Vermont View: Downturn hits Statehouse
Toolbox
Q and A with Art Woolf - Published: November 23, 2008
Editor's note: Sunday editor Anne Galloway interviewed economist Art Woolf, a former state economist and University of Vermont professor, about the state's revenue projection shortfall.
Q: We've reported this week that state government faces a $64 million shortfall this year and that over the next two years we face falling revenue projections of $100 million. Could you talk about how the state has gotten itself into such a hole?
A: Well, part of it is the economy itself, which is not doing well at all both nationally and in Vermont, but part of it is both the spending decisions that we've made over the last decade and also the tax structure that we have gradually put in place that has actually exasperated the revenue shortfall problems.
Beginning in about 2004, tax revenues poured into the General Fund in 2004, 2005 and 2006 and during two of those years they were growing at double-digit rates. The number was at 7 percent or 8 percent. Those are very, very high rates of growth in tax revenues, and they're simply not sustainable. And what the Legislature did in those years, and the governor signed the budget bills, was to essentially pass a law that said if we get more revenues in at the end of the fiscal year than we had anticipated we will spend them.
Rather than adding the money to the rainy day fund or cutting taxes, which makes it easier to raise taxes in the future if you need to, the state just spent money. Now they were called one-time expenditures, but you get used to those things.
Of course, the alternative would have been to bank that money for the future.
The second problem is the way we've designed some of our programs. For example, Vermont's Medicaid program makes people eligible for Medicaid in the state at much higher income levels than in most other states so we have a very high Medicaid caseload for a state that's relatively average in terms of our per-capita income, we have much higher Medicaid caseloads than other states with our income level. Most of the states with high Medicaid caseloads are very poor states, Mississippi, Texas, states like that. And that has not reduced the number of uninsured; it's just transferred people from private health insurance to public health insurance. So the state's Medicaid budget keeps growing every year, and that's one of the major holes in the budget this year.
Another, similar situation is with Act 68, the school finance law. We have insulated most Vermont homeowners from the consequences of their decisions at town meeting. The median family income in Vermont is about $60,000 yet we provide income sensitivity to people making up to $90,000 to $100,000. So that goes way up into the upper middle class. So we've essentially made it a lot easier for people to spend more money on education which leads to higher property taxes and also leads to more money being spent on income sensitivity for upper-income people, not just lower-income people.
And finally the tax issue. Vermont has an extremely progressive income tax, and we're very proud of that. One of the first things we talk about when we talk about any tax is whether it's progressive or regressive. Unfortunately, we don't consider other important issues associated with taxation. Vermont gets a disproportionately large share of its tax revenues from a very small number of people. About 40 percent of all of our income tax revenues come from about 7,000 taxpayers who earn over $200,000 and about 60 percent of all of our income taxes come from taxpayers who earn over $100,000, and there are only about 20,000 to 30,000 of those. So we have a very unbalanced tax system. The income tax raises about half of all funding that comes into the General Fund, so it's the largest single source of tax revenues. During this decade from 2003-2007, those people did very well with capital gains income and the stock market was rising.
The tax revenues in the upper income group went up tremendously, and those were the extra revenues the state spent in waterfall spending decisions they made. Now with the economy doing what it is, the income of the rich is no longer growing like it was before and it may even be shrinking.
That's one of the reasons why the tax revenue situation is so dire. (Income taxes) are plummeting and that's because there are no capital gains in the stock market, there are no capital gains being made from people selling their second or third homes, and companies are not paying dividends. So we rode the income of the rich up, and now we're riding the same horse going down.
It's going to be a nasty recession and it's going to hit everyone, especially those who rely on capital gains.
Q. What should the administration and lawmakers do to remedy the situation? Should we use the rainy day funds, raise taxes or drastically cut programs?
I think raising taxes is a really bad option. Vermont has one of the highest tax burdens in the nation. Relative to our income, we're No. 6 or No. 8 in terms of our tax burden. So we're high relative to other states, and it impacts economic development. I wouldn't 100 percent rule it out but that should be a very, very last resort because there are a lot of other things the state can do.
The choices are all painful, unfortunately. What they're going to have to do is cut spending.
Q. What about the rainy day fund?
Fiscal year 2010 is going to be awful. If the rainy day funds are going to be used, they should be used that year.
I don't think we should do it in fiscal 09. You can usually make some accounting changes to move your budget around, but I think you're going to have to cut programs.
This is a time when the state is going to have to look at programs and not just cut a few percentage points across the board like we've done in the past. (We need to look at) what programs are least important to the state of Vermont. We can either significantly cut spending in those or even eliminate them.
Any program that I mention is going to have its supporters, but you've got to prioritize and I think when this budget situation is this bad, you can't just keep carving out bits and pieces from every program.
We eventually are going to have to talk about education because it's the single largest expenditure, and we didn't do anything with it in the last budget cuts and rescissions. If you ignore education, you're ignoring the biggest chunk of money that's spent by Vermont taxpayers.
For the fiscal year 1009, we're really going to have to do some pruning and that's going to help fiscal year 2010 as well.
Q. So how much do you think we need to prune at this point?
Based on the numbers from the revenue forecasters, we're talking about a total of $100 million over this year and next year. It's a big number, and you really can't do that by simply doing across-the-board cuts.
Q. So you couldn't chop 10 percent off every department?
I think you'd be cutting the meat in some departments. And that's why I think it's a much better option to prioritize.
Q. So what programs would you jettison entirely?
I wrote a piece on this for Vermont Tiger. (I mentioned) the Housing and Conservation Trust Fund. Do we really need to spend money on conserving land the way we're doing it, or can we cut that entirely? In terms of the housing part of it … maybe that money could be more efficiently spent within the state government.
I also mentioned the Agency of Natural Resources. Do we really need a whole division dealing with recycling? How important is that really? All the people in that division may be doing what just one person could (accomplish).
And income sensitivity, I mentioned that earlier. Do we really need to spend 10s of millions of dollars on income-sensitivity for high-income people?
Q. You said this week that in earlier recessions the impact was regionalized and that we haven't had a global crisis on this scale in decades, perhaps since the 1930s. Is that an accurate characterization of your comments?
The recession we had in 1990-91 was pretty mild recession nationwide. Within New England, however, it was a very deep recession. The 1991 recession was much worse in Vermont than it was in the rest of the United States and the one we're in now will be just as bad. Nationally, the recession we're in will be as bad as the one in the early 1980s.
Usually the global economy doesn't contract at the same time. I don't know when the last global recession was, but certainly the Great Depression of the 1930s was global, but generally when the Unites States is in recession generally there are some countries in the world that are not. Usually, Japan or Western Europe can pull us up. This time, Japan and Western Europe are not doing well. Even China is slowing down, and there's no external engine of growth that we can look to help pull the U.S. economy up.
Q. How dependent do you think Vermont is on the national economy?
Vermont is inextricably linked to the national economy. If the U.S. economy sinks or swims, so too will Vermont.
Q. Do you think we'll see a dramatic increase in foreclosures here?
No. Foreclosures are concentrated in a few areas.
Q. I know we don't have a lot of subprime mortgages here, but if we have a lot of layoffs will it become more of an issue?
You'll see some but no more than you would normally see in a downturn. There will be some subprime foreclosures, but there are really just a half dozen states where the subprime loans are concentrated.
Q. How high do you think the unemployment rate will go in Vermont?
I have been talking about 6.5 percent. It depends, probably 6.5 to 7 percent. If it gets up over 7 percent it wouldn't surprise me.
Q. When do you think we'll hit bottom in this recession?
I think it's not going to be until late next year.
Q. When do you think the stock market's going to stabilize?
I refuse to answer on the grounds that it might incriminate me. Don't ever ask an economist that question. You know, three weeks ago, I said it couldn't go any lower, and I actually put some money I had in a money market into the stock market, because I thought it couldn't go any lower. If I knew the answer to that question, I would be very wealthy.
13