1. 2006 Legislative Orientation Joint Fiscal Office Economic and Revenue Review Montpelier, Vermont December 1, 2006 Thomas E. Kavet, President Dr. Nicolas O. Rockler, CEO Consulting Economists to the Vermont State Legislature Since 1996 Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting 985 Grandview Road Williamstown, Vermont 05679-9003 USA Telephone: 802-433-1360 Facsimile: 866-433-1360 Cellular: 802-272-8385 Website: www.kavetrockler.com E-Mail: tek12@columbia.edutek12@columbia.edu

2. JFO Analyses: Linkages Between Economics and Public Policy Issues Economics Macro-Economics Demographics Micro-Economics Data and Forecasts Policy Review and Commentary Public Policy Issues State Revenues State Expenses Tax Policy Impacts Public Policy Options Oversight Functions Special Studies

3. Macro-Economics State Revenues

5. Economic Forecasts State Revenues

6. Official State Revenue Projections Prepared Semi-Annually, in January and July Forecasts of 41 Revenue Concepts Consensus Forecast Process With Administration Economist, if Possible Forms Basis of Official State Budgets Education Fund Forecasts of About 60 Key Variables Affecting both Revenues and Expenses

7. Detailed Economic and Revenue Outlook Updates for Vermont Are Available Every January and July at: Vermont Legislative Joint Fiscal Office Website: - www.leg.state.vt.us/jfo - see Publications and Archives Latest Consensus JFO and Administration Economic and Revenue Outlook (some hard copy handouts may be available here or at the Joint Fiscal Office): http://www.leg.state.vt.us/jfo/State%20Forecasts/06%20 July%20Forecast.pdf

8. Current Economic Indicators Are Mixed

9. Vermont Revenue Collections for Major Funds Are Expected to Slow Dramatically in the Current and Next Fiscal Years…

10. …As Sources of Exceptional Growth During the Past Two Years Diminish, Including: Slowing real estate markets and reductions in associated wealth, taxable capital gains and personal income revenue Waning Corporate profitability as the business cycle ages Relatively high energy prices, dampening per unit tax source revenues such as gasoline and diesel fuel, as well as new motor vehicle purchases and associated ad valorem taxes Most risks at this time are on the downside, with some calling for a 50/50 risk of recession in the next year Rising interest rates, inflation risks and the extended housing market render the economy vulnerable to further external shock

11. At the Same Time, the Property Tax Base Supporting Education Expenditures Will Decelerate Rapidly…

12. …As Real Estate Markets Retrench

13. In the Meantime, Near Term Cost Pressures Are Expected to Escalate, With Fuel and Health Inflation Leading the Way

14. Demographic Forecasts State Expenses

15. Demographics State Expenses

23. Demographic Forecasts State Expenses

25. Economics Tax Policy Impacts Tax Increases: MV Fees, Cigarette Tax, etc. Tax Cuts: Income Tax, Sales & Use Tax Federal Tax Change Impacts Neighboring State Tax Changes (e.g., NH Income Tax, NY, et. al., Cigarette Tax Changes) Tax Collection and Compliance (e.g., Diesel Tax Change) Tax Credits, Tax Expenditures (e.g., Business Subsidies, VEPC, VEGI, TIFs, etc.)

26. Economics Tax Policy Impacts The Arizona Alt-Fuel Debacle What Happens When Tax Policy Impacts Are Not Adequately Estimated? End-of-Session, “last minute” legislation Pet Project of Speaker of House No Party Opposition – Governor’s Support Federal Highway Funds Threatened So-Called “Minor” Changes to Existing Policies

27. Economics Tax Policy Impacts The Arizona Alt-Fuel Debacle What Happens When Tax Policy Impacts Are Not Adequately Estimated? 1% Program Cap Changed to “Registered” Vehicles, Instead of “New” Vehicles Refundable Credit of 30%-50% of a New Vehicle Plus Fuel Conversion Costs No Fuel Use Requirement No Resident Requirement for Credit “Quick and Dirty” Estimates of $2-$11 Million

28. Economics Tax Policy Impacts The Arizona Alt-Fuel Debacle What Happens When Tax Policy Impacts Are Not Adequately Estimated? Potential $400-$800 Million Out-of-Budget Expense! 5-10% of Total State Budget Possible 4 Year Budget Freeze Program Cancellation – Lawsuits Abound Speaker Loses Re-election Bid Becomes Major Political Issue in Subsequent Elections

29. Other JFO Economic Functions and Special Projects State Economic Model Specification and Management (REMI, REDYN, IMPLAN) Legislative Oversight Functions (e.g., VEPC, State Agencies and Departments, Legislation Compliance Follow-up, etc.) Legislative Studies and Sub-Committee Support Functions (e.g., Property Tax Analysis, Livable Income, etc.) Special Topic Research/Analysis (Fiscal Cost-Benefit Models, Electric Utility Deregulation, etc.)

30. For Further Information, Contact The Joint Fiscal Office or: Thomas E. Kavet Dr. Nicolas O. Rockler Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting 985 Grandview Road Williamstown, Vermont 05679-9003 USA Telephone: 802-433-1360 Facsimile: 866-433-1360 Cellular: 802-272-8385 Website: www.kavetrockler.com E-Mail: tek12@columbia.edutek12@columbia.edu