Tuesday, October 31, 2006

Utah Property Tax Revenues Surpass $2 Billion Milestone

Total property tax collections in Utah -- including age-based vehicle fee-in-lieu (FIL) -- will surpass $2 billion in 2006, according to calculations by the Utah Taxpayers Association based on data from the Utah State Tax Commission. Earlier this year, the state passed another revenue milestone as individual income tax revenues surpassed the $2 billion mark for the fiscal year that ended June 30, 2006.

Excluding vehicle FIL, taxes on real and personal property will be $1.84 billion in 2006, up 7.8% from 2005. Including vehicle FIL, property tax revenue will be $2.02 billion, up 7.2% from 2005.

The statewide effective tax rate (ETR) on real and personal property (excluding FIL) decreased from 1.289% in 2005 to 1.185% in 2006. The reduction in ETR is due to a significant 17.3% increase in property valuation.

School districts will receive 55% of all property taxes, about the same proportion as in 1986 but up from 50% in 1996. Counties will receive 18.3%, cities 15.5%, and special service districts 11.2%

Thursday, October 26, 2006

Primary Residential Exemption Worth $230 million in 2005

In 2005, the 45% primary residential exemption shifted $230 million in property taxes from primary residences to other types of properties, primarily businesses, according to calculations by the Utah Taxpayers Association based on Utah State Tax Commission data.

This calculation assumes that removing the 45% exemption would be accompanied by a corresponding reduction in property tax rates to maintain revenue neutrality. However, if the 45% exemption were removed without a reduction in property tax rates, the impact on home owners would be $718 million.

In addition, residential non-vehicular personal property such as computers, washing machines, refrigerators, furniture, etc. are 100% exempt from property taxes while businesses pay property taxes on personal property ($111.5 million in 2005). We'll be talking more about business personal property taxes in a later post when discussing the constitutional amendment on the November ballot.

The spending lobby complains that businesses benefit from "loopholes", but in Utah home owners (and 501 (c) (3) non-profits) get the property tax breaks. In a couple of weeks, we'll let you know who's getting the sales tax breaks.

Note: The association will be releasing several reports on property taxes for 2006 in the next several days. Today's post is based on 2005 data due to data availability. Subsequent posts in the next several days will be based on 2006 data. Calculations are made by the Utah Taxpayers Association based on data from the Utah State Tax Commission unless otherwise noted.

Sunday, October 22, 2006

We've come a long way, baby

Recently, we’ve written about the significant increases in state tax revenues and expenditures. Click [here] to read about increased education expenditures, [here] to read about state revenue increases, and [here] to read about increases in rainy day fund balances.

However, it was just a few short years ago that the talk was about increasing taxes, not cutting taxes. In February 2003, the Salt Lake Tribune editorial board, arguing in support of tax increases, wrote the following:

“. . .Kent Michie, big time banker and the state of Utah's official expert on managing its debt, has called for increases in the state's big four taxes -- income, sales, property and gasoline -- in order to balance its books and cover its debt. He also suggests a temporary hike in the state's property tax to replenish the state's "Rainy Day Fund," a reserve that has dwindled from $120 million to only $20 million in just a few months.”

This is an example of the intense pressure to increase taxes in 2002, 2003, and 2004. Several legislators proposed bills to increase individual income taxes, property taxes, restaurant taxes, phone taxes, state sales taxes, local sales taxes. Some of these proposals included increasing rates while others proposed expanding bases. Fortunately, a majority of legislators rejected these calls for massive tax increases.

Some taxes were increased, but the 1987 disaster was avoided
The spending lobby argued that taxes should be increased because taxes were cut during the good times of the 1990s. However, the tax cuts of the 1990s were in response to the massive tax increases in 1987.

In the mid-1980s, the state economy tanked as Geneva Steel and Kennecott Utah Copper shut down (temporarily in Kennecott’s case) and construction on the Intermountain Power Project was completed. Back then, the state was a lot smaller so these events tremendously impacted the state's economy. The Legislature responded by increasing taxes by $150 million: $50 million in individual income taxes, $50 million in sales taxes, $40 million in gas taxes, and $10 million in cigarette taxes. These tax increases would be more than $550 million in today’s economy.

When the economy tanked a couple of years ago, the state was in a better position to deal with the revenue shortfall. The state had built up a rainy day fund of $120 million and had been using $150 million in cash for state roads and millions more in state building projects. The rainy day fund was tapped, and the cash appropriation for roads was reduced to $64 million for three straight years. (Roads, not K-12 education, took one for the team during the recession.)

With the exception of not annually adjusting individual income tax brackets for inflation, the state successfully avoided raising general taxes, but the state did raise some selective taxes during the last recession, including tobacco, cigarettes, beer, cable and satellite TV, and other taxes. The total net tax increases were as follows:

FY2003 (passed in 2002 session) $13.8 million
FY2004 (passed in 2003 session) $28.4 million
FY2005 (passed in 2004 session) $15.6 million

A lot of people deserve credit for resisting the call for massive tax increases during the last recession, but Speaker of the House Marty Stephens deserves special recognition.

Tuesday, October 17, 2006

Like High Property Tax Rates? Move to Ogden

Utah’s highest combined property tax rates – which include tax rates for county, school district, city, and special service districts – are found in Ogden, according to the Utah Taxpayers Association’s analysis of Utah State Tax Commission’s 2006 Taxing Areas/Tax Rates report.

Utah has more than 1,000 taxing areas due to the numerous combinations of 29 counties, 40 school districts, 247 cities, and a couple hundred special service districts. Twenty-nine of these taxing areas are found in Ogden City, and all of these taxing areas have rates that are higher than any other taxing area rates in the state.

Of the 29 taxing areas in Ogden, twenty-four have a tax rate of 1.7813%. One tax area has a combined rate of 1.8141%. A typical taxpayer in Ogden is subject to the following property tax rates:

Weber County: 0.4063%
Ogden City School District: 0.8380%
Ogden City: 0.3905%
Weber Basin Water: 0.0178%
Central Weber Sewer: 0.0573%
Weber County Mosquito: 0.0106%
Weber 911: 0.0302%
Ogden City/Weber Water: 0.0306%
Total: 1.7813%

A typical taxing area in Utah has a property tax rate of about 1.2% in 2006. (The rate for 2006 is lower than in previous years due to a 17.3% increase in real and personal property valuation). Excluding Ogden tax areas, less than 2.0% of all Utah tax areas have tax rates exceeding 1.5%.

Why are property tax rates so high in Ogden?
Ogden City, Weber County, and Ogden School District all have tax rates that are higher than the statewide average for cities, counties, and school districts. On top of the high city and county tax rates, Weber County residents pay a lot of taxes to special service districts. A typical Ogden resident pays property taxes to five special service districts. A typical Utah County resident, on the other hand, not only pays lower county taxes but also pays property taxes to only one or two special service districts.

Another factor contributing to high tax rates has been Ogden City's habit of using RDAs to subsidize retail and other locally-driven economic activity like office parks. Ogden is one of the few cities in Utah that has diverted more than 10% of its property tax base to RDAs and EDAs.

Compared to the state average, RDA-adjusted property valuations per student are about 19% lower in Ogden School District, and property valuations per capita are about 31% lower in Weber County which means tax rates would tend to be higher in Ogden. However, Ogden City and Ogden School District are not experiencing the population and enrollment growth rates that other parts of the state are experiencing. Population and enrollment growth usually lead to higher tax rates because of the need for local governments, especially school districts, to issue bonds to cover the costs of building new facilities.

Thursday, October 12, 2006

Education Funding and the Surplus

“… the Utah Legislature refuses to funnel surplus dollars into schools”;
Salt Lake Tribune, October 12, 2006

Most Utahns read this and other newspaper reports and think that the Legislature is not increasing education spending, or at least not significantly. However, the Legislature significantly increased education funding for FY2007. While many will argue that one year of significant increases does not negate the fact that other states spend more than Utah, the fact remains that the Legislature significantly increased education spending for FY2007, but the spending lobby won’t admit it.

While education spending is increasing at a significant rate – even after the $78 million tax cut, whether or not education has received any of the “surplus” depends on your definition of surplus.

Definition #1: Surplus is any amount of revenue in excess of the previous year’s revenue.
Policy wonks and accountants may wince at this definition, but this is the definition that the media and many elected officials have used, and it’s the definition that most people in the public accept.

By this definition, legislative appropriations for education have increased substantially, although the percent increase depends on how the spending is measured.

When only state general/education fund dollars are considered, FY2007 education appropriations are 12.8% higher than FY2006’s pre-supplemental appropriations. (Supplemental appropriations are excluded from the FY2006 base year because FY2007’s supplementals won’t be known until next year.) This amount includes appropriations for state agencies that do not end up at the school district level.

When only state individual and corporate income tax revenue for the Minimum School Program is considered, FY2007 education appropriations are 12.4% higher than FY2006's pre-supplemental appropriation.

When total state, federal and basic/voted/board/K-3 local sources are considered, FY2007 education appropriations are 11.3% higher than FY2006’s pre-supplemental appropriations. This amount includes appropriations for state education agencies that do not necessarily end up at the district level as well as school lunch expenditures that do not show up in per student operations spending amounts.

FY2007 spending per student won’t be officially released for another year. However, assuming the following realistic increases:

  • State income tax revenues for K-12 operations (including supplementals but excluding $37.3 million for school building program) increase 12%
  • Property tax and other local operations revenues increase 5.5%
  • Federal revenues increase 6.0%
  • The split between state, local, and federal sources is 68% - 23% - 9% (the state portion may actually be higher because the state increase is much higher than the local and federal)
  • Enrollment increases 2.8%

then total per student spending will increase by roughly 7%, which is substantial. We wouldn’t be surprised if the actual increase approaches 8%.

Definition #2: Surplus is any amount of revenue in excess of projected revenues for that year.
Policy wonks are more comfortable with this definition, and by this definition education did not receive a lot of the surplus. However, this is a moot point. Most state-level education appropriations are ongoing, but year-end budget surpluses are one-time dollars. Budgeting one-time revenues for ongoing appropriations is a big no-no. Moreover, one-time school district appropriations – like building a new school – are typically handled at the local level. In FY2005, state funding covered 6.3% of school district capital. The rest was covered by local property taxes. The state does spend some money for school district capital projects, but that amount ($37.3 million in FY2007) has never been a large amount compared to what districts spend using local dollars.

[There is a debate as to whether or not these capital expenditures are truly "one-time" expenditures. More about that in a later post.]

Some have argued that the surplus should have been spent on school construction, but there are a couple of issues with that. First, year-end state budget surpluses are typically spent on one-time state capital projects, like new buildings for colleges, universities, and state agencies as well as building roads and preserving transportation corridors. If the state did not fund these projects, then these projects would never be funded since local governments are generally not responsible for funding these projects, particularly state agency and university buildings. Local school districts, on the other hand, are primarily responsible for building schools. A local funding mechanism already exists for local capital projects but not for state buildings (although local funding of state roads is increasing but is still a comparatively small amount).

Ironically, those calling for use of one-time state revenues for school construction are the same ones who do not include capital expenditures when determining how much Utah and the U.S. spend per student. Utah could spend hundreds of millions of state or local dollars on capital projects, but the legislature would still be criticized for not spending money on education because capital expenditures are not included in per student spending.

Utah’s per student spending trails other states, but the spending lobby should at least acknowledge that the Legislature and taxpayers have significantly increased per student spending for FY2007 instead of claiming that FY2007 spending increases are “status quo”.

Saturday, October 07, 2006

Charter Schools, Hitler, and Godwin's Law

We’ve always been supporters of school choice, which includes charter schools and education vouchers for low-income families. Taxpayer groups nationwide support school choice because what American K-12 education really needs is more choice and competition, not necessarily more money.

Since 1970, U.S. per student spending has increased more than 100% after inflation. Despite this infusion of tax dollars, twelfth grade NAEP math, reading, and science scores are virtually unchanged, and the U.S. still performs below many industrialized countries on
international math and science comparisons. And yes, these international comparisons are apples-to-apples comparisons and are not comparisons between average American students and elite European and Asian students.

Legislator compares charter school governance to Hitler
Unfortunately, some legislators -- including Republicans -- either don’t like the charter school concept and/or don’t like the way some charter schools are governed. In a recent Administrative Rules Committee meeting, Rep. Dave Ure (R – Kamas) said the following:

“Adolf Hitler started virtually the same way we’re starting this . . . If you read about the rise and fall of Adolf Hitler, he started the very same way we’ve started some of these charter schools.”

Ure didn’t elaborate on this analogy, and unfortunately no one asked him to. As a taxpayer group, we don’t claim to be Hitler experts, but we are quite certain that the Hitler analogy is quite a stretch. Below, we list several links to Wikipedia entries regarding Hitler’s rise to power.

Treaty of Versailles (see also World War I reparations)
Beer Hall Putsch
Mein Kampf
(see also Anti-Semitism, Drang nach Osten and Lebensraum)
Sturmabteilung (The SA)
Hitler Youth
(The SS)
Reichstag Fire

But of course, if Utah charter schools invade Poland and bomb Coventry, we’ll admit that Ure was right.

First Application of Godwin’s Law in Recent History of Utah Legislature
Several weeks ago, a reader of our blog referred to Godwin’s Law, just in time for Rep. Ure's comments. According to Wikipedia,

Godwin's Law (also Godwin's Rule of Nazi Analogies) is a mainstay of
Internet culture, an adage formulated by Mike Godwin in 1990. It is particularly concerned with logical fallacies such as reductio ad Hitlerum, wherein an idea is unduly dismissed or rejected on ground of it being associated with persons generally considered "evil".

The law states: As an online discussion grows longer, the
probability of a comparison involving Nazis or Hitler approaches one.

Although Godwin’s Law originally applied to online discussion, there’s no reason to believe that this could not apply to legislative debates as well. The Wikipedia entry on Godwin’s Law also notes

There is a tradition in many newsgroups and other Internet discussion forums that once such a comparison is made, the
thread is finished and whoever mentioned the Nazis has automatically "lost" whatever debate was in progress.

Charters under attack?
Last year, the Legislature imposed a cap on new charter schools. Recently, Salt Lake Tribune reporters, editorialists, and columnists have covered the charter school issue negatively.

School choice has been a hotly debated issue in Utah for almost ten years. Opponents of school choice have strategically focused their attention on preventing means-tested vouchers while looking the other way on charter schools. This was a miscalculation. School choice opponents seriously underestimated the demand for charter schools.

Now that charter school enrollment is booming and vouchers are likely to pass in the next legislative session, school choice opponents are rethinking their strategy, but they are too late. The charter school genie is out of the bottle, and the UEA-faction within the Utah Republican Party continues to shrink.

Wednesday, October 04, 2006

LDS Church Forgoes Subsidies for Redevelopment

City Creek Center -- the LDS Church's recently announced downtown development -- will not be subsidized by taxpayers. What does this mean?

  • No so-called "public-private partnership".
  • No RDA or tax increment financing
  • No free infrastructure.
  • No diversion of tourism taxes.
  • No new taxpayer-funded parking facility
  • No logic-free claims by county and city officials that subsidies for locally-driven retail and entertainment "grow" the economy.
Let's hope this marks a turning point in Utah. If a retail project of this magnitude that requires expensive demolition and site preparation doesn't need taxpayer subsidies, then other retail projects don't either.

And yes, this development will be fully taxable like any other for-profit entity.

Sunday, October 01, 2006

Good news: RDA growth rate slows to 4.25% in 2005

RDA growth rate in 2005 was significantly lower than the annualized RDA growth rate for the previous ten years. This is good news for taxpayers, school districts, and existing businesses that have to compete against companies receiving RDA subsidies. Will this trend of slower RDA growth continue? Maybe. This is not the first time RDA growth has slowed only to be followed by explosive growth in the following year.

In 2005, RDAs diverted $90.7 million from local governments, an increase of 4.25% over 2004, according to data from the Utah State Office of Education (USOE). Click here to see the USOE's detailed file on RDA diversions.

The 4.25% growth rate is much lower than the annualized RDA growth rate of 11.0% for the previous ten years (1994 to 2004) and is slightly lower than the total property tax growth rate of 5.1% (including automobile fee-in-lieu but prior to adjustment for RDAs). Excluding automobile fee-in-lieu, which decreased from 2004 to 2005, property tax growth rate -- unadjusted for RDA diversions -- was 6.2%.

In response to RDA abuses, the Legislature passed bills in the 2005 and 2006 general sessions. Sen. Curt Bramble (R-Provo) was the sponsor of these reform bills. In 2005, the Legislature imposed a moratorium on RDAs, which covered most of 2005 and part of 2006. This moratorium partly explains the slow growth in 2005 (RDAs that were approved in the earlier part of 2005 were exempt from the moratorium). In 2006, the Legislature passed a bill that makes RDA approval more difficult.

However, RDA diversions do not necessarily occur in the year that the RDA was authorized since tax increments are usually not generated until the project is completed, which can be a year or more after the RDA was created. In other words, RDA diversions in 2006 may spike because of RDAs approved just prior to the 2005 moratorium and prior to the 2006 reform.

Cities use RDAs to subsidize business activity that in most cases would occur on its own somewhere in Utah without subsidy. Most RDA subsidies are used to incentivize retailers to locate in a certain city. Retail, particularly retail targeted to local customers, occurs on its own and does not need to be subsidized. Fortunately, the Legislature recognized this and passed reforms. Time will tell how effective these reforms are. Hopefully, we'll see negative RDA growth rates in the future.