get more severe despite the massive investments already made via COVID funds.
Health care sustainability and cost growth is also chomping at our heels, exacerbated by the workforce crisis and long pre-dating COVID, yet it seems to have fallen off the radar as an urgent priority. It remains one of mine. Despite the degree of federal control that limits what we can do, there are things we could be doing to chip away at some of the inequities in access.
One of the “gap” groups that we’ve ignored thus far is those who are dropped from Medicaid when they turn 65 because a higher income threshold goes into effect. As much as we hear the call for “Medicare for all,” Medicare has some large holes and some cost burdens. I think our low-income senior citizens should get the same support that we provide our citizens before they turn 65, instead of dropping some of them off the cliff.
Last year, we asked for a report on how we might achieve that goal and how much it would cost, and I have a bill underway to put this issue directly on the table for the coming year. This would require unexpected improvement in revenues this year. It would also require that it move in front of the new and expensive priorities that have been added to the legislative wish list for 2023.
The bottom line in all of this is strengthening economic development as the basis for being able to do more of what we want for our citizens. Despite the experience I’ve built in health care systems over the years, I hope that this year I can move into playing a bigger role in building our workforce and economic stability.
So – a challenging year ahead.
Best to you for the holidays and for the new year around the corner.
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Please contact me or district-mate Rep. Ken Goslant anytime with questions or concerns. I can be reached at adonahue@leg.state.vt.us, and Ken is at kgoslant@leg.state.vt.us. We both look forward to serving you in the year ahead.
