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Is Vermont heading off the rails?

By John McClaughry

Posted December 29, 2006

What happens to a state when it becomes the oldest state in the nation, its working age population steadily shrinks, and there’s no longer enough to tax to pay for its very generous K-12 education and human services programs?

In short, that state is heading “off the rails.” And that’s the title of a new Ethan Allen Institute report, based on research by Art Woolf, a University of Vermont professor and founder of Northern Economic Consulting.

For a year now, in op-ed pieces and other forums, former state economist Woolf has been making the case that Vermont’s combination of changing demographics and increasing obligations for state spending programs will lead to serious problems — not immediately, but by 2030. The new report is a concise version of his thesis, produced with contributions from a 23-person advisory group.

The report explains clearly that Vermont will soon become the nation’s oldest state. More of its young people are seeking opportunity elsewhere. The proportion of active wealth producers is declining. The proportion of dependents — increasingly retired seniors instead of children — is growing.

But as Vermont’s taxpayers are well aware, Vermont’s high level of public service spending — especially on public education and human services — is requiring ever-greater tax revenues. There is little reason to believe that over the next 25 years those taxpayers will be willing to pay enough in taxes to support the state’s spending habits.

In the 1996 school year — just before Act 60— state and local governments spent $940 million (in 2005 dollars) to educate 105,600 K-12 pupils. Ten years later, the school population had declined by 7,200, the schools had added 1,179 more teachers, the pupil-teacher ratio had declined to 11.3 (lowest in the nation), and K-12 spending had increased to $1.2 billion, a 27 percent increase in constant dollars.

By 2030, even if Vermonters are willing to devote an all time high of 18 percent of their adjusted gross incomes to state and local taxes, more than two thirds of all tax dollars collected will be needed just to pay for public K-12 education. In fact, by this projection the cost per pupil in 2030 will be an astonishing $33,400 — and that’s in 2005 dollars, not inflated dollars.

Almost all of the remaining tax dollars will be required to fund human service programs. And that assumes there will be no new spending programs, like universal preschools or universal taxpayer-financed health care.

The problem is not beyond our control, but we can’t wait until 2029 to start taking remedial action. There are several possible approaches.
Legislators can slow the growth of spending for both public K-12 education and human services. They can also create a much more favorable climate for investment, entrepreneurial opportunity, and economic growth. That will increase incomes, enlarge the revenue base, and reduce the rising tax burden.

Increasing tax rates in an attempt to increase government revenues is not a viable option. That would propel Vermont from fifth to first place in state and local tax burden. Such a heavy tax burden would doom the state’s efforts to stimulate wealth producing economic growth. The report notes that if Vermont had the national average tax burden, Vermont taxpayers would this year have enjoyed $227 million more in disposable income.
Keeping Vermont on the rails will require transforming Vermont into a state more attractive for productive young Vermonters to stay and work in, and for productive workers from outside the state to migrate into.

This will require changing the state’s tax and regulatory policies. It will require improving its educational and work force quality, strengthening its institutions of post-secondary education, and expanding its telecommunications system. It will also require maintaining the high quality of the state’s health care system and protecting its environmental amenities.

Those steps would make Vermont more attractive to existing businesses and to new firms that base their enterprise on highly educated, skilled, high-salaried workers.

The report concludes by saying, “A conscious decision to implement such policies will take vision and political courage.

“It will mean creating a much more favorable climate for investment, entrepreneurial opportunity, and economic growth, and resisting the political temptation to pick and subsidize favored enterprises.

“It will mean putting limits on the state government’s role as the provider of tax-funded benefits to an increasing proportion of the state’s population.
“But if Vermont’s government and economy are to stay on the rails for our children’s generation, there seems to be no other viable choice. We do not have decades to get this right.”

John McClaughry of Kirby is president of the Ethan Allen Institute. The Off the Rails report can be found online at www.ethanallen.org.