Vermont Treasurer: Federal cuts and tariffs could shrink interest income, hit tourism and small businesses

State Treasurer Mike Pachek told the House Appropriations Committee on April 9 that a changing federal funding picture, uncertain interest rates and recently announced reciprocal tariffs could reduce the roughly $90,000,000 in interest income the state earned in the last fiscal year and that some Vermont regions could feel an outsized tourism impact.

Pachek, appearing before the House Appropriations Committee chair, said the treasury office itself receives almost no federal operating funds but does pass through small federal forest-service emergency funds to towns. “We have almost basically no federal funding that impacts our offices operations,” he said. He added that the office generated “about $90,000,000 of interest income over the last fiscal year,” with a significant portion directed to the state general fund.

That windfall, Pachek said, arose from two factors that may not persist: a larger cash position and higher interest rates. He warned both balances and rates are uncertain. “We did expect generally it to come down a bit as federal spending is out the door,” he said, citing about $400,000,000 in ARPA spending that will be expended in the next 18 months to two years and roughly $400,000,000 in FEMA reimbursements the state is still awaiting. If federal funds decline or state revenues fall in a slowing economy, the cash available to invest — and the interest the state earns on it — could shrink.

Pachek outlined the channels state leaders should watch. He recommended paying particular attention to month-to-month revenue reports for sales tax and the rooms and meals tax, and then corporate and personal income taxes, because those narrower taxes typically show earlier sensitivity to economic disruption. “I think there’ll be a lag in the corporate tax. There’ll be a lag in personal income in terms of maybe seeing it missing the mark. But sales tax and rooms and meals tax…would be more sensitive,” he said.

Pachek also called out recently announced federal tariffs as a separate risk to both consumers and Vermont businesses. Citing independent estimates his office has tracked, he said the Yale Budget Lab projects a $3,800-per-household increase in consumer costs if tariffs remain in place, which Pachek said would exceed the state’s annual sales-tax take. “If you think about how many households there are in Vermont and equate that out, it’s over a billion dollars, just over a billion dollars of additional cost,” he said, noting that the state’s total sales tax revenue is roughly $700,000,000.

He described how tariffs can affect small businesses disproportionally: larger firms may stockpile inventory, have multiple supply chains or absorb some cost increases, while smaller firms have less capital to pre-buy materials or pivot suppliers and therefore may need to pass higher costs to customers.

Pachek and committee members also discussed the potential effect of tensions with Canada on tourism. The treasury monitors border-crossing data as an indicator of Canadian travel to Vermont; Pachek said February border crossings were down about 8.5% year over year in Vermont while national passenger crossings were down about 17.5%. Flights from Canada, he said, appeared to show larger drops in bookings. He warned those declines would affect different parts of the state unevenly: northern parts of Vermont and Burlington — where Quebec license plates are common — could see larger hits.

Committee members asked about other fiscal vulnerabilities. Committee member Lynn asked whether federal attempts to “claw back” unspent ARPA funds could affect agency budgets; Pachek said the revenue impact is similar whether ARPA money is spent or clawed back because either outcome reduces cash balances available to earn interest. He also told the committee that the state’s pension systems and OPEB remain cash-flow positive, reducing the need to liquidate investments to meet benefit payments, and that the pension system uses a five-year smoothing mechanism to blunt year-to-year market volatility.

Pachek summarized the posture his office plans to take: continue monitoring monthly revenue reports, border-crossing and travel data, and to update the committee as new data arrives. “So look forward to be helpful to the committee any way that we can,” he said.

The committee did not take any formal votes during the treasurer’s briefing. Members asked the treasury to share any updated March border-crossing data when available and discussed ways local chambers and businesses might provide more timely information on tourism impacts.

Why it matters: Interest income in recent years has provided a nontrivial supplement to the general fund; a sustained reduction in cash balances or a prolonged period of higher interest rates combined with a recessionary revenue drop could reduce that supplemental revenue as state leaders approach future budgets. Separately, tariffs and declines in Canadian tourism could further depress sales and rooms-and-meals receipts and put small Vermont businesses at competitive risk.

Looking ahead: The committee requested updated border and sales-tax data and discussed following up with regional chambers and tourism entities. The treasurer’s office said it will continue to report monthly revenue trends and provide the committee with updated border-crossing figures as they become available.