Full Tilt

The pace of work under the Golden Dome picked up last week. Though most committees are still bringing new committee members up to speed several pieces of important legislation are taking form. House Ways & Means (my committee) continued hearing testimony from the Joint Fiscal Office and the Tax Department about Vermont's current tax structure. Mid-January is also a common target date for reports designed to provide an "evidence based" foundation for legislation.

Reports

It's a standing joke in Montpelier that "When in doubt, require a report." Reports are inexpensive and give the impression of progress. At least we didn't do nothing!

About 110 reports have already come due this session. They range in topics from the 2022 High Mileage Users Report to the State Plan on Aging Annual Report. Does anyone read them? Yes, mostly, well, probably. At least we hope so.

Legislation requiring a report also states to whom the report should be delivered. That's one or several committees in the House and/or Senate.  When a report comes due it is posted on the committee website ready to be reviewed. Important reports are then explained and discussed through testimony to the committee. Generally a member of the Administration gives the committee a presentation about the report.  Last week House Ways & Means (my committee) reviewed several reports. 

2023 Economic Review and Revenue Forecast

How is Vermont's economy doing?  Tom Kavet of Kavet, Rockler & Associates, LLC explained that there are two countervailing pressures on Vermont's economy: inflation and interest rates. The tremendous influx of federal dollars has resulted in higher inflation. That's bad in that goods and services cost more. It's good in that tax revenues tied to the cost of those goods and services also go up. As Vermonters pay higher prices, they also pay more in sales tax. The taxes collected are then recycled into the economy as the State provides services: repairs and plows roads, builds and maintains prisons, educates our youth, and a lot more. 

But inflation, in general, is bad because wage growth and investment returns do not necessarily keep up with the increased cost of goods. We lose money. So the Federal Reserve uses interest rates to help reduce inflation. Raising the cost of borrowing money reduces the amount of money borrowed and then spent. Fewer houses, cars or major appliances are bought. Demand for such goods will decrease and, hopefully, prices will ease.

Here's Tom Kavet's bottom line (actually the introductory paragraph to the report):

[R]esilient growth is prevailing to date. The two opposing currents now at play consist of the stimulative effects of unprecedented recent federal spending and, more recently, monetary policy designed to slow the economy in the face of the highest inflation experienced in more than 40 years. Steep interest rate hikes beginning early last year have driven the effective federal funds rate above 4%, pushing 30-year mortgages close to 7%. Thus far, the effects of these rate hikes have been blunted by the massive savings and net worth built up during the past three years, keeping consumers spending, corporate coffers flush and tax revenues rolling in. It has also exacerbated inflation, which will likely cause even further rate hikes, elevating the risk of a deeper downturn in FY24. Despite our baseline forecast for no recession this year, we do anticipate a significant slowing of the economy in FY24.

So far, Vermont is doing OK, but the outlook is not bright. For legislators that means we have to be cautious in our spending. The strong revenues may not last.

Tax Expenditures

Another particularly interesting report is the biennial Tax Expenditure Report from the Joint Fiscal Office. A "tax expenditure" is money that the State has decided not to collect by adding exemptions to certain taxes. We forgo over half a billion dollars ($579.8 million) of potential revenue by adding exemptions to taxes. Such exemptions include those for food and clothing   ($111.8 million for food and $34.8 million for clothing).  The 82-page report was reviewed and presented to the committee last week and will be discussed in detail later in the session.

Other Reports

Last week we also reviewed the following reports:

• PCB Testing in Schools: 3-Page Report, Presentation

• Income Based Education Tax Report (11 pages) - Should public education be financed through property taxes or an income tax? The administration'sperspective.

• Income-Based Education Tax Study Committee report - The Legislature's perspective on this issue.

• Act 73 Secondary Residences Report, Presentation - How might we tax secondary residences?

• 2023 Property Valuation and Review (PVR) report -  The PVR annual report details and expands on the annual process of property tax administration in Vermont

• Early Care and Education Financing Study, Presentation - What might it cost to subsidize high quality child care and early education in Vermont?

Throughout the session we will be relying on the information in these reports.