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Politically Thinking: State economy shifting with times

Last week, the Legislature’s consulting economist, Tom Kavet, presented his semi-annual revenue forecast and analysis of the Vermont economy to Gov. Shumlin and legislative leaders. Kavet’s reports are important events in Montpelier, because they identify issues that are likely to be on the Legislature’s agenda in the next session.
Kavet sees both the Vermont and the national economies as approaching the self-sustaining recovery stage. He projects slight increases from his July 2010 forecast in Vermont tax receipts over the next 18 months. In his report, Kavet also directs the attention of the state’s policymakers to several important economic trends.
Although Vermont has the fifth lowest unemployment rate in the country, there continues to be a large gap between the unemployment rate in the most prosperous regions of Vermont — Chittenden County and the Upper Connecticut Valley — and the areas facing the greatest economic challenges — the Northeast Kingdom and Rutland County.
From June 2007, the pre-recession employment peak, through November 2010, Vermont lost over 14,500 jobs. The only sectors to have added jobs during this period are health care and education, from early childhood to universities. The sectors with the biggest job losses in Vermont have been construction, manufacturing and retail trade.
Kavet’s analysis shows that one of the biggest policy challenges Vermont faces is private sector economic development. The Shumlin Administration has also identified working with the private sector to leverage job and income growth as one of its top priorities.
With public budgets strained at all levels, job growth in the health and education sectors, which depend heavily on public funds, will be minimal in the years ahead. With residential construction in Vermont at a 30-year low, the construction business has been dependent on stimulus-funded projects, most of which will be completed by the end of the 2011 construction season. Proposals to expand the Vermont sales tax, if approved, would place further pressure on the state’s retailing sector, which has lost almost 4,000 jobs in the last three years.
Kavet’s report notes that one bright spot for the Vermont economy is exports. Over the past 15 months, the volume of Vermont exports has grown by nearly one-quarter. Vermont businesses are exploiting international markets more than ever. Nearly half of Vermont’s exports go across the border to Canada, a proportion that has remained steady for the past decade. In the last year, the share of Vermont’s exports shipped to China, Taiwan and Hong Kong has reached more than 25 percent. The Douglas Administration and Vermont exporters developed an aggressive marketing program in Asia. This program has helped some Vermont manufacturers weather the effects of the recession.
While real estate prices have not declined in Vermont at anything like national averages, real estate values in the state have fallen by 2-to-3 percent over the last three years. Kavet estimates that the education grand list reached its highest value in 2008-09. Since then, the grand list has been slowly declining. Kavet does not expect the education grand list to exceed its 2008-09 peak until 2014-15. As he wrote in his report, “declining or flat grand list values over the next several years will require property tax rate increases, unless spending declines or remains constant with revenues.”
Finally, Kavet expects that Vermont grocers and convenience stores located within 10 to 15 miles of the New York border should see a pickup in sales as a consequence of the recent increase in the New York cigarette tax to $4.35 a pack, the highest in the nation.
Eric L. Davis is professor emeritus of political science at Middlebury College.

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