The government’s response to the COVID-19 pandemic, both at the state and federal level, required higher spending and will result in lower revenues. Basically, a fiscal bomb has gone off across the USA.
The impact, particularly for the federal government, is likely to last a very long time.
This article will examine the fiscal consequences of coronavirus in Vermont, beginning with a brief assessment of how well the state was prepared for this crisis. Increased costs, the impact on revenues and mitigating factors will also be discussed. The next article will do the same for the federal government.
The state government of Vermont has a long history of fiscal prudence. As a result, Vermont was well positioned fiscally for the COVID-19 crisis. It was ready to take one on the chin.
Coming into the first quarter of 2020, Vermont was benefiting from a strong overall economy with growing wages and low unemployment. State tax revenues were $3.4 billion in the fiscal year ended June 2019, up $167 million over FY 2018. As of February 2020, Vermont’s tax collections were trending a bit ahead of FY 2019 levels.
Vermont also has a quite modest level of general obligation debt. Over the prior two fiscal years, Vermont’s debt did not grow at all and interest expense in FY 2019 was a mere $17 million, or just 1.6% of total state income tax revenues.
The single largest expense associated with any kind of economic downturn is unemployment insurance benefits. Again, Vermont was very well prepared to deal with the next recession. Unemployment Insurance revenues exceeded outflows by $45.9 million in FY 2019, resulting in an Unemployment Insurance Trust Fund with $516 million of net assets at year-end. In FY 2019, total Unemployment Compensation paid out was $65.7 million, so the Trust Fund covered normal year claims by a factor of almost eight times.
Soaring Unemployment Insurance Benefit Costs
As indicated above, Vermont paid out $65.7 million in Unemployment Insurance benefits in the fiscal year ended June 30, 2019. During that year, there were an average monthly number of Continuing Unemployment Insurance claims of 3,665. Given these numbers, the average weekly Unemployment Insurance benefit in Vermont in FY 2019 was $341 (the maximum allowed is $513).
As outlined in the previous article, the number of Continuing Unemployment Insurance claims in Vermont peaked at 76,457 during the week ending April 18 and stood at 38,335 as of the week ending July 4. For the fifteen-week period from the week ending March 21 to the week ending July 4, and assuming an average weekly benefit payment of $341, Vermont would have paid out something like $235 million in Unemployment Insurance benefits.
Under the CARES Act, the federal government is adding $600/week to all these benefit payments. These extra funds do not come out of Vermont’s Unemployment Insurance Trust Fund. This extra $600/week is scheduled to terminate shortly and an extension of extra benefits is now being debated in Washington.
While continuing claims have declined sharply since April, they still remain more than 10x the normal level. Should unemployment claims continue to fall at a reasonable pace, Vermont’s Unemployment Insurance Trust fund should be able to handle the crisis with room to spare. However, if the recovery stalls for a period of many months, even Vermont’s very healthy Trust Fund could be challenged.
Declining Tax Revenues
Vermont’s state tax revenues for the fiscal years ending June 2020 and June 2021 are likely to take a hit as a result of the coronavirus recession. Mandatory business shutdowns and high unemployment result in lower incomes and lower transactions volumes, both of which drive Vermont’s tax collections lower.
The state government publishes a monthly revenue report that itemizes tax collections for the state. The most recent report covers the 12-month period ending June 30, 2020. As of that date, state revenue collections were down $145.6 million compared to the same period one year ago. At the end of February, state revenues were up on a year over year basis, so this decline occurred entirely in the four-month period ending June 30.
The largest negative variance was in personal income taxes, which were down $111.5 million. The major reason for the decline was the government’s decision to postpone the income tax filing deadline from April 15 2020 to July 15 2020. Vermont received 39,000 fewer tax returns and will need to wait until July ( the first month of FY 2021) to collect these taxes.
It seems highly likely that incomes will generally be lower in 2020, so next year’s income tax collections are likely to be lower as well. The single largest source of tax revenue for Vermont is likely to be challenged well into FY 2021.
Not surprisingly, Meals & Rooms tax receipts were down $12.6 million on a year-over-year basis. The recovery in this revenue stream will depend on how fast the tourist industry is allowed to reopen and the extent to which consumer behavior has been affected by the coronavirus pandemic. This will likely remain under pressure for months to come.
Transportation Fund tax revenues (Gas & Diesel, Motor Vehicle Purchase & Use & Motor Vehicle Fees) were down $16.6 million. This largely reflects lower miles travelled and deferral of major purchases, both very predictable consequences of a business shutdown.
The bad news seems likely to continue past June 2020 and into fiscal year 2021. The timing and extent of any recovery in the months following June are highly uncertain, but downside scenarios seem more likely near term. So, fiscal year 2021 may prove challenging as well from a fiscal perspective.
Vermont will benefit from some new revenue sources as a result of federal programs put in place as a direct response to the COVID-19 pandemic. First and foremost, Vermont received a $1.25 billion grant under the CARES Act. This money is NOT available to cover costs that had been budgeted before March 2020, so it is not going to cover the holes left by the revenue setbacks outlined above. However, it is available to cover any and all incremental costs arising as a result of the coronavirus outbreak.
As reported in an earlier Informed Vermonter article, the federal government has also agreed to increase its share on Medicaid funding by a full 6.2%, from about 60% to about 66%. Depending on how long the COVID national emergency is in force, this change should increase federal funding by $50 to $75 million in Vermont. This will plug a major part of the budget holes in fiscal years 2020 and 2021.
Also, Unemployment Insurance benefits are taxable. The extra $600/week being funded directly by the federal government becomes taxable income in the state of Vermont. This will help keep the state’s personal income tax receipts closer to a normal level.
Fiscal year 2021 revenues will also be bolstered by the receipt of income taxes from 39,000 Vermonters that postponed filing from April to July.
Some of the state government’s major expenses should also be going down as a result of this crisis. COVID-19 has made hospitals a scary place to go and admissions are down across the state, as much as 50% in some health facilities. As a result, a decline in overall Medicaid expenses seems likely. Also, education expenses should be lower as well. With schools shut down, one would think food, transportation, overtime, utility and other variable expenses would all be heading lower until schools reopen in September.
It’s difficult to judge how the mix of lower state tax revenues, potentially lower state expenses and higher federal grants will ultimately affect the State of Vermont’s budgets. However, assuming the economy recovers at a steady pace and things don’t get worse, the situation appears quite manageable.
A tax revenue shortfall exceeding $145 million has occurred in the fiscal year ended June 2020, entirely in a four month period of time. While fiscal year 2021 is likely to start off weak, its difficult to forecast or predict full-year results. To the extent reduced expenses and increased federal grants offset some of the tax revenue weakness, the scale of resulting deficits may be reasonably modest.
Access to the bond market, with historically low interest rates, would be one way to fix any problems. Sharper reductions in government spending would be another way to address any deficits. Raising state tax rates in a recession is probably not an alternative that makes sense.