Vermont expects $30M Trump bump
The bad news? While the Republican plan was supposed to cut taxes, many Vermonters will actually pay more to the federal — and state — governments.
While some middle class couples could see a tax break, many married couples filing jointly in Vermont who earn between $125,000 and $500,000 will be hit by an increase in state taxes, according to the state's economists. Meanwhile, corporations will see a 14 percent reduction in federal tax rates. While experts are unsure exactly how the federal Tax Cuts and Jobs Act will affect the state's economy over the long haul, in the short term it looks like a boon for state revenue.
Receipts will begin to heat up over the last six months of the 2018 fiscal year, and net revenues for the General Fund are expected to increase by $8.1 million over the July 2017 forecast.
Jeffrey Carr, the economist for the governor's office, and Tom Kavet, the economist for the Legislature, however, urged lawmakers and Gov. Phil Scott in a meeting on Thursday to take the projections with a grain of salt.
It's the first time the two economists have issued a "provisional" economic forecast that is "standing on much softer ground," Kavet said.
Carr said the federal tax changes are "historically unique" and present "a higher than usual level of forecast risk" for state personal income and corporate taxes.
In other words, the estimates are subject to change. That uncertainty is the result of unforeseen tax adjustments that could shift the numbers.
Rulemaking for the new tax law approved in December by Congress and President Donald Trump will take months to complete. And taxpayer behavior is expected to change in response to the new tax code over the next several years. In the meantime, state corporate and income tax revenues, which make up 60 percent of tax receipts, are expected to be volatile.
"It's going to be a couple of years before these things settle down," Carr said.
The forecast for the federal tax reform impacts was based on new microsimulation models used by the Joint Fiscal Office and the Vermont Department of Taxes that Carr and Kavet said will help the state better understand the short-term and long-term effects on the state's economy.
Carr said he has served as the state's economist for 30 years and it's been that long since the federal government has significantly reformed the tax code. The change, he said, is far reaching and profound.
"I'm grateful this new technology will help us get under the hood," Carr said. "The more I do this, the less I know."
The governor saw the uncertainty as potential future liability for state revenues.
"In other words, let's not get too excited to about anticipated revenues," Scott said.
The governor reiterated his call for caution at his weekly press conference, which was also held Thursday. "I want us to be cautious," he said. "This could take a couple of years to sugar off."
"We have to wait and see what this is going to be, this might not be real," he continued.
Scott has said he wants to hold harmless Vermonters who would pay higher state taxes as a result of federal tax reforms. Just how that would be accomplished, however, is difficult to discern at this point. It could be complicated and result in singling out individual taxpayers, Scott said. Reducing tax liability for certain residents would result in lower state revenues.
"If we can determine if there is one sector affected more than others, we want to do what we can to keep them whole," Scott said. "If we determine it's the middle class paying more and it's actually creating more of a burden, then we need to take action because it would be bringing more revenue into the state.
"If we're seeing substantial increase in revenue as a result of federal initiatives we should do what we can to provide relief," he said. "We don't want Vermont to be an outlier so we don't further burden Vermonters."
Anticipated receipts are potentially volatile enough that Scott says he wants to meet with the emergency board, made up of the chairs of the tax and budget committees in the House and Senate, again in a few months to review the situation before making final tax and budget policy decisions at the close of the session.
Growth across the state since the end of the Great Recession has been uneven. While Chittenden County has boomed, the rest of the state has not seen the same kinds of gains on a number of economic indicators, including property values, income, demographics and business growth.
Home prices in Chittenden County, for example, are up by 4.8 percent, while every other county in the state has seen declines. Bennington County values have dropped by 19.4 percent.
Chittenden County has also seen more job gains than any other county — a whopping 75 percent increase, for a total of 8,168 new positions since 2009. Rutland, on the other hand, has seen a loss of 1,181 positions.
Total General Fund revenues have grown from $1.4 billion to $1.8 billion since 2012, when the state started to climb back out of the recession.
Sen. Jane Kitchel, D-Caledonia, chair of the Senate Appropriations Committee, said she is concerned that the state isn't doing enough to support economic growth in the Northeast Kingdom and Rutland and Bennington counties. She asked the economists if there is a way that the state can stabilize those areas of the state.
"I'm sure you're seeing a trend of the hollowing out of rural America," Kitchel said. "How are you looking at that?"
Kavet said there is a "limit to what you can do on the state level" and he and Carr said growth in Chittenden County is helping the whole state. However, he said that broadband access is a critical component of economic development and many rural communities currently "don't have basic access."
Nationwide, economic growth is expected to continue well into 2018 and likely into 2019, Kavet said. Consumer spending is up, home prices continue to recover and Wall Street stocks continue to rise, driven by growing global markets. Tight labor markets in Vermont (2.9 percent unemployment) and nationally are slowly pushing up wages.
The economic "upcycle," which has lasted 102 months, is the third longest upturn in postwar history, Carr says.
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