Wednesday, November 29, 2006

Larger Cities, Higher Property Tax Rates

Bigger isn't always better, especially when it comes to city property tax rates. As a whole, Utah's largest cities have the highest property tax rates even though they have slightly higher per capita property tax bases than smaller cities and higher per capita sales tax revenues.

Using data from the Utah State Tax Commission and the Governor's Office of Planning and Budget, the Utah Taxpayers Association calculated valuation-weighted property tax rates and per capita property tax bases for Utah cities grouped by population. The valuation-weighted property tax rates are as follows:

15 largest cities: 0.002907
16 to 30 largest cities: 0.001906
31 to 50 largest cities: 0.001834 (0.001775 excluding Park City)
51 to 100 largest cities: 0.001600
101 to 240+ largest cities: 0.001600

Tax bases impact tax rates. For example, a larger tax base means a local government can provide services at a lower tax rate. However, large cities have higher tax rates despite having higher property tax rates per capita:

15 largest cities: $55,374
16 to 30 largest cities: $57,944
31 to 50 largest cities: 68,080 ($50,479 excluding Park City)
51 to 100 largest cities: $44,944
101 to 240+ cities: $45,435

Large cities also have higher sales tax revenues per capita as shown in the following chart (we use sales tax revenues instead of sales tax base to account for the 50-50 distribution formula):

15 largest cities: $159
16 to 30 largest cities: $143
31 to 50 largest cities: $140 ($127 excluding Park City)
51 to 100 largest cities: $138
101 to 240+ cities: $124

Monday, November 27, 2006

Bait and switch: making a bad tax worse?

Sandy officials are allegedly trying to change the distribution of restaurant tax revenues so that cities spend the revenues instead of counties.

Currently, counties impose restaurant taxes and spend the revenues generated by this tax. In most counties, the rate is 1.0%. In Utah County, the rate is 0.65%. Emery, Millard, Piute, and San Juan do not impose restaurant taxes. Statewide, Utah restaurants collected $25.6 million in restaurant taxes in FY2005, according to the Tax Commission’s annual report.

However, we predict that Sandy's real goal is not to take the counties' restaurant taxes but to allow cities to impose -- with legislative approval --their own restaurant taxes. This appears to be an attempt by Sandy City to find another means to subsidize Real Salt Lake's soccer stadium.

Restaurant taxes are bad policy
Taxing restaurants to fund recreation, athletic, and cultural facilities violates several principles of sound tax policy.

General government programs like recreation should be funded by general taxes, not by earmarked taxes. Except for user fees like water fees, gas taxes, etc., taxes should not be earmarked for specific programs. Earmarking taxes reduces government flexibility in establishing spending priorities. Government officials need to annually prioritize expenditures, and government programs need to compete against each other for prioritization. Earmarking prevent this.

Disposition of tax revenues should be related to its collection. For example, gas taxes should be used to fund roads, not Medicaid or the arts. There is no direct relationship between restaurant meals and cultural, athletic and recreation facilities. These facilities -- if they are to be funded at all -- should be funded by user fees and/or general taxes.

Who pays restaurant taxes?
More than 80% of restaurant taxes are paid by Utahns, according to the Utah Restaurant Association, even though restaurant taxes are billed as a means to tax tourists. Some restaurants, like those in Park City, Moab, and downtown Salt Lake, are heavily patronized by out-of-state tourists, but the majority of restaurant taxes is collected in places like Cafe Rio in Draper, Quizno's in American Fork, Gandolfo's in West Jordan, and hundreds of other restaurants where the vast majority of customers are Utahns.

Does Sandy's claim make sense?

Sandy argues that restaurant taxes are generated in cities, and therefore cities should get the revenues. Technically, nearly ALL tax revenues -- including individual income taxes, corporate income taxes, gas taxes, etc -- are generated in cities. Does this mean that the state constitution should be changed so that cities should get income taxes instead of school districts and higher education because these revenues are generated in cities?

This is just a bait and switch. Counties' restaurant taxes won't be touched.

The counties really don't have much to worry about. When county leaders tell legislators that restaurant tax revenues are being used to pay off existing bonds for recreation and cultural facilities, the issue will be dead. Sandy's next proposal will be a city-option restaurant tax.

Tuesday, November 21, 2006

Truth-in-Taxation Works

Local governments are not harmed by Truth-in-Taxation, an analysis by the Utah Taxpayers Association demonstrates. Opponents argue that local governments are harmed by Truth-in-Taxation because certified tax rate calculations do not include annual adjustments for inflation. However, local governments are able to recoup inflationary losses by going through the Truth-in-Taxation notification process, and the association's analysis shows that property tax revenues as a percent of personal income have been very stable over the past ten years.

In 1995, property tax revenues excluding vehicle fee-in-lieu equaled 2.45% of personal income and increased very slightly to 2.46% in 2005.

Property taxes, including vehicle fee-in-lieu, amounted to 2.76% of personal income in 1995 and decreased slightly 2.72% in 2005.

In fact, property tax burdens would have increased if the Legislature hadn't reduced the statewide basic levy twice in the 1990s beyond the amount mandated by Truth-in-Taxation and if counties (except for Millard, Emery, and Kane) hadn't reduced reduced property taxes in exchange for imposing a 0.25% sales tax. However, there is some dispute on this point. Some argue that legislative property tax reductions gave "cover" for cities, counties, and school districts to raise their property taxes so that the tax cuts were zeroed out by tax increases.

Either way, the evidence is clear that local government revenues have not been adversely impacted by Truth-in-Taxation.

We'll be posting more about Truth-in-Taxation (TNT) in the next couple of weeks, including

  • What is a certified tax rate?
  • If TNT causes rates to decrease as valuations increase, why am I paying more property taxes now than I was last year?
  • Is TNT solely responsible for Utah's property taxes being lower than the national average while all other major taxes (individual income taxes, sales taxes, and gas taxes) are above the national average?
  • Why was TNT implemented and who was responsible for its implementation?
  • How stable are property tax revenues compared to income and sales tax revenues?
  • What impact do the following have on certified tax rates: board of equalization adjustments, delinquencies, personal property depreciation, centrally assessed valuations, and voter-approved bonds?

The association will also be releasing its annual property tax report in the next couple of weeks. This report will have more detail about the impact of TNT on property tax revenues.

Saturday, November 18, 2006

TRAX to the Airport?

Spending $290 million (which excludes interest and operating costs) to build TRAX to the airport is an inefficient use of tax dollars. In a state with pressing transportation and education needs and a high state/local tax and fee burden – click [here] to see our annual report on this – , Utah needs to make sure that state and local tax dollars are spent most efficiently.

An airport TRAX line doesn’t make sense because there is no traffic congestion around the airport. Moreover, airport employees arrive at the airport during off-peak hours (between 5 and 6 am and 1 and 2 pm) so they are not contributing to congestion on I-15 or other highways en route to the airport.

Transportation experts at UDOT and WFRC say that the percent of rush hour I-15 traffic heading to the airport is either "low" or "very low".

Precious transportation tax dollars should be spent relieving real congestion, not pretend congestion.

Predictably, many proponents of TRAX to the airport also support wasting tax dollars on Real Salt Lake’s soccer stadium.

It’s not just about “ridership”
TRAX proponents argue that more light rail lines should be built because light rail ridership has exceeded expectations. Certainly, people will use TRAX to and from the airport. But ridership is only part of the equation. Three other measures are even more important.

First, how many rush hour commuters will be using TRAX that previously were driving cars on congested roads?

Second, how much will this cost taxpayers?

Third, how does the congestion-reduction-to-cost ratio of this project compare to others?

The primary purpose for building light rail must be congestion relief, not merely how many people will use light rail. Building light rail in an area without congestion, such as the airport, makes about as much sense as a growing school district building a new high school in a part of the school district where the schools are in good condition and are half empty. Logically, the new school should be built where the existing schools are overcrowded.

What about pollution and dependence on foreign oil?
Utah Transit Authority officials have told us that transit’s total share of trips in Salt Lake County would increase by 1 percentage point if ALL four TRAX lines were built. Presumably, the airport TRAX line by itself would increase mass transit’s ridership by 0.25 percentage point or less. At a capital cost of $290 million, this is an exceptionally cost ineffective way of improving air quality and reducing dependence on foreign oil.

What about tourism?
Proponents argue that spending $290 million on airport light rail will increase tourism, but this claim is at best tenuous. Other cities have airport light rail probably because getting from the airport to downtown is a problem, which is NOT the case in Salt Lake. If the state’s tourism promotion people had $290 million to spend, it is highly unlikely that airport light rail would be anywhere near the top of their priority list. Keep in mind that $290 million excludes interest payments and operating costs.

But light rail is world-class, cool, sexy, and popular
Popular, sexy, and cool things are best left to the realm of the private sector. We don’t need to raise taxes to get these kinds of things.

But every time we build more roads, they get congested
Population along the Wasatch Front is expected to grow by about 1.5% to 2.0% annually for the next 25 years, or about 16% to 22% every ten years. Growth of this magnitude means that state and local governments need to build even more infrastructure, including more schools, university buildings, and yes, even more roads. No one argues that we should stop building schools because the schools reach 100% capacity very soon after they are built.

Fortunately, growth in road construction can be slowed without sacrificing commute times if Utah would implement congestion pricing. Click [here] to read about this.

Wednesday, November 15, 2006

A Good Use for Severance Tax Revenues

Sen. Lyle Hillyard is sponsoring legislation that would annually deposit oil and gas severance tax revenues above $41 million into the permanent state trust fund. Interest from the permanent state trust fund would be used for long-term capital projects.

Currently, the disposition of severance tax revenues is to the state's general fund where it is appropriated for ongoing general state expenditures.

In FY2006, the state collected $71.5 million in oil and gas severance tax revenues. Had the law been in effect for FY2006, $41 million would have been transfered to the general fund and $30.5 million would have been transfered to the permanent state trust fund.

This proposal is long overdue.

Utah, like many states, imposes severance taxes on oil and gas production. Oil is taxed at 3% up to $13 per barrel and 5% above $13 per barrell. Natural gas is taxed at 3% up to $1.50 MCF and 5% above $1.50 MCF. For example, if the well-head price of oil is $50 per barrell, the first $13 is taxed at 3% and the next $37 is taxed at 5%.

Depositing severance tax revenues into a trust fund is better than appropriating these revenues for ongoing general fund purposes for several reasons. Severance taxes are imposed on oil and gas (and minerals as well) because these resources are non-renewable and removing ("severing") these minerals from lands within the state represents a permanent reduction in state resources. By transfering a portion of severance tax revenues to a trust fund, the state will have a financial resource even after the oil and gas resources have been depleted.

Additionally, severance tax revenues are very volatile due to significant fluctuations in prices and production levels for oil and gas, and relying on volatile revenue sources for ongoing government services is not good budget policy.

Years ago, western states like Wyoming and New Mexico established trust funds into which severance taxes are deposited.

The timing of Sen. Hillyard's proposal is excellent. Since general state revenues have been growing and continue to grow at very high rates, the state can easily shift a portion of severance tax revenue from ongoing operations to the trust fund without negatively impacting current government operations.

Sen. Hillyard's proposal was recommended by the Tax Review Commission and was unanimously approved today in Interim Revenue and Taxation Committee.

Friday, November 10, 2006

Are Toll Roads Double Taxation?

Supporters of higher taxes and inefficient government are trotting out the old "double taxation" canard when arguing against congestion pricing and toll roads. It's a great sound bite, but it's faulty logic.

Toll opponents falsely argue that tolling is a “double tax” because motorists are “already paying at the pump”. Toll opponents’ logic is faulty because taxpayers are already paying multiple taxes for transportation:

- twice at the pump (federal and state gas taxes)

- three times at the cash register (portions of state, county, city sales taxes are used for roads)

- twice on property taxes (portions of county and city property taxes are used for roads)

- once when they buy a newly built home (many cities impose impact fees for roads)

- twice when they register their vehicles (state and some counties)

Additionally, toll opponents “double taxation” argument inevitably leads to the following illogical positions:

- Roads can only be funded with one and only one revenue source. Opponents should choose wisely which source because they only get one pick otherwise it's "double taxation".

- Double taxation exists in K-12 public education because schools are funded with state income taxes, local property taxes, federal income taxes, state liquor taxes, and fees.

- Double taxation exists in nearly every government operation since very few government programs rely on a single source of revenue.

Finally, if imposing a toll is a form of “double taxation” because we are already “paying at the pump”, then wouldn’t increasing sales taxes – which is what toll opponents want to do – be a form of “double taxation” since we would be paying at the cash register as well?

Congestion pricing -- a form of tolling that charges higher tolls during rush hour and lower or zero tolls during off-peak hours -- provides an incentive for commuters to change their driving habits. When commuters telecommute, car pool, leave earlier or later for work, or live closer to work, Utah can spend less on transportation in the long run. Congestion pricing is more than just a funding mechanism but rather a means to incent commuters to use transportation infrastructure more efficiently.

Sunday, November 05, 2006

Incrementalism 101, Part 2

Utahns living north of Lehi would be surprised that Utah's most fiscally liberal newspaper is actually based in conservative Utah County.

Not surprisingly, The Daily Herald (aka Provo Daily Herald or Pravda Daily Herald) is also the biggest promoter of incrementally increasing our tax burdens by trivializing the impact of tax hikes and tax cuts.

We've searched their online archives and found several examples. We highlight a few examples here.

- A $130 annual property tax increase for an owner of a $200,000 home in the Provo School District was described as costing "36 cents per day." -- June 26, 2006

- An income tax credit was dismissed as a "[buying] a night on the town" and a "measly $75 refund".-- January 17, 2006 and January 20, 2006. Note: Despite the Herald's use of the term "refund", legislators were not talking about refunds.

- A 0.25% point increase in sales tax rate for roads was described as "a few cans of soda a month" -- May 19,2004

- The impact of a new statewide restaurant tax was "fairly small . . . most of us, we hope, leave a lot more than that as a tip when eating out. . ." -- March 8, 2004

- A sales tax increase for arts was "practically painless" and "diminutive". -- March 2, 2004.

- Increasing Utah's state corporate income tax from 5% to 6% was described as a "1% increase". Actually, it's a 20% increase, but calling it a 1% increase makes it look smaller. -- November 13th, 2001

- An increase in sales tax was described as "a tiny one-tenth of 1 percent sales tax" and a "practically painless tax" and "parting with a penny on every $10 is insignificant." --August 6, 2002. Similar comments appeared on August 16, 2002.

- A 0.6% point increase in sales tax rate was described as "painless". -- October 28, 2002.

- Nebo School District's tax increase to fund a $140 million bond was reported as "23 cents a day, less than the price of a can of soda.'' -- February 3, 2004.

- A 0.1% point sales tax increase was reported as "painless, virtually invisible". -- October 23, 2005.

- An $83 annual increase in property taxes in the Nebo School District was described as "one hamburger per week at the fast-food joint." -- November 9, 2003.

-Tax cuts during the 1990s were dismissed as "enough to take your family to a fast-food restaurant, provided nobody supersizes their french fries." -- November 27, 2005.

This is just a glimpse of the tax increases the Daily Herald has supported over the years as well as the tax cuts they've opposed. On November 10, 2003, the Daily Herald advocated for a 30-cent per gallon gas tax increase, but such an increase cannot be possibly passed off as a couple of cans of soda per month so the Daily Herald didn't even try.

The dangers become very apparent when these attempts to incrementally increase our tax burdens are viewed collectively. The Herald's unhealthy obsession with fast food and soda is something we should all be concerned about.

No one out-liberals the Pravda Daily Herald. We'll have more on them later.

Thursday, November 02, 2006

Incrementalism 101, Part 1

Public policy issues are solved or worsened incrementally. Very few serious issues are quickly solved by silver bullets, and very few disasters occur overnight. It's all about incrementalism.

We recently received a mailer from a legislative candidate that demonstrates this point. In this mailer, the candidate dismissed the recent income tax cut as "enough to buy a tank of gas, go out to dinner, or get your hair done". This is a time-honored tactic of the spending lobby: scream loudly if the tax cut is big and dismiss the tax cut as inconsequential if it is small.

This same argument is used to raise taxes during bad times: this tax increase will only cost you a tank of gas per year so don't worry about it. In fact, we've noticed over the years that the politicians who use the tank-of-gas argument to justify opposition to tax cuts during good times are the first ones to argue for tax increases during bad times using the same tank-of-gas argument.

So here's the question: what happens when tax cuts are rejected during good economic times because "it's only enough to buy a tank of gas" and when tax hikes are passed during tough economic times because "it's not worth worrying about because it is only a tank of gas"? Click [here] to find out.

More on this later.