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The budget gap solution

“Vermonters need to smoke more.”

That was the eye-catching headline to a recent column by Jon Margolis on vtdigger.org. It was a great way to explain Vermont’s chronic budget gaps without putting everyone to sleep talking about “structural revenue problems.”

Margolis was right. Part of Vermont’s budget problems are due to the state’s reliance on revenue that is tied to an ever-shrinking tax base.

There are fewer cigarette smokers. It’s a good thing. We want people to quit. But because cigarettes are taxed by the pack, we take in less money unless we keep raising the tax rate. It’s the same with gasoline. A portion of the gas tax is levied by the gallon. As vehicles get more efficient, or are powered by something other than gasoline, the state takes in less money to repair roads and bridges. Driving more was another of Jon’s prescriptions.

A few years back, a commission appointed to study Vermont’s tax structure found that the state’s sales tax base, if not shrinking, certainly wasn’t keeping up with consumers’ changing buying habits. The commission recommended the sales tax be levied on most services and on online Internet purchases. By broadening the sales tax base, the commission said, Vermont could lower the sales tax rate.

Modernizing Vermont’s revenue system would help to address the state’s recurring budget gaps. Policy makers and elected officials also need to do a better job managing the ups and downs of the economic cycles— build up adequate reserves and be willing to use them.

We heard a lot this fall about matching state budget growth to the economy as a way to deal with budget gaps. While the two generally need to be in sync over the long term, budget growth and economic growth aren’t going to move together every year, nor should they.

The late Gov. Richard Snelling understood the idea of countercyclical budgeting—and was known to lecture reporters on the subject during news conferences. When the economy tanks, as it did most recently at the end of 2007, state revenues fall at the same time that there is greater demand for public services: food stamps, home heating assistance, unemployment compensation, welfare, housing for the homeless, and the other things families need when people lose their jobs. That’s exactly when government needs to step in, not pull back.

To be sure, Snelling advocated for “sustainable” budget growth. But in 1991, when Vermont was in the throes of another recession, he and the Legislature spent money the state didn’t have—Vermont ran a budget deficit—rather than slash critical services trying to match budget growth and economic growth in the short term. They also raised tax rates to pay off the deficit, and later rolled back the tax rates after the economy recovered.

In today’s political climate, it is unlikely we’ll see the state run temporary deficits again. But Vermont can further develop another fiscal tool: reserves. Revenue volatility, which some economists warn has gotten worse in recent decades, could be mitigated if the state had larger reserves to manage through an inevitable downturn. The Center on Budget and Policy Priorities recommends reserves equal to at least 15 percent of the budget.

Long-term budget sustainability is an important goal. So is fiscal stability. State government will function better and Vermonters will be better served by a combination of revenue modernization and sound, steady fiscal management than by erratic, unpredictable funding of state services driven by annual cash flow.

The purpose of the state budget, according to the statute adopted in 2012, is to “address the needs of the people of Vermont in a way that advances human dignity and equity” and “[s]pending and revenue policies will … recognize every person’s need for health, housing, dignified work, education, food, social security, and a healthy environment.” Those are the criteria our elected officials should use in determining spending in the state budget.

 

Posted by Jack Hoffman on November 30, 2016 at 10:05 am

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