Utah Taxpayer

Gov. Huntsman is proposing to expand tax reform by lowering the flat tax rate from 5.35% to 5.0%. Huntsman is also proposing a refundable tax credit targeted towards low and moderate income families.

About 6% of taxpayers will benefit from the rate reduction and about 51% will benefit from the means-tested refundable tax credit.

The governor is to be applauded for continuing to work towards lowering Utah's individual income tax rates. Click [here] to see how states have been lowering their individual income tax rates over the years.

Credit details
Maximum credits would be as follows:

Married: $600
Single: $300
Per person: $115

The credit is refundable up to 2% of AGI. For a married household, the credit phases out between $30,000 and $90,000.

The Utah Taxpayers Association and other groups have calculated the impact of these changes, and the governor's office agrees that the credit amounts -- which are based on FY2004 Tax Commission data -- will have to be increased in order to get taxpayers to switch to the new system.

The governor anticipates that these two changes will move about 57% of all taxpayers to the (modified) flat tax. This is a good idea, and we hope the Legislature gives it serious consideration.

The purpose of the phased-out tax credit
The refundable phased-out tax credit is a good idea for several reasons.

- By phasing out the tax credit, the governor can lower the flat tax rate even more than if the credit weren't phased out. No matter how big the tax cut ends up being, a phased-out credit will allow for a lower tax rate because the phased-out tax credit consumes less tax cut "headroom" than a credit that isn't phased out.

- Like most states, Utah's state and local tax structure is regressive (low income households pay a higher percent of income in state and local taxes than higher income households), and this is due to sales taxes. Low income households spend a higher percent of income on goods and services subject to sales taxes. A means-tested refundable credit can significantly reduce the regressivity of state and local sales taxes. [Note: some studies overstate the regressivity of state and local taxes. We'll discuss that at a later time.]

Some have referred to Huntsman's means-tested refundable credit as an earned income tax credit (EITC), but it is more accurately described as a sales tax offset.

Some will oppose this approach because it "takes people off the tax rolls", but many low income household are not currently paying state income tax. In tax year 2006, a family of four earning less than $20,000 is not paying Utah state income tax (standard deduction of $10,300 and 4 x 0.75 x $3,300 standard exemption equals $20,200).

Again, the real culprit is the regressive sales tax, and the insistence of the spending lobby to push for additional local boutique sales taxes makes matters worse.

Proposal will be tweaked
As Huntsman's proposal meets the realities of the sausage factory, the proposal will be modified, maybe even significantly. Fortunately, Huntsman has some really sharp people working on this.

Posted by Utah Taxpayer at 8:23 PM | Permalink | Comments

I'll be taking a break until Tuesday.
Merry Christmas.

Posted by Utah Taxpayer at 6:36 AM | Permalink | Comments

Gov. Huntsman is proposing an ongoing individual income tax cut of $100 million starting in FY2008 as well as a one-time $50 million tax cut retroactive to FY2007. The income tax cut will be coupled with tax reform which we'll talk about tomorrow.

Is the tax cut too small, too big, or just right?
Some people, like the editors at the Provo Daily Herald, think any tax cut is too big and any tax hike is probably not big enough. Click here and here to see what we mean. These people will never be satisfied no matter how fast government grows and no matter how much funding government has in reserve. Consider the following facts about Huntsman's proposals for general/education fund expenditures:

- Huntsman's FY2008 budget is 15% higher than FY2007's pre-supplemental budget (14.5% if earmarked sales taxes are included).

- Huntsman's FY2007 budget including supplementals is 19.7% higher than FY2006's final budget (21.9% if earmarked sales taxes are included).

- FY2007 rainy day fund balance is expected to reach $275 million, an all-time high and about 129% higher than the rainy day fund balance of FY2001 (the year before the legislature drew down the rainy day fund to balance the budget during the recession).

- Huntsman's FY2008 budget includes $700 million in cash for roads and $200 million in cash for buildings.

- Huntsman is not proposing any new general obligation bonds. In fact, Huntsman's FY2008 budget projects debt service expenditures of $239.5 million, which is 12.7% less than debt service expenditures in FY2005.

Considering these facts as well as our high state/local tax and fee burden (click here to read our annual report on this issue), now is an ideal time for a substantial tax cut.

Some argue that state government isn't really growing even though state government is growing
Despite the proposed massive EF/GF increases, some argue that Huntsman's budget proposal isn't really growing government because a lot of the increase is being used for capital projects and the number of state employees isn't increasing.

First of all, the number of official state government employees may not be growing, but the number of school district employees -- mostly teachers -- is growing. While nearly everyone agrees that more teachers are needed to handle enrollment growth, these should still be counted as employment growth since state funds account for about 68% of school district operating costs and since K-12 education is the largest single item in the state budget.

Second, capital projects are still government expenditures, even if they are considered "one-time" expenditures on a year-to-year basis. Moreover, since Utah will be growing at significant rates for the foreseeable future, capital projects -- including transportation -- really aren't one-time expenditures from a long-term structural budget perspective since the state will have to continue to spend massive amounts of tax dollars on transportation for the next several decades.

How much will the tax cut be? The House Republican proposal of $300 million is the ceiling, and the Governor's proposal of $100 million is the floor. Senate Republicans have deferred their decision to January. Democrats have not publicly addressed the issue yet.

Posted by Utah Taxpayer at 2:24 PM | Permalink | Comments

Governor Huntsman is proposing huge increases in public education funding. Exactly how much of an increase, as usual, depends on how you measure it.

Total state public education funding: 11.6% increase over FY2007 pre-supplemental budget
This includes several sources, such as education fund, general fund, federal funds, some local property tax (basic, voted, board, K-3 reading), and other misc. sources. It excludes many local property tax levies including capital, debt service, recreation, 10% of basic, and tort liability.

Most of these expenditures will occur at the district level, but some of these expenditures will occur at the State Office of Rehabilitation and Schools for the Deaf and the Blind.

Minimum School Program including School Building Program: 14.97% increase over FY2007 pre-supplemental budget
The Minimum School Program (MSP) is the major funding mechanism for Utah public school districts. It is funded mainly by state individual and corporate income taxes (about 80% in FY2007), local property taxes (about 18% in FY2007) and a small amount from the education permanent trust fund. MSP sources exclude federal funds, several local property tax levies such as capital, debt service, recreation, 10% of basic, recreation and others.

Weighted Pupil Unit: 7.0% increase over FY2007
The weighted pupil unit (WPU) is the most misunderstood term in Utah public education finance. Education groups and newspapers frequently equate WPU increases with per student funding increases, but this is not accurate (see Holly Mullen's article in today's Tribune for an example of how the MSM understates increases in education spending). We'll have a post or two in the future explaining the WPU.

Unfortunately, most people will think that spending per student is increasing by 7% when the increase will be much higher. So-called "below the line" items are not included in the WPU, and Huntsman is proposing a massive 21.7% increase in below-the-line expenditures. In Huntsman's 2008 budget, below-the-line items account for more than one-third of total MSP expenditures.

Assuming a 3% enrollment growth, MSP expenditures per student will increase by about 11.5% if Huntsman's budget is approved, much more than the 7% WPU increase.

Will it be enough?
Since 1970, inflation-adjusted per student spending in the U.S. has increased by 122% yet 12th grade NAEP scores have been flat. Right now, reform is at least as important as additional spending. Spending increases must be accompanied by real education reform including

- vouchers for low and moderate income families
- merit pay for teachers
- differential pay for teachers
- removing the cap on new charter schools
- funding equity for charter schools

Governor Huntsman has already committed to signing a voucher bill. It's time for the Republican-controlled legislature to deliver.

Posted by Utah Taxpayer at 9:49 PM | Permalink | Comments

Governor Huntsman released his 2008 budget proposal this morning. We'll be posting our analysis of the proposed budget over the next several days. Each day we'll focus on a different item:

- total spending growth (today)
- education spending growth (tomorrow)
- tax cut and tax reform (a starting point)
- rainy day fund and working rainy day fund (good news)
- transportation
- state spending limit

Total Spending Growth
Except for last year, we can't remember the last time state spending was projected to grow so fast. Here are the details:

Total state budget growth: 6.7% (includes federal funds, dedicated credits, etc.)
General/education fund growth: 15.0%
General/education fund revenue growth: 15.3%

General/education fund revenue growth: $761.8 million
Surplus for 2007: $498.2 million
Surplus for 2006: $308.4 million (was $380 million before transfers)
Total new revenue: $1.57 billion

The governor is also proposing $114 million in supplemental appropriations for 2007. If approved, the 2007 post-supplemental budget will officially be 19.7% higher than the 2006 post-supplemental budget.

Are growth rates correctly stated?
To its credit, the governor's office -- unlike the Legislature --has always calculated budget growth rate by taking the difference in the proposed budget for the next fiscal year with the original, pre-supplemental budget for the current year.

The Legislature's approach, on the other hand, understates eventual budget growth because it includes supplemental appropriations in the current year but excludes supplemental appropriations for the next year (because next year's supplemental appropriations won't be known for twelve months).

However, the governor's office -- like the Legislature -- excludes earmarked general fund revenues when calculating general/education fund growth rates. Since the amount of earmarked general fund revenues continues to increase -- from $102 million in 2006 to $215 million in 2007 and maybe even more in 2008 -- total general/education fund growth rate is understated. Huntsman's budget projects earmarked general fund revenues of $222.7 million in 2008, but the Legislature may increase that again.

Obviously, these are exceptionally high growth rates, and taxpayers should be concerned that government is growing at an unsustainable rate. Fortunately, the governor has budgeted a lot of ongoing and one-time cash for capital projects. We'll discuss this issue later this week.

Posted by Utah Taxpayer at 8:11 PM | Permalink | Comments

Recently, the MSM has been beating the Utah-teachers-aren't-getting-paid-enough drum. Before taxpayers take the MSM's arguments hook, line, and sinker, they should look at some of the facts that the MSM doesn't want you to know.

How do wages in Utah compare to other states?
According to the 2006 Economic Report to the Governor (page 51), Utah average annual pay is about 81% of the national average. This is an average wage for all non-agricultural workers and is NOT a per capita wage (which would include non-wage earning children).

According to the National Education Association's Rankings & Estimates (November 2006, page 19, chart C-12), Utah teachers on average earn 82.8% of the national average.

Notice any similarities? It's no surprise that Utah teachers earn about 83% of what teachers nationally earn while Utah workers as whole earn about 81% of the national average (we've heard reports that the percentage for Utah workers has increased by a couple of percentage points). If Utah workers earned 100% of the national average, they would be paying more taxes which would allow the state and school districts to pay teachers what teachers in other states earn. In other words, Utah teachers make less than their counterparts in other states because Utah accountants, engineers, plumbers, and electricians make less than their counterparts in other states.

But wait, there's more: benefits
Utah state and local government employees receive a very generous retirement benefit. Utah is one of a very small group of states where state and local government employees (including public school teachers) don't have to pay into the retirement system. With the exception of a small group of older employees, state/local government employee pensions are funded 100% by taxpayers.

According the Census Bureau's Public Education Finances 2004 (March 2006, page 6), Utah taxpayers spent 37.44 cents on teacher benefits (including retirement) for every $1.00 of teacher salaries. The national average was $29.07 cents per $1.00 of teacher salaries.

After adjusting for benefits, Utah teachers' total compensation is 88% of the national average.

Can we close the gap?
Even though Utah teachers, compared to their national counterparts, earn what Utah workers in general earn compared to their national counterparts and even though Utah teachers receive better benefits than their national counterparts, Utahns still have an opportunity to pay teachers more.

We'll discuss this in a future post.

Posted by Utah Taxpayer at 9:36 PM | Permalink | Comments

Three years ago, Utah businesses had a rude awakening when they received notices from the Utah Division of Workforce Services that unemployment insurance premiums would be increasing by up to 300%. With Utah's economy booming, unemployment insurance tax rates are dropping again.

DWS recently mailed the UI tax rates for 2007, and a majority of employers (68%) will be paying a rate of 0.3%, a 25% reduction from 2006's rate of 0.4%. This is still higher than the 0.1% rate for 2001, 2002, and 2003, but rates are projected to decrease to 0.2% in 2009. Rates for employers that have had UI claims charged to their account within the past four years will be higher.

Now, with unemployment down to historic lows, the Unemployment Insurance Trust Fund balance is at $659 million as of September 30, 2006, or nearly 85% more than the fund balance of $357 million in June of 2004.

In June 2003, the UI trust fund balance had fallen below the minimum adequate threshold as determined by a statutory formula. DWS projects that the UI trust fund balance will surpass the minimum adequate threshold in June 2007 and will surpass the maximum adequate threshold in June 2008.

Technical note
The formula for calculating UI rates is as follows:

rate = (benefit ratio) x (reserve factor) + social rate.

If an employer has not had UI claims charged against its account by previous employees, the employer pays only the social rate, which will decrease from 0.4% in 2006 to 0.3% in 2007. The social rate covers benefit costs that cannot be charged to specific employers.

Benefit ratio is calculated by dividing UI claims charged against a company's account in the previous four years by annual taxable wages.

Reserve factor is adjusted annually depending on the state of the trust fund balance. If UI reserves are between the maximum adequate balance and the minimum adequate balance, the reserve factor is 1.0. When UI reserves fall below the minimum adequate balance, the reserve factor exceeds 1.o. The reserve factor in 2006 was 1.25 and will decrease to 1.05 in 2007 and is projected to decrease to 0.80 in 2009.

Posted by Utah Taxpayer at 8:56 AM | Permalink | Comments

Voucher opponents maintain that vouchers are subsidies for private schools, but a logical analysis says they are not.

Are all taxpayer-funded purchases of goods and services from the private sector a subsidy for private sector providers?
Government at all levels contracts with private sector companies to provide goods and services. Some examples include:

- Medicaid: a subsidy for doctors and hospitals or a subsidy for low-income patients?
- Heating assistance: a subsidy for gas and electric companies or for low-income households?
- Food stamps: a subsidy for grocery stores or a subsidy for low-income families?
- Pell Grants: a subsidy for private universities like BYU (whose football team recently won a big game) or a subsidy for low and moderate income college students?

Clearly, the private sector providers are not being subsidized because they are being paid to provide goods and services. The recipients of these services are the ones being subsidized.

Even within the school system, tax dollars are used to procure services and equipment from the private sector. School districts don't build their own buildings but contract with the private sector to design and construct buildings. These contracts are not subsidies for construction companies since they are providing a service, just as private schools would be providing a service to low and moderate income students with vouchers.

A subsidy for low income students?
Vouchers are a subsidy for low income students, but the current public education system is a subsidy for most children. In FY2005, taxpayers spent $6,309 per student (including capital and debt service but excluding non K-12 programs), and this is more than double the average amount of the proposed voucher.

Most households do not earn enough money to pay enough taxes to cover the costs of educating their children in public schools (while at the same time covering the costs of other government programs such as roads, higher education, public safety, Medicaid, etc.) In terms of absolute dollars -- but not necessarily in terms of percent of personal income -- higher income households subsidize everyone else. Subsidizing the education of low and moderate income children is one of the fundamental premises of public education.

What about parents without children? Where's their voucher?
Taxpayers without children benefit from vouchers because they will be paying less to have low and moderate income children educated since the average voucher amount is less than half of what taxpayers are paying to educate children in public schools.

Opponents of vouchers who rhetorically argue that vouchers are unfair to childless taxpayers are essentially arguing that childless taxpayers shouldn't be funding public education in the first place.

Posted by Utah Taxpayer at 3:17 PM | Permalink | Comments