Report urges state to build a budget based on Vermonters' needs

Public Assets Institute report paints a picture of a state with glimmers of economic growth - but damaged by the consequences of inequality and a lack of investment in projects and policies for the public good

BRATTLEBORO — Vermont's economy is telling two stories.

One story tells the tale of economic gains and increased personal income. The other tells the tale of economic struggle and poverty.

Both are true.

The Public Assets Institute (PAI), a Montpelier-based economic analysis nonprofit, released State of Working Vermont 2019 last month. PAI compiles the annual report in conjunction with the Economic Policy Institute in Washington, D.C., a non-profit think tank that studies the economy and effects of economic policy.

The report included data on various aspects of the state's economy such as personal income, cost of living, and the number of families living in poverty.

This year, the report writers also focused on long-term trends that have settled into the fabric of the state's economy since 2010, the year that technically marked the end of the Great Recession that had begun in 2007.

According to the report, the Vermont economy has experienced multiple successes and growth such as increased wages.

Meanwhile, it has also become more of a haves-and-have-nots economy plagued with growing income inequality. For example, wages grew faster for high-wage workers than they did for employees in the middle- and lower-income brackets.

“We essentially have a top-heavy economy, and a lot of people are being left behind,” said Paul Cillo, PAI founder and president.

Many of the negative attributes, according to the report writers, are ripple effects of the state government's lack of public investment in clean water, teacher's pensions, and child care, to name three examples.

According to Cillo, the percentage of local and state taxes relative to a Vermonter's total income has remained flat for 25 years, at roughly 12 percent.

This also means that the level of resources the state has for public investments has remained flat for more than two decades.

Part of the solution? Cillo says the Legislature needs to build a state budget based on Vermonters' needs.

“Our policymakers need to try something new,” he said. “Coming out of the recession, Vermonters had reason to expect their lives would improve, but the benefits aren't trickling down.”

Success and struggles

To give credit where due, Cillo said that the Vermont economy experienced multiple successes after 2010.

• The gross state product grew 1.2 percent last year (after adjusting for inflation).

• More private sector jobs have emerged.

• Wages grew for all income levels.

• The number of children living below the federal poverty threshold fell to its lowest level in 15 years.

• The tax systems of the state and its municipalities are among the least regressive in the U.S.

However, Cillo added a “but” to the state's story of economic growth.

• Vermont's economy grew one-third slower between 2010 to 2018, compared to the rate of growth of the national economy.

• The typical Vermont household's buying power in 2018 is no better than that of a similar household before the recession.

• Wages rose faster for highest-paid hourly workers than they did for the lowest-paid employees in this sector.

• The median income for households headed by single mothers - $29,215 - was smaller than it was in 2010, after taking inflation into account.

• More than 1 in 10 children lived in poverty in Vermont in 2018.

Cillo said that these aspects of the economy - positive and negative - represent symptoms of the top-heavy nature of Vermont's economy.

Along with wage growth happening faster for higher-income earners, he said, the federal Tax Cuts and Jobs Act passed in 2017 essentially put $350 million into the pockets of the top 20 percent of wage earners, with benefits of the legislation bypassing most middle- and lower-income households.

The common narrative around making the state more affordable focuses on cutting Vermonters' tax obligations, Cillo said.

To which he adds: fine - then cut taxes for lower-income households.

“Really, [in Vermont] we have a wage problem rather than a cost problem,” he said.

In the State of Working Vermont 2018 report, PAI compared Vermont's cost of living to that of other New England states.

The report writers found that Vermonters paid similar prices for goods and services as their neighbors. What they didn't do, however, was earn as much in wages.

“We need to bring wages up,” he said.

Income inequality - wealth distributed unevenly across a population - is nothing new in Vermont. But, it does hurt the state's overall health, the report said..

According to Cillo, in the pre–Great Depression years of the 1920s, 15 percent of the state population comprised the top 1 percent of earners. After the Great Depression, however, the gap steadily decreased during the following 50 years, reaching a low of 7 percent by the mid-1970s, according to PAI's 2018 report.

Starting in the 1980s, said Cillo, the gap began to widen again, with the top 1 percent of Vermonters peaking in Vermont at approximately 21 percent of the population around the time of the Great Recession.

The state's gap has returned to 15 percent, or pre-Depression levels, he said.

So if the inequality is nothing new, why does it matter?

“Top-heavy economies essentially have the result of creating poverty,” he said.

So why earners in the upper-income brackets experienced growth, middle- and lower-income households experienced a decline in their economic resources, he said.

These economies also reduce their population's upward mobility and dampen economic growth.

For example, according to Cillo, if one person has $10 million, it's unlikely that they can spend it all within the state.

However, take that same $10 million and distribute it to 20 people. With that $500,000, each person would tend to buy goods and services: appliances, mortgages, education, or entertainment. This money then circles throughout the state benefiting communities, he said.

Cillo stressed that Vermont is not alone: income inequality is a national trend.

He's not sure why wages have stagnated, but he suspects that part of the story is the nation's shift from producing goods to providing services. Many service jobs are low-paying.

Breaking the economic logjam

It can feel as though the flow of the Vermont economy has tangled into a logjam. Vermont needs to increase population, but to increase population, people need to afford to live here. But to afford to live here, people need better wages. But to have better wages....

“We're stuck until someday takes action,” Cillo said.

One example of taking action? More public investments, the type of dynamite the PAI recommends the Legislature hurl into the center of the blocked economy.

According to Cillo, the state government has “failed” to make timely investments across all sectors. He points to the state's lack of investment in its portion of teachers' pensions, water quality, and affordable child care as a few examples.

Cillo disputes the Scott administration's framework that increasing spending will make Vermont unaffordable.

“For Vermonters struggling with affordability, it's low wages that are at the root of the problem,” Cillo wrote recently in a blog post. “State of Working Vermont 2019 shows that prices, as calculated by the U.S. Bureau of Economic Analysis (BEA), were only slightly higher - 2.5 percent - in Vermont than the national average.”

“Vermont's average wage, meanwhile, was 18 percent lower than the U.S average wage,” he continued.

According to the report, state government has committed approximately the same percentage of resources to public investments as it did in 1992.

Vermonters are paying the price, he said.

This price takes the form of increased costs associated with delayed maintenance or investment. For example, the state waited years to start cleaning up Lake Champlain and did so only after the federal government had intervened.

Delayed investment can also create social and economic barriers for Vermonters, Cillo said, pointing to affordable child care.

In 2018, approximately 12,000 Vermont children live in poverty. More than half of these children lived in households headed by a single mother.

Part of this disparity reflects the income gap between men and women. In general, women earned less than men in Vermont last year.

The median income for female-headed households was $29,215, or a little more than 60 percent of what single fathers earned.

Unless these mothers leave their children in the care of family or friends during the workday, how does the state expect these women to stay in the workforce, he said.

“It's a big dilemma, structurally,” Cillo said.

He added that providing affordable child care is more than a social-service program. There's also an economic benefit to society, because affordable child care frees parents to stay in the workforce, Cillo said.

It is also important, since employers across the state reported workforce shortages.

Addressing need for economic growth

According to the data gathered by PAI, improving the lives of Vermonters will come more from with increasing state investments than from cutting costs.

In the 2019 report, PAI staff wrote, “For more than 20 years, Montpelier has been guided by an unwritten policy: 'manage to the money.'”

In other words, state policy has consistently built annual budgets for Vermont based on revenue estimates rather than on what Vermonters need to get ahead.

“Whether intentionally or not, policy makers have locked themselves into a revenue structure that is unresponsive to scale and economic changes,” staff wrote.

Cillo said the initial money can come from higher taxes on the top 20 percent of earners, making possible tax cuts for middle- and lower-income earners.

To Cillo's knowledge, no state that has raised taxes on upper-income earners has ended up with less money or has seen so many wealthy residents move away that it hurt the economy.

“Vermont's fiscal policies - decisions about how much to raise and invest - should be based on continuing and up-to-date assessments of what it will take for Vermont to meet today's challenges - not the ones the state faced 25 years ago,” Cillo added. “Planning and investing in the future is the way Vermont moves forward.”

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