Following a small decline in tax revenues in fiscal year 2017, Vermont’s tax revenues shot up sharply in fiscal year 2018. Total tax revenues were up 5.7%, or $ 173.9 million, of which $116.8 million came from increased income tax revenues. This article will explore why this happened.
To provide a basis for the discussion, the following table summarizes the year-over-year changes in key tax revenue streams.
Vermont State Tax Revenues ($ millions)
|Tax||FY 2018||FY 2017||Change in $||Change in %|
|Personal & Corporate Income Tax||947.6||830.8||116.8||14.1%|
|Sales & Use Tax||397.1||376.1||21.0||5.6%|
|Meals & Rooms Tax||175.7||169.1||6.6||3.9%|
|Purchase & Use Tax||109.4||103.2||6.2||6.0%|
Source: Vermont Comprehensive Annual Financial Reports for Fiscal Years 2017 and 2018
As indicated in the table, pretty much every tax revenue stream went up in 2018, with income taxes leading the way. Personal Income Taxes, at just over $830 million, were up about $77 million, or 10% of the increase. Corporate Income Taxes, at approximately $108 million, were up over 25%.
Vermont Was Not Alone
The National Association of Budget Officers tracks state government revenue collections annually. Fiscal year 2018 was a very good year, with 40 states (including Vermont) recording revenues above budget. Across the country, state General Fund revenues collections were up 6.4%. For all 50 states, Personal Income and Corporate Income Taxes were up 7.9% and 3.7%, respectively. As noted above, Vermont experienced greater growth in income tax revenues.
The National Association of Budget Officers site three principal reasons for the growth in tax revenues, as follows:
Employment and Wage Growth: Across the country, there were more people working and higher wages in 2018. In Vermont, the number of non-farm workers was stable, but wages were certainly up circa 4% on average. Greater payrolls mean higher tax revenues.
High One–Off Earnings: The fiscal year ended June 30, 2018 was very good in the stock market. Interest rates also went up. As a result, interest, dividend and capital gains income were all up sharply. This type of income, particularly capital gains, tends to be non-recurring. Vermont residents probably experienced their fair share of these income gains.
Higher Oil & Gas Prices: For those states that have meaningful oil industries, higher oil prices means higher corporate profits and higher tax revenues.
Vermont’s Fiscal-Year 2018 Tax Experience
Many elected representatives in Vermont were surprised by the upside in 2018 tax revenues. In July 2018, the Vermont Emergency Board published its Consensus Revenue Forecast Update for fiscal years 2019 and 2020. In order to forecast future revenue, they needed first to understand what happened in 2018. Here is the Vermont Emergency Board’s assessment:
- In general, “2018 receipts benefitted from a rare confluence of a relatively small number of large revenue events”.
- Federal tax law changes gave rise to Vermont tax revenue from corporate profits parked in offshore jurisdictions.
- There were a small number of exceptionally large capital gains.
- Only 30 discreet revenue events between Jan and June, 2018 gave rise to about $65mm of incremental tax revenue.
While the Vermont Emergency Board gave credit to the underlying strength of the economy, it basically believed that one-off events were largely responsible for the 2018 tax haul and remained cautious about future years.
Are Vermont’s Higher Tax Revenues Sustainable?
The one-off events that drove Vermont’s 2018 tax revenue increases must be continuing into fiscal year 2019.
The Vermont Department of Taxes provides a monthly revenue report that compares year-to-date revenues against both the budget and the prior year. As of April 2019, which is ten months into the 2019 fiscal year, total General Fund tax revenues were up 7.19%% over 2018. Personal Income tax receipts were up $34.8 minion, or 4.8% and corporate tax collections were up $38.67 million, or just in excess of 50%.
There are, of course, 12 months in a year. Future monthly tax collections could be lower or refunds could be higher. As of April, however, Vermont’s 2019 tax revenues were looking fairly robust.
Effect of the Tax Cut and Jobs Act
Passed in December 2017, the Tax Cuts and Jobs Act was the biggest overhaul in the federal tax code since the 1980’s. The impact this had on Vermont state taxes in fiscal year 2018 and will have in future years is difficult to estimate.
With respect to personal income tax, the Tax Cuts and Jobs Act increased the standard deduction and eliminated the personal exemptions for family members. The Vermont Department of Taxes estimated that this would have the effect of increasing personal income tax receipts by $30 million in fiscal year 2019. Vermont decided to change its tax code in an effort to “neutralize” the impact of the new federal tax code, so the impact on state personal income taxes should be small.
The changes with respect to business and corporate taxes were many and very complex. The treatment of foreign income had large one-off impacts but also long term effects, the treatment of capital investments was changed and the rules around pass-through entities were greatly altered, to mention but a few of the new provisions. How all these federal tax code changes flow through to Vermont’s tax code is uncertain and the net effect on corporate tax receipts difficult to estimate.
So far, the hard data suggest both higher personal and corporate tax receipts in fiscal year 2018 and year-to-date 2019. Some of this is clearly related to the Tax Cuts and Jobs Act, such as the treatment of foreign income. Much of it was related to the strength of the underlying economy and one-off business events. The true impact of the Tax Cuts and Jobs Act on State of Vermont taxes will probably not be fully understood for a number of years.
The Sun Is Shining: They must be celebrating in Vermont’s Tax Department! Revenues are coming in over the transom. There was a budget surplus in 2018 and 2019 is looking bright. What should Vermont do with all this money? The next article in The Informed Vermonter will take a look at what the state government actually decided to do in 2018.
- Vermont’s Many Taxes Explained: https://theinformedvermonter.com/493-2-vermonts-many-taxes/
- How Do Vermont’s Taxes Compare To Other States: https://theinformedvermonter.com/487-2-comparative-taxes/