State economists deliver rosy 2015 revenue forecast
Jeff Carr and Tom Kavet delivered an optimistic revenue forecast for fiscal year 2015, which starts July 1.
Carr, who serves Gov. Peter Shumlin, and Kavet, who reports to the joint fiscal committees of the Legislature, together maintain a projection of tax revenues the state can expect each year. The consensus revenue forecast, as adopted by the Emergency Board, is the projected income on which the state budget is based.
Because revenues leading up to Thursday's meeting had come in very close to projections, very little was changed in the existing forecast for FY15 and beyond.
The biggest change in the forecast is a reduction in revenues as a result of the anticipated closure of Vermont Yankee at the end of 2014. The nuclear power plant in Vernon was projected to pay about $12 million annually in electricity generation taxes.
The two economists also said wealth continues to be concentrated in the upper rungs of Vermont tax filers. That's where income tends to fluctuate the most, and it's where an increasingly high proportion of the state's incomes taxes come from. In future, this overreliance on taxes from upper-income Vermonters may translate into less predictable revenues for the state's major funds, Kavet warned.
Shumlin agreed with Kavet that this volatility is even more reason to build up Vermont's reserve fund with any surpluses.
The big economic picture
Carr and Kavet appeared to be relieved that their forecast this year is based more on evidence than conjecture.
Cause for their current optimism comes largely in the form of "pre-conditions" for economic growth, Carr and Kavet said.
Prominent on the horizon are labor market indicators, which Carr and Kavet agree could mean an expansion of Vermont's labor force.
An alternative forecast from the Vermont Economy Newsletter on Monday was much less enthusiastic. UVM Professor Art Woolf predicted that statistical revisions in 2014 will reveal a continued lag in the labor force, rather than the slow gains data are showing now. Carr acknowledged that possibility, but he and Kavet focused instead on other factors pointing to labor market growth.
Those include a much-reduced debt burden in both households and corporations. Kavet explained that less debt means businesses have more capital to invest in the future -- by hiring, for example. Interest rates, inflation and electricity costs also are very low, he added. And a "fiscal drag" from federal sequestration and struggles has, for the time being, ended.
They said some uptick in manufacturing is already evidence that the labor environment is ripening for growth. What's missing, Carr said, is confidence -- among both consumers and businesses.
Moody's Analytics shows a recent rise in business confidence, but Carr noted that it's traditionally a hard metric to capture. Strong stock market performance is a good sign though, he said.
On the housing and construction front -- arguably the industry whose collapse caused the recession the state is now struggling to emerge from -- they said there is also cause for hope.
A recent spike in non-residential construction consists of wide-ranging and variably sized projects, not just isolated big projects, Carr said. Aside from the construction jobs this provides, it also is likely that businesses will be hiring new people to work at their expanded facilities, he said.
Single-family housing starts are also up, and a slow increase in property values is taking hold, as indicated by Shumlin's proposed FY15 budget. If all property transfer tax revenue that's statutorily earmarked for the Vermont Housing & Conservation Board actually went to the agency, its budget would increase by about 30 percent, Administration Secretary Jeb Spaulding said Wednesday.
The total value of taxable property in the state is still depressed from the recent recession, however. And those low values are partly to blame for rising property tax rates. Because tax rates are based on property values over time, the real estate market's rosy outlook will take a while to trickle down to good news for the state's Education Fund, Carr and Kavet said.
One more volatile area is the Transportation Fund and related fuel taxes. In 2013, the Legislature pinned gas and diesel taxes closer to their actual prices. Now the cost per gallon is headed down, analysts agree. The price drop may mean that the state will pull in less money from fuel sales than previously thought.
Kavet noted the Internet sales tax has not been strong. Carr also pointed out that certain products exempted from the sales taxes, such as food, constitute some of the highest aggregate sales.
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