COVID-19 Tax and Revenue Implications
Disclaimer – The budget numbers included below are changing week to week. They are included here to provide a picture of where we are at present. They are likely to get worse before they get better.
The impacts of the COVID-19 virus will be far and wide and will cause havoc throughout Vermont’s economy. The recently enacted federal relief packages will provide financial support when we desperately need it. But that money comes with strings attached. The federal bill was written for all 50 states, and Vermont is unique among them in many respects. Trying to get the money from federal buckets to where it’s needed most in Vermont will require dexterity and creativity. What’s more, information and guidance is still in its infancy and seems to change from day to day.
Of the $2 trillion federal package, the direct economic stimulus to states is $150 billion for states. Vermont is expected to receive about 0.8% or $1.25 billion. That is more than our proportional share would be were it not for the Small States Minimum negotiated by our Congressional delegation!
As we know, COVID-19 is disrupting our state’s economy, and the most serious ramifications are unfolding before our eyes faster than we can anticipate them. Trying to estimate COVID-19’s impact on state revenues is devilishly difficult. Simply put we’re operating in the dark. We don’t have enough economic data or a clear path to spend the federal money or to make accurate statements about when we’ll get our noses above water – economically or socially. In very stark terms, Vermont revenues are seeing a dramatic downturn and federal aid won’t be enough to make everything whole again, at least not for some time.
Some may find the following discussion overly wonky. I’ll apologize in advance for that. And note that the analysis is complicated because we are talking about two different fiscal (financial) years. A fiscal year is abbreviated FY. The interplay from one to another effects our understanding of who’s affected, in which bucket revenues are deposited and when they are available for spending.
Different fiscal years:
Calendar year – most of us think of a year as beginning on January 1st and running through December 31st.
Vermont State fiscal year – Vermont’s FY and budget begin on July 1st and run through the following June 30th.
Most of what follows is in consideration of the Vermont State fiscal year. The current fiscal year is for the budget we passed last May 2019. That’s state FY 2020. FY 2021 will begin on July 1st.
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Due to COVID-19 FY20 General Fund will likely see a reduction of revenue of over $200 million. This would represent a reduction of about 17% of total FY20 General Fund revenues. Part of this is because tax filing deadlines have been postponed from from April 15th to July 15th (a different state fiscal year). Hence, money due to be collected in FY20 won’t be collected until FY21 where it will reappear on the FY21 balance sheet. We will see a huge hole in the current fiscal year budget.
The net revenue loss due to COVID-19 in income, sales and rooms and meals taxes is likely to be close to $150 million or perhaps substantially more. The Transportation Fund will also see a reduction of around $45 million. The eventual shortfall will require corresponding current year budget cuts. The impact of the Governor’s action to defer rooms and meals and sales tax revenues could further change these estimates. While the Governor’s actions were necessary under the circumstances, postponing tax collections makes it difficult for our state government to do its work. It also makes projecting FY21 revenue very problematic. Further it makes setting statewide property tax rates and the yield impossible at this time.
Note that sales tax revenues and 25% of rooms and meals tax revenues go to the Education Fund; so, shortfalls in those collections will affect the Ed Fund going forward. At this time it is estimated it’s likely that the Ed Fund will be in deficit by as much as $40 million the end of FY20 and a much larger one in FY21 which begins July 1st. Just a week ago we anticipated using reserve funds to end the year with a balance of $0, but things have gotten far worse as we blinked. Non property tax revenues for FY20 are expected to fall $35 to $45 million below January targets. And as taxpayers know, if revenues are down the only place to make up the difference is through the property tax. (see below)
The Education Fund (EF)
The EF will run a significant operating deficit in FY2020. Vermont had a pre-COVID projected surplus of $12.9 million and a statutorily required stabilization reserve of about $36.4 million. These funds will be completely depleted, but that won’t be enough to balance the bottom line. Lottery transfers to the Ed Fund are also way down. Hence the year end balance sheet will show the Education Fund to be insolvent to the tune of about $40 million.
The Federal COVID-19 stimulus package includes $13.5 billion for elementary and secondary schools. Vermont’s share of this additional school aid is over $30 million. We are working through issues that will determine whether the funds can be distributed to school districts during the current fiscal year or next year.
Given the current level of uncertainty, setting the education property tax rates and the “yield” for FY2021 prior to adjournment will be problematic. We clearly recognize the difficulties towns will face when lodging the Grand List, sending out tax bills and collecting taxes on time. However, if these parameters are not set prior to adjournment, there are default parameters set forth in current law.
COVID-19 related EF revenue losses are expected to be significantly higher in FY2021 for both education property taxes and non-property taxes; however, reliable estimates are not yet available.
Consistent with current statute, the property tax credit (income sensitivity) for FY2021 will be based on 2019 property tax bills and last year’s income – that is as reflected by pre-COVID circumstances. There seems to be sufficient cash on hand for income sensitivity payments to go out on time; however, there will be no additional property tax assistance for taxpayers with COVID-19 related loss of income. Currently there is no pot of money to provide additional assistance, but the matter is under consideration.
Moving the filing deadline for the property tax credit to July 15th creates a potential problem for municipalities to issue timely education property tax bills in FY2021.
Vermont's Cash Position (money in the bank)
Fortunately the state’s cash position for all combined funds is quite good. Our statutes allow transfers among funds, provided that all transfers are paid back. Our net cash position is such that Vermont will end the current year with the ability to pay all its bills. Note that cash position is very different from our budget.
Education Finance Issues Raised by the COVID-19 Pandemic Summary
(weedy stuff interesting to some)
Businesses will be allowed to postpone paying some trust taxes due in March and April to July. If this revenue is not fully paid by the end of this fiscal year, this postponement may create an EF cash flow problem in the current fiscal year, FY2020. Note that rooms and meals and sales taxes are considered to be trust taxes because they are paid by purchasers at the point of sale and held “in trust” by the merchant until remitted to the state.
Voters have already approved 94 school budgets which will increase education spending by $73 million over FY2020 levels in FY2021. That $73 million becomes part of the Ed Fund balance sheet in as much as approximately 2/3 of that cost in absorbed through statewide property taxes.
Voters defeated nine school budgets in March and other school districts have votes scheduled in April or May. How and when these votes will take place now is uncertain.
Moving the filing deadline for the property tax credit (income sensitivity) to July 15th creates a potential problem for municipalities to issue timely education property tax bills in FY2021. This loss represents about 2% to 2.6% of total EF revenues in FY2020.
Schools will be required to create Continuing Education Plans for all students and all educational services, to the extent possible. They must be offered to students through various remote and virtual means. Since school budgets are set, any additional funding required to provide educational services during the 2019-2020 school year will require school districts to reallocate existing funds, use reserve funds if available, or run a deficit that would carry forward into the next school year. However, this far into the current school year school districts have less flexibility to reallocate funds and districts are universally thin on reserves.
Prior to the COVID-19 outbreak - the EF was projected to close FY2020 with a full stabilization reserve of $36.4 million plus a surplus of $12.9 million. Those monies will be exhausted before the end of the current year. However, without additional funding from some other source such as the Federal COVID-19 stimulus bill, the EF will run a significant operating deficit in FY2020 and all the surplus and stabilization reserve will be used cover statewide education spending. As of this date, we are projecting an Ed fund deficit of about $40 million.
Under current law, school districts receive three equal payments from the EF on September 10th, December 10th, and April 30th. For school year 2019-2020, the April 30th payment to school districts is still outstanding. This payment includes state categorical aid for special education, transportation, and small schools as well as the education payment. Revenue losses and deferral of some trustee taxes could create a cash flow issue for the EF. Municipalities must be timely in their payments of statewide education property tax to the State even if property taxpayers are delinquent or fail to pay their taxes.
Consequently, in addition to losing municipal property tax revenue, municipalities would need to remit the full amount of education property tax owed to the State. There is also an 8% penalty for late payments, but the Commissioner of Taxes can exercise his general authority to waive the penalty.
The Federal COVID-19 stimulus bill includes $13.5 billion for formula grants to states. States must distribute 90% of their allocation to school districts based on their proportional allocation of Elementary and Secondary Education Act Title I-A funds. Up to 10% of the allocation may be retained by the Agency of Education for emergency needs. Funds distributed to school districts may be used for COVID-19 response activities, such as planning for and coordinating during long-term school closures, purchasing educational technology to support online learning, and additional activities authorized by federal elementary and secondary education laws. That said, the Treasurer and the Administration are working out how the funds might be distributed.
During a normal year prior to adjournment, the Legislature normally sets the property and income yields as well as the non-homestead property tax rates for the upcoming fiscal year. Given the current level of uncertainty about the health of the EF at the close of FY2020 and the magnitude of any FY2021 revenue shortfall, setting education property tax parameters for FY2021 will be problematic if not impossible at this time. COVID-19 related revenue losses are expected to be significantly higher in FY2021 than they are in FY2020. At this point in time reliable estimates of how significant those revenue losses will be are not available.
Note that any reduction in State categorical aid for special education, transportation, or small schools will increase local education spending by the same amount. Even if it is possible to undue voter-approved education spending, efforts by districts to reduce budgeted education spending in FY2021 would be constrained by existing teacher contracts.
Salaries and benefits alone account for almost 80% of education spending statewide. In districts with contracts in place for FY2021, the only way to significantly reduced spending would be to lay off teachers and other staff – an undesirable outcome in the midst of an economic downturn. In March voters defeated nine school district budgets and in five school districts the vote is scheduled in April or May. It is uncertain when the municipalities that belong to these districts will be able to vote on their school budgets.
Also note that if voters are unable to pass a school budget by June 30th there is a default in current law that will allow a school district to continue to operate by borrowing funds necessary to enable operation on a budget up to 87% of the most recently approved budget. If the yields and non-homestead tax rate are not set prior to adjournment, there are default parameters set forth in current law. The property and income yields would remain at their FY2020 level and the non-homestead tax rate would remain at its statutory level of $1.59. Alternatively, these tax rate parameters could be set as recommended by the Commissioner of Taxes last December. Board-approved school budgets were presumably presented to voters with the spending-adjusted homestead tax rates that result from these parameters.
Under current law, the filing deadline for both the homestead declaration and the property tax credit claim is April 15th. The Commissioner of Taxes has now pushed that deadline back to July 15th to conform with the personal income tax filing deadline. This creates a potential problem for municipalities to issue timely net education property tax bills in FY2021.
So there you have it. The situation is grim and it’ll be a long time before we see daylight at the other end of the tunnel.