Money Troubles

The biggest and most challenging item on the Legislature’s agenda this session is the 2016 budget. As you’ve probably heard or read about, there is a $112-114 million budget gap between budgeted expenditures and available revenue.

How did we get to this point? There are some answers, but none of them are particularly satisfying or comforting, and the potential solutions are painful, unpopular, or both.

Budgets are generally based on projected available revenues that come in from different sources, but mostly from taxes (and most of these are from income and sales taxes). When the economists that we rely upon deliver projections of how much revenue we can expect to see in a given fiscal year, we – by which I am mostly referring to the Executive Branch and the House and Senate Committees on Appropriations – are tasked with determining how to allocate the working capital we will have on hand to fund the programs and services managed by the various agencies and departments of the state. In addition to expanding or contracting existing line items in the budget, new services, programs and positions can be created. But the old adage always holds true – you can’t spend more than you take in and expect to have a balanced budget. But if we can’t accurately determine how much we’ll be taking in or how much a given service or program will cost the state year-to-year, how confidently can we budget hundreds of line items and say YES when the roll is called to approve a bill and pass it to either the Senate or Governor for final approval? And at the end of the day, is a balanced budget a healthy one? There is no constitutional requirement that Vermont balance its budget but this has been the practice since deficit spending through borrowing would hurt our credit rating.

The state funds and operates many worthy and necessary programs, such as supports for those with mental health and physical needs, veterans services, rehabilitation of the incarcerated, treatment for the addicted, protection of abused and neglected children, maintenance and repair of roads and bridges, food safety inspection, environmental protections, contributions to the humanities and arts, and promotion and marketing of Vermont’s way of life to attract new residents and taxpayers. Using methods like Results-Based Accountability we make a concerted effort to determine the cost-benefit analysis of these programs, and can then opt to either streamline a program or service to enhance efficiency or boost funding to areas in need. Child protection and opiate interdiction & treatment immediately come to mind as services that could benefit from a lot more funding.

When confronted with a gaping hole in our budget, there are many questions we need to ask ourselves: Are there flaws in the economic modeling we rely on? Should we be factoring in a larger margin of error to account for potential revenue downgrades in the future? Have we been too dependent on one-time funds and federal assistance? Is the money we’re allocating being well-spent? Are we victims of economic malfeasance in Washington (yes!) and/or budgetary mismanagement in Montpelier? What programs, services and positions do we cut in response, and to what extent do we consider raising taxes to plug the hole?

We know for a fact that lower than anticipated income tax revenue plays a large role in our current predicament. According to some fiscal analysts, this is because more and more people (and possibly corporate people too) are using “tax strategies” to minimize their state and federal liabilities. Nothing wrong with that, I suppose, as long as it’s legal. (Then again, not everything that’s legal is necessarily ethical or beneficial.) We also know that there is a larger, more fundamental reason why income tax revenues aren’t as robust as desired –
stagnant wages for the average Vermont worker. And it’s not just a Vermont problem; in 81% of counties across the country, household income for middle-class Americans peaked in the late 90′s and has stagnated or in many cases even declined over the past 15 years. (The performance of the stock market and corporate profit reports stand in stark contrast to this broader economic reality, and the disconnect there breeds a much larger debate; international trade policies and financial deregulation orchestrated by the Clinton administration immediately come to mind as contributing factors to these structural problems, but the blame can also be shared with every President and Congress during my lifetime.) Low wages and stagnant income equates to reduced sales tax revenue since there is less discretionary cash flowing through the system, and the problem is exacerbated. The reduction in the cost of oil is a welcome respite for Vermont, with our high per capita gasoline consumption and reliance on heating oil, but the petroleum economy is volatile to say the least and could turn on a dime.

What is state government’s response to this current fiscal crisis? Should state employees who negotiated in good conscience for pay and benefits be sent home, temporarily reducing their own share of income tax into state coffers and possibly making them eligible and dependent for a time on state entitlements? Do we cut middle-management positions or plow drivers? Do we cut support services for the blind, our veterans, those with autism, those who can’t afford to heat their homes during a harsh winter like the one we just had, prisoners who want to improve themselves through educational opportunities? Or do we take a hard look at things like raising the rate on capital gains and eliminating certain tax exemptions to blunt the effect of budget cuts and their potentially net-negative repercussions?
As I write this, no proposal for cuts or new revenue is set in stone, but the House will likely take a position by the end of next week and many hot-button items are in play. In the past I have supported our budgets because I believed that they included important investments and I trusted in the economic and budgetary expertise of those with higher pay grades than me, a part-time, amateur, citizen legislator. I believed our budgeting was sustainable and would achieve positive outcomes for Vermonters. Maybe I was wrong.

I welcome your thoughts on this issue.

PO Box 875, Barnard, VT 05031
802-234-9125
tzagar@leg.state.vt.us

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