Wednesday, September 27, 2006

Interview with Rep. Greg Hughes (R-Draper)

On Wednesday, September 27th, Utah Taxpayer Association vice president Mike Jerman interviewed Rep. Greg Hughes (R-Draper). Hughes, along with Rep. Wayne Harper (R-West Jordan), was the recipient of the association's 2006 Taxpayer Advocate of the Year. A small business owner, Hughes is also the chairman of the House Conservative Caucus.

Mike Jerman: What are the biggest issues in the 2007 General Session?
Rep. Greg Hughes: Slowing the growth in state government spending is a major issue. The state's general revenues increased 18% in the recently concluded fiscal year (2006), and this follows a 12.4% annual increase in 2005. We had some lean years a couple of years ago, but overall state revenue growth has exceeded inflation and population growth over the last ten years. We'll always have unfunded needs in Utah, but we can't forget the taxpayers nor can we pretend that high tax burdens don't negatively impact long term economic growth. Reform is also a big issue.

MJ: What type of reform?
Hughes: Tax reform, education reform, and transportation reform. If the education and transportation lobbies had their way, we would see an avalanche of taxes that would kill our economy. We would have to raise our individual income taxes by more than 80% to increase our per student spending to the national average. And then we would have to increase local property taxes to build new schools to accommodate class size reduction. Education reform entails many changes, including merit pay, differential pay, and more parental choice. I also support increasing funding in the classroom as a percent of total education funding.

MJ: What about transportation reform?
Hughes: We need to make sure that transportation is adequately funded because economic development depends in large part on the viability of our transportation infrastructure. However, I am opposed to simply throwing money at the problem, and that's where transportation reform comes in. In the recent special session, I worked with my legislative colleagues to require side-by-side prioritization of road and transit projects. Prioritization will be based on cost-effectiveness of reducing congestion. We should have done this years ago. I also successfully fought for increased funding for corridor preservation. We can save a lot of money by buying up road corridors now before residential and commercial development encroaches on these corridors. This is also something we should have been aggressively pursuing years ago.

MJ: Politics usually focuses on the bad news. Is there any good news out there?
Hughes: Yes, the economy is growing which is why tax revenues are exploding. We significantly increased education funding in the recent general session, even though education groups don't acknowledge this. The education appropriation for FY2007 is 11.3% higher than the original pre-supplemental appropriation for FY2006.

When calculating spending increases, spending groups like to include supplemental appropriations for the base year even when the supplemental appropriations are not known for the current year. This understates actual expenditure growth. Supplemental appropriations should be included only when the supplemental amount is known for both years that are being compared.

The rainy day funds and the "working" rainy day funds are at all time highs, $255 million and $708 million respectively. The state has the highest possible credit rating. As a growing state with large families, we will always face challenges, but I am optimistic about the future of this state. I wouldn't be in the Legislature if I had a pessimistic view of Utah's future.

MJ: One last question. Are your Pirates going to let my Astros win so the Astros can have another shot at the World Series?
Hughes: I hope not. The Disastros embarrassed the entire National League last year when they were swept by the White Sox.

Monday, September 25, 2006

State spending limit: decreased chatter

A couple of weeks ago, we noted that we had been monitoring a lot of chatter about attempts to weaken Utah's state spending limit. One source even mentioned the possibility of a "contingent budget" based on the possibility of the spending limit being weakened or repealed. Recently, we've noticed a decrease in the volume of chatter. This is the time of the year that state government starts finalizing the next fiscal year's budget and the current fiscal year's supplemental budget.

In our September newsletter, we wrote an article about the state spending limit. The FY2007 budget is $20 million under the limit. Considering the size of the education fund ($2.76 billion) and the general fund ($2.18 billion plus $207 million in earmarks), the state is just barely under the spending limit. As a percent of the general and education funds, $20 million is about 0.4%. As a percent of expenditures subject to the limit, $20 million is about 0.9%. Click here to read the newsletter article.

We've noted that the current spending limit is not very strong since so much is excluded from the limit. In the current, pre-supplemental FY2007 budget, only 43.7% of the education fund and general fund (including earmarks) is subject to the limit. In fact, since all K-12 expenditures and most transportation expenditures (particularly earmarked general fund expenditures) are excluded from the limit, defenders of maintaining the limit have argued that the best way to increase K-12 education and transportation spending is to keep the limit in place.

The following is a list of items that are excluded from the limit:

Exempt education fund expenditures
- K-12 operations ($2.103 billion)
- K-12 capital ($37.288 million)
- Higher education cash for capital projects ($68.042 million)
- Tax Commission ($19.263 million)
- Debt service ($17.164 million)

Exempt general fund expenditures
- Transportation Investment Fund ($256.0 million)
- Debt service ($51.7 million)
- Revenue bond debt service ($9.97 million)
- Section 63A-5-104 capital developments ($128.62 million)
- Earmarked general fund ($207 million)

Source: Governor's Office of Planning and Budget

Despite the recent chatter decrease, we are still anticipating an attempt to weaken the state spending limit.

Thursday, September 21, 2006

Rainy Day Funds at All-time Highs

Utah's financial situation looks better now than it has in a very long time, due to an expanding economy that has generated huge increases in state tax revenue.

Utah's rainy day funds -- officially known as budget reserve accounts -- are now at all-time highs and have reached their statutory limits. According to data just released by the Division of Finance, the General Fund Budget Reserve Account now has a $132.1 million balance, and the Education Budget Reserve Account now has $122.9 million for a total of $254,925,000. State statute allows the budget reserve accounts to retain a maximum of 6% of general fund and education fund appropriations.

Some may dispute that the statutory 6% reserve limit is too low. Cities are allowed to have reserves equaling 18% of general revenues while counties are allowed to have 20% in reserve. School districts, on the other hand, are allowed to have 5% in reserve. The lower limits for the state and school districts are probably attributable to the fact that there is significant overlap between state and school district budgets and reserves held at the school district level lessen the need for the state to have reserves of its own and vice versa.

It was only a couple of years ago that Utah had bled its rainy day fund down to $19.5 million in FY2002 from the previous high of $120.3 million in FY2001.

Also, Utah unofficially has a "working" rainy day fund. A "working" rainy day fund consists of cash revenues -- as opposed to bonds -- that are used for capital projects. In FY2007, about $708 million in cash are being used for capital projects like roads and buildings. Normally, state and local governments in the U.S. use bonds to fund capital projects, but the state of Utah to its credit has also relied heavily on cash to fund capital projects. In addition to avoiding interest expenses, using cash to fund capital projects allows the state to manage its budget more effectively if projected revenues do not materialize.

These funds are frequently called "working" rainy day funds because

  • the funds are actually being "put to work" by funding the construction of a capital project instead of just sitting in a bank account collecting interest
  • the funds can be transferred from capital projects to cover ongoing operating general expenses if projected state revenues end up being lower than initially projected.

If cash is transferred from capital projects, the projects are then either funded with bonds or are delayed.

Diverting cash, particularly ongoing revenues, to capital projects has the added advantage of slowing the growth of ongoing operating expenditures, although some would argue that using ongoing revenues to build state buildings ultimately increases ongoing expenditures because these buildings are then filled with state employees and the buildings require ongoing maintenance. Nevertheless, even if ongoing expenses are increased when buildings or roads are built, the increase in onging expenditures would be higher if the ongoing revenues had initially been used exclusively for ongoing expenditures instead of capital.

During the last recession when revenues stopped growing, the state relied on rainy day funds and "working" rainy day funds to balance the budget. Although the state raised taxes in the last recession (K-3 district option property tax, cable and satellite TV tax, individual income taxes due to lack of bracket adjustments), these tax increases were small compared to the tax increases of 1987 which in today's economy would be the equivalent of hundreds of millions of dollars.

Sunday, September 17, 2006

Are Utah's Tax and Fee Burdens Overstated?

In June, the Utah Taxpayers Association released its annual How Utah Compares study which compares tax and fee burdens in Utah to tax and fee burdens in other states as percent of personal income basis. Click here to see the report.

A summary of the report’s findings are as follows

Total taxes and fees: . . . . . . . . . . 15.32%, 4th highest in U.S.
Taxes and fees less tuition: . ... . . 13.51%, 14th highest in U.S.
Taxes and fees: . . . . . . . . . . .. .. .10.67%, 19th highest in U.S.

Should tuition be excluded altogether from tax/fee burdens?

Last week, the Utah Foundation (UF) released a report that says including tuition overstates Utah’s tax burden. UF claims that tuition should be excluded because tuition is “non-mandatory” (that is, no one is legally required to go to a public university) and because some eastern states rely on private schools.

The Utah Taxpayers Association included several measures of taxes and fees, one of which specifically excluded tuition in order to demonstrate the impact of a high college-age population on Utah's tax and fee burden (UF’s idea comes from the Utah Taxpayers Association’s June 2006 report). However, we disagree that tuition should not be considered at all.

Tuition: A non-mandatory fee?

Completely ignoring public university tuition because it is a “non-mandatory fee” has several flaws.

First, fees (including tuition) should be included in tax/fee burden calculations because there is a direct linkage between decreased reliance on taxes and increased reliance on fees. While increased reliance on user fees makes sense in certain situations, especially if user fees encourage efficient use of resources such as water and transportation, fees should be included in tax burden analyses since governments frequently increase fees in order to avoid increasing taxes.

In recent years, Utah has essentially shifted more of the cost of higher education from general taxes to user fees like tuition. Most Utahns are concerned about declining university enrollments as a percent of population, and most policy experts attribute much of this decline to increasing tuition costs. Tuition has increased for several reasons, but one major reason is that the state has made a conscious decision to rely less on general taxes and more on user fees like tuition. In FY1996, tuition accounted for 25% of higher education revenues. In FY2007, that percentage increased to 30%. While some may applaud such a shift, government is not really reducing our total burdens when shifting from general taxes to user fees like tuition.

According to UF's logic
, the state could cut state/local tax burdens by reducing general taxes and increasing “voluntary” fees. Since tuition doesn’t “count” as a fee according to UF, a reduction in general taxes and a dollar-for-dollar increase in tuition would be a net tax cut according to UF.

However, tuition is not the only “voluntary” fee that most Utahns will be paying in future years. Many new highways may be tolled. Will UF also call these “voluntary” fees that should be excluded from our state/local tax and fee burden since no one will be forced to drive on a toll road?

Second, while no one is forced to attend a public university, attending a public university is the only option for most Utahns who want to attend college. This is especially true since BYU has capped enrollment and BYU draws most of its enrollment from out of state. For most Utahns, attending a public university is only voluntary for those who don’t want to attend college in the first place.

Third, most fees are voluntary to a degree. Impact fees could be argued as “non-mandatory” since people could buy an old house instead of a new house. The same could be said of gas taxes, which are really a fee, since taxpayers could significantly reduce their payment of gas taxes by driving less or by driving a fuel efficient car. Excluding "voluntary" fees is just an attempt to understate the real size of government burdens. Fees, including tuition, are real burdens and should be included.

Fourth, even if UF and others want to call fees like tuition “voluntary,” government still has a responsibility to keep fees under control.

When calculating state/local tax and fee burdens, the Utah Taxpayers Association pioneered the idea of calculating several tax burden measures. Some measures include tuition, and other measures exclude tuition. The purpose for excluding tuition in one measure was to demonstrate the impact that Utah’s unique demographics have on Utah’s state/local tax and fee burden, not to minimize the amount of taxes and fees that Utahns pay. This information is available at

Nevertheless, despite Utah’s unique demographic challenges, tax and fee burdens should be accurately reported and not intentionally understated, and the most accurate measure is one that includes so-called “voluntary” fees.

Thursday, September 14, 2006

Income Tax Reform Must Include Automatic Bracket Adjustments

Hopefully, next week's tax reform bill will include automatic annual increases in tax brackets, not just a one-time increase.

For years, the Utah Taxpayers Association has been advocating for annual inflationary adjustments to individual income tax brackets. Nearly every year for the past ten years, the association has held a press conference on Tax Day, April 15th, in front of the Utah State Tax Commission in order to call attention to the indexing problem. Radio, TV, and newspapers (except for the Tribune) have always covered the event.

Without bracket adjustments, effective tax rates increase over time because, as wages increase due to inflation, more and more income is taxed at the highest marginal rate. While lack of indexing harms nearly all taxpayers, low and middle income taxpayers are impacted the most as a percent of income. (However, taxpayers with zero, near-zero, or exceptionally low taxable income typically do not benefit from indexing.)

For example, a typical 2-parent, 2-child household with AGI of $40,000 in 2005 had an effective tax rate (ETR) of 2.97%. Had brackets been indexed for inflation since 1973, the ETR would have been 1.70%, a 43% reduction.

The same household configuration with AGI of $200,000 in 2005 had an ETR of 5.12%. Had brackets been indexed, the ETR would have been 4.78%, a 7% reduction.

While nearly all households would have lower tax burdens if tax brackets had been indexed every year since 1973, lower and middle income households would have received the largest tax breaks in percent terms.

In the 1970s, "bracket creep" was a household term in the U.S. because the federal government did not automatically index federal tax brackets for inflation. As a result, effective tax rates increased, especially during periods of high inflation. The term is not widely used any more because the feds began indexing tax brackets more than twenty years ago. However, Utah has made only one adjustment to tax brackets since 1973, a 15% increase in 2001 sponsored by Sen. John Valentine. In 1973, the top marginal tax rate kicked in at taxable income of $7,500. Today, the top rate kicks in at taxable income of $8,626. If tax brackets had been adjusted continuously for inflation since 1973, the top rate in 2005 would apply to taxable income in excess of $32,990. The annual tax increase due to NOT indexing is not very large, but the small increases add up over time.

Friday, September 08, 2006

Utah Foundation Forum

At the Utah Foundation education forum Thursday, several groups presented positions on education finance and reform. Participants included the following:

Increased Spending Advocates
Steve Kroes, Utah Foundation (host)
Christine Kearl, Governor Huntsman's Education Deputy
Patti Harrington, Superintendent of Public Instruction
Bruce Williams, Utah School Boards Association
Kim Campbell, Utah Education Association
Richard Kendell, Commissioner of Higher Education

Reform Advocates
Mike Jerman, Utah Taxpayers Association
Doug Holmes, Parents for Choice in Education

Other Emphasis
Scott Smith, Chairman of State Charter School Board

Obviously the forum wasn't exactly balanced with regards to spenders and reformers, but with the exception of the predictable cheap shots that Commissioner Kendell took at reformers (Kendell was playing to the audience that consisted mostly of public education employees), the forum went reasonably well. In their coverage of the forum, The Deseret Morning News gave equal time to both reformers and spenders while The Salt Lake Tribune did not report on comments made by reformers.

Most of the participants were given ten minutes to summarize their positions. While ten minutes is not enough time to thoroughly address complicated issues, the forum did allow each organization to present important points. The Utah Taxpayers Association presented the following

  • Adjusted for inflation, U.S. per student spending has increased 65% since 1980 and 122% since 1970.
  • During that time, 12th grade NAEP scores have been flat (NAEP scores for twelfth graders are the best output measure since it is measuring student achievement as students complete their education).
  • Compared to other developed countries, U.S. student performance is mediocre on TIMSS and PISA even though the OECD reports that the U.S. spends more per student than just a couple of countries (and yes, these tests are apples-to-apples comparisons despite claims by some in the education establishment that only the "elite" are being tested in other countries).
  • Unfavorable demographic changes -- such as increases in children in single parent homes and percent of children in homes where English is not spoken -- account for only a small part of the spending increase.

The association then presented arguments in favor of vouchers. In the future, we'll be making several posts on this blog regarding vouchers and charter schools. Some of the issues we'll address include:

  • will vouchers harm public education?
  • are vouchers a subsidy for private schools?
  • are vouchers constitutional?
  • can choice and competition be successfully applied in K-12 education as it has been in higher education?

Tuesday, September 05, 2006

Don Gale misses the point on school choice

Last Saturday, Don Gale wrote an op-ed in the Deseret Morning News in opposition to school choice. This should surprise no one, considering Gale's consistently liberal positions. For those of you too young to remember, Gale was KSL's editorialist during the 1970s and 1980s.

In the past, we've heard Gale describe conservatives as reactionary and resistant towards progressive change. Ironically, opponents of school choice are the reactionaries, and some of the old definitions of liberal and conservative don't apply to this issue.

Fortunately, Gale did not repeat the erroneous "draining money from public schools" and "fixed costs" arguments nor did he cite the illogical "vouchers are subsidies for private schools" argument, but he did make some unfounded accusations against parents who want school choice and students who are beneficiaries of school choice.

Below are some excerpts (in italics) with our commentary. When reading these statements, keep in mind how American higher education -- which is the epitome of education choice where students are not assigned to a particular college or university based on their residence and where many students receive vouchers (Pell Grants) -- would look if Gale's sentiments regarding K-12 education prevailed in higher education.

- Truly special children perform well academically whether or not they are in special schools, but they become better human beings if they experience a real-world school environment.

Nearly everyone knows that students have different learning styles and that one particular method of instruction cannot possibly be the best for all students. For some, math is easy. For others, math is hard, unless it is taught to them in a particular manner (and there are several ways to teach math). To expect any school -- public, charter, or private -- to teach all students effectively using one particular instructional approach is unreasonable. The math controversy in Alpine School District demonstrates this point. Some parents realize that Alpine's math program is not good for their children and have enrolled their children in one of the many charter schools located in northern Utah County. However, other parents realize that Alpine's math program is great for their children and have decided to keep their children in Alpine schools.

- "Choice" students will grow up thinking they are elite and should associate only with others like themselves. . . [T]he parents want to take their "special" children away from schools where mere ordinary folks congregate.

Unfortunately, Gale plays the elitism card here. However, since the rich can already afford private schools (vouchers are targeted towards low income families) and/or live in neighborhoods with high-achieving district schools, elitism is not the issue. Gale erroneously maintains that the real motivation for these parents is making sure that their children don't associate with the masses of the great unwashed when their real motivation is much more pure and praiseworthy: making sure that their children get the best education possible.

- And proponents either do not understand or do not care that children in every classroom need the academic pacesetters and student leaders who are part of the school choice exodus.

Gale falsely assumes that only the high achievers will go to private or charter schools. The high achievers are actually the most likely to stay in public schools because they are already receiving a good education. Most school choice proponents acknowledge that many students are currently receiving a great education in district schools. School choice is targeted towards those children who are not achieving their academic potential. Moreover, vouchers are targeted towards children in low income families, generally the most difficult and expensive children to educate (that's why Title I funding exists).

- School choice is not the issue. The issue is community involvement.

Actually, the issue is what's best for the individual student. Individual student needs should not be sacrificed on the altar of so-called "community involvement". Parents will actually be more involved in their schools if they have a financially viable choice as to where their students attend school.