Recession battering state coffers
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By Peter Hirschfeld VERMONT PRESS BUREAU - Published: July 2, 2009
MONTPELIER – Rising unemployment rates, battered investment portfolios and declining corporate profits have taken an alarming toll on income-tax revenue paid to Vermont.
According to a recent report by the Nelson A. Rockefeller Institute for Government, Vermont saw income-tax revenue dip by more than 33 percent in the first four months of calendar year 2009. The percentage decline was among the most precipitous in the nation; only four states – Arizona, South Carolina, Michigan and California – saw steeper dives.
"I think this report from the Rockefeller Institute just bears out the fact that these are extraordinary fiscal times," said Jeff Carr, economist for the administration of Gov. James Douglas.
The four-month period analyzed by the Rockefeller report charts income-tax revenue during the key January-through-April taxpaying season. Carr said the figures reflect the difficult economic conditions that dealt such a harsh blow to personal finances in 2008.
Carr, one of two economists who craft the revenue projections on which state budget writers base their spending plans, said he was aware of the severe revenue drop in advance of the last official revenue outlook in April.
That means the numbers contained in the Rockefeller report won't in and of themselves equate to a downgrade in the most recent fiscal year 2010 revenue projections. However, some observers say continuing employment woes – manifest in a recent mass layoff at Ethan Allen's Beecher Falls plant – mean the income-tax slide isn't likely to abate anytime soon.
"It's clear things are still deteriorating," said Commissioner of Taxes Tom Pelham. "… For 2010, it doesn't appear that one should have high expectations that things will be better than they were in the past tax season."
In fact, Carr's April revenue outlook predicted continuing revenue declines well into calendar year 2010. While the rate of decrease is moderating, Carr said, Vermont likely will endure another fiscal year of falling revenue.
The Emergency Board – a panel that includes Gov. James Douglas and key members of the Legislature's money committees – receives its next revenue forecast July 16.
Income taxes generated $550 million for the state's general fund in fiscal year 2009, and key government services are vulnerable to dips in that critical revenue stream. Officials say the state's "highly progressive" tax structure makes it more prone to downward swings than other states.
Because the wealthiest citizens and businesses pay the lion's share of total income taxes, according to Art Woolf, professor of economics at the University of Vermont, wild swings in financial markets and other economic indicators can take a severe toll on income tax payments. Nationwide, states averaged a 26-percent drop in income tax revenue.
"Vermont has a steeply progressive income tax – we get most of our income tax revenue from people at the very top income brackets," Woolf said.
Roughly 60 percent of Vermont's income-tax revenue, according to Woolf, comes from people making in excess of $100,000. When high-wage earners suffer the slings of economic misfortune, he said, revenues see a commensurate slide.
"Whatever the story is, it's got to be high-income people driving all of this," he said.
Pelham speculated that capital gains losses likely account for a sizeable portion of the lost tax revenue.
"We have a very progressive income-tax system that is relatively more reliant on capital-gains income," Pelham said. "Capital gains have gone in the tank with the stock market and investment market."
Carr said dramatic reductions in home transactions, notably within the second-home market, also could be at fault. Fewer sales, he said, means less Vermonters are cashing in on the home-value appreciations that infuse the state's revenue stream.
"Vermont has one of the highest percentages in the country of personal income from nonwage sources," Carr said.
Lawmakers and administration officials will find out later this month whether the dour April forecast will be revised further downward, or if economists see hope on the horizon. Carr said a number of factors – including credit markets, monetary policy and the infusion of stimulus money into the nation's economy – will all figure heavily in the pace of Vermont's recovery.
"At this particular juncture the news on the economy is pretty mixed," Carr said. "By and large, I think the free fall is over. But I wouldn't say we're out of the woods yet, and I wouldn't say we don't have obstacles to overcome before we see a legitimate and genuine recovery."
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