MONTPELIER — Economists for the Scott administration and lawmakers say the state is expected to take in $24.6 million less in revenue during the remainder of the current fiscal year because of a significant decline in corporate income tax it is owed.
Economists Jeff Carr and Tom Kavet, who work for the governor and Legislature, respectively, issued their twice yearly revenue forecast Thursday for the state’s Emergency Board. They declared Vermont’s economy is growing, albeit slowly, and prompting businesses to expand and hire. But that, in turn, is causing a drop in their profits as their expenditures increase, resulting in less corporate tax revenue for the state.
“Revenues … absent one category would be upgraded this time. And that one category is corporate income tax,” Kavet told the Emergency Board.
Without the large decline in corporate tax revenue, overall projected general fund revenues would be up $1.8 million in the current fiscal year, and up $3.3 million for the 2018 fiscal year.
“We had a really good run in corporate tax and now that run appears to be over,” Carr said, noting the state owes large amounts back to companies in refunds as their expenditures increase and profits decrease.
The Emergency Board, comprised of Republican Gov. Phil Scott and the chairs of the Legislature’s four money committees, adopted the consensus revenue forecast unanimously Thursday.
Companies can deploy a variety of strategies in any given year that can drastically impact their tax liabilities. That makes the corporate income tax a difficult revenue source to project, the economists said.
“It’s why it is the most volatile revenue category outside of (the estate tax),” Kavet said. “You can have companies that are making millions and millions of dollars one year, and liabilities as such, and the next year not be having any liability whatsoever.”
That point is illustrated by the top 15 corporate taxpayers over the past several years. In the 2015 fiscal year, the top 15 corporate taxpayers in Vermont paid a total of $52.4 million into the state’s coffers. In the 2017 fiscal year, the top 15 corporate taxpayers are expected to contribute just $6.1 million.
Now, Scott and lawmakers must find a way to close the gap created by the drop in corporate income taxes in the current 2017 fiscal year, as well as an additional $7.7 million hole in the 2018 fiscal year — on top of an existing projected $70 million shortfall in revenue.
Scott had already proposed setting aside $10 million of existing state funds in his budget adjustment proposal, the annual mid-year bill to adjust state spending to reflect new economic realities.
Finance Commissioner Andrew Pallito said the administration now plans to use $10 million available in the State Health Care Resource Fund to help cover the remaining $14.6 million. Another $4.6 million will be taken from an Agency of Human Resources caseload reserve fund to cover the rest.
“That is one-time funding but this is a revenue downgrade in (fiscal year 2017) much greater than (fiscal year 2018). The economists said the downgrade was bigger in 2017 because of refunding activity. It’s much less in 2018. It is one-time money, but it is a one-time big downgrade,” Pallito told reporters after the Emergency Board meeting.
Scott, who was briefed in the last week on the projections laid out on Thursday, said he will outline his plan to address next year’s revenue shortfall in his budget address next week.
“The bottom line is we’re starting out with less revenue than we had a year ago, which is a challenge, but we’ll lay that all out on Tuesday,” the governor said. “I think we were forecasting this.”
Despite the economists’ view that Vermont’s economy is growing, Scott said he remains concerned about Vermont’s fiscal future.
“I thought it sounded concerning to me that corporate revenue is down. The good news is it appears that wages are going up. That is good news and we would like Vermonters to earn more money, but we need to make sure that our businesses can survive and we want to make sure that they prosper as well. So we need more economic activity,” he said.
Scott said the state’s economy is “fragile” and a number of small changes made by a few businesses “can alter things in a severe way.”
“I would like to take a look and see whether it’s sustainable or not and whether it is growing and we’re trending in the right direction. My feeling still is that Vermonters are struggling, that we’re dealing with this crisis of affordability and that we need to grow the economy to make it work for everyone, and that includes businesses,” Scott said. “We need them to prosper. We have to look at some of our larger businesses in the state and look at how we’re doing because one large business in the state, if they’re not doing as well previously, it could have a drastic effect on what we saw today.”
Kavet and Carr are also projecting $3.2 million less in the current fiscal year for the transportation fund, and $2.3 million less in the 2018 fiscal year. Meanwhile, the state’s education fund will see $400,000 less this year and grow by $700,000 next year, according to their projections.