Gov. Shumlin has directed agency heads to cut their 2014-2015 budgets by 4 percent to compensate for reduced revenues in the first six months of 2014. The revenue projections and analysis prepared by Tom Kavet, the state government’s long-time economic forecaster, show that all three of Vermont’s major funds are facing serious structural challenges.
General Fund revenues, which come primarily from personal income and sales taxes, underperformed projections from January to June. Personal income tax receipts actually declined in April, May and June compared with the same period a year ago.
Although Vermont has one of the lowest unemployment rates in the nation, household income in Vermont, especially for middle-income families, has been stagnant since the Great Recession of 2007-2009. An increasing proportion of the jobs in Vermont are low-wage and part-time positions. Many households do not believe their economic circumstances have improved since the recession ended.
The shift in the job mix in Vermont over the last five years has led to personal income tax receipts that have been growing only slowly. At the same time, the labor force has declined due to the aging of Vermont’s population.
Consumption among higher-income Vermonters, whose economic circumstances have improved, in some instances substantially, in the last five years, has been increasing. However, increased purchases at the high end are not enough to compensate for stagnant sales tax revenues. Middle-income households feel strained, and are hesitant about making large purchases. Kavet also notes that Vermonters at all income levels are making more of their purchases online, further shrinking sales tax receipts.
The Education Fund, supported largely by property taxes, is facing challenges resulting from the subdued real estate market in Vermont. Kavet’s research shows that Vermont is one of five states where average real estate sales prices declined in the first quarter of 2014. Residential construction activity in Vermont, although recovering slightly in recent years, is less than half what it was in the pre-recession years. Real estate sales in 2014 to date have been slow, with an increasing number of towns seeing sales of middle- and higher-priced homes at less than appraised value.
All of these developments mean that the grand list, both statewide and in many towns, is growing more slowly than school budgets are increasing. This is one of two contributors to increased education property taxes. The other is declining enrollment in many schools, which results in lower state contributions based on per-student formulas.
Finally, the Transportation Fund is under pressure because of declining gasoline consumption resulting from new fuel-efficient cars replacing older vehicles. Although the gasoline tax is now a percentage of the pump price rather than a flat per-gallon fee, the change in the mix of cars on the road means Transportation Fund revenues are dropping faster than gasoline prices are rising.
Because of the dysfunctional Congress, the long-term level of federal funding for road maintenance and repair is also uncertain. Within a few years, the Transportation Fund will once again not provide enough revenue to cover the state’s highway program needs.
All three funds — General, Education and Transportation — do not generate enough revenue to meet current and projected spending. Elected officials need to look carefully at both the spending and revenue sides of the state budget, and at the underlying programs and funding formulas, in order to restore Vermont’s public finances to a sustainable state.
Meanwhile, the budget cuts ordered by Shumlin are an appropriate short-term response to the ongoing revenue weakness, even though the cuts will be difficult for many departments, especially those in human services and health care dealing with increased caseloads.
Eric L. Davis is professor emeritus of political science at Middlebury College.