Utah Taxpayer

In our February newsletter, which will be released next week, we will have a report on major changes to the state budget since 1990. Here is a preview.

The following shows how allocation of state education and general funds -- mainly income tax and sales taxes along with several other taxes such as inheritance taxes, severance taxes, and earmarked sales taxes -- has changed from 1990 to Huntsman's proposed 2008 budget. This shift has occurred gradually over the years and is not attributable to just Governor Huntsman.

K-12 education's share of the budget has decreased from 47.8% to 42.2%.

Higher education operations share has decreased from 18.0% to 13.4%.

Transportation's share has increased from 0.1% to 12.1%.

Health's share has increased from 5.0% to 6.5%.

Corrections share has increased from 4.8% to 5.7%.

[Note: the 2008 numbers are Huntsman's proposal and are subject to change based on legislative action.]

The proposed 2008 budget does not include supplementals. Supplementals are typically appropriated for capital projects like roads, which means that transportation's share of the budget will most likely increase and education's share will decrease.

Surprisingly, these massive increases in state general fund expenditures for roads have occurred at the same time that local sales taxes were being increased to fund mass transit, and there is even more talk about local tax increases for roads and transit.

Obviously, something has to change because the present course is not sustainable. We've talked about transportation reform before:

- congestion pricing
- corridor preservation
- prioritization of road and rail projects (one list, not two)
- requiring road and rail projects to compete for the same general funding

A sound transportation infrastructure is critical to economic growth, but the current course is not working.

Posted by Utah Taxpayer at 9:15 PM | Permalink | Comments

Voucher opponents argue that Rep. Steve Urquhart’s voucher bill (HB 148) is bad policy because the official fiscal impact is about $9 million. Some opponents argue that the fiscal impact would be even higher.

Here’s what they are not telling you
The fiscal analyst’s methodology has one serious omission: when calculating costs to educate students in public schools, the model does not include costs covered by local property tax dollars. The fiscal analyst has always argued that his/her job is to calculate costs and savings to the STATE budget, which excludes property taxes. (However, the legislative fiscal analyst includes local fiscal impacts when a bill is proposed that would cut local taxes).

As a result, the fiscal analyst’s model excludes a very large portion of taxpayer savings when students transfer from public schools to private schools because of vouchers. In FY2005, expenditures from local sources (primarily property taxes) were $2,237 per student. In FY2008, the first year the voucher will be available, the amount will be much higher, probably around $2,500. By understating taxpayer savings by $2,500 per student, the official fiscal note severely overstates the impact of the proposed voucher bill.

We don’t know how many students the fiscal analyst is projecting will switch to private schools because of a voucher. If the amount is 3,600 students or higher, the voucher fiscal note turns positive if the $2,500 savings per student is accounted for.

Are there other problems with the fiscal note methodology? Maybe, but unless we get a chance to look at the model and the assumptions underlying the model, we’ll never know.

But what about fixed costs?
Voucher opponents argue that there will be no savings because education costs are fixed. Let’s start off by acknowledging that fixed costs are not an issue in areas experiencing enrollment growth. There are no fixed costs associated with buildings that have not yet been built, teachers that have not yet been hired, and equipment that has not yet been purchased.

Regarding districts with declining enrollment, we’ll cover that next week.

Posted by Utah Taxpayer at 10:30 PM | Permalink | Comments

Salt Lake County Mayor Peter Corroon made the right call today by rejecting Real Salt Lake's request for taxpayer subsidies for a soccer stadium. Proponents of the taxpayer-subsidized stadium have wrongly argued that these subsidies make economic sense.

- Most of the economic activity that would have occurred at or around the stadium would have been locally-driven retail and entertainment which will occur on its own in some form somewhere in Utah without subsidies from taxpayers.

- Long-term economic growth depends on investment in export-oriented industries -- such as IT, manufacturing, natural resources -- and industries that improve productivity, such as IT and telecommunications. In a global economy, successful economies focus on production, not locally-driven consumption such as retail, recreation, and entertainment.

Besides, we already have Rice-Eccles Stadium, The E-Center, USANA Amphitheatre, and the EnergySolutions Center. It looks like we’ve got the venue situation covered fairly well right now.

According to arguments used by supporters of stadium subsidies, virtually every new business would be entitled to some sort of taxpayer subsidy, including those with unrealistic business plans.

Subsidy proponents argued that RSL's in-kind contributions justified the subsidies. However, the value to county taxpayers of the in-kind contributions (advertising, free tickets) was overstated. Even though RSL would incur costs and opportunity costs to provide these in-kind benefits, the value to county taxpayers was marginal at best and did not equate to RSL's costs or opportunity costs of providing these "benefits".

To read more about this topic, please click [here] to read our October 17, 2005 edition of Taxing Times. [Note: since this version of Taxing Times was written more than a year ago, some of the numbers have changed. However the arguments have not].

Posted by Utah Taxpayer at 2:00 PM | Permalink | Comments

Earlier this week, the Senate Revenue and Taxation Committee approved SB 13 - Tax Credits for Alternate Power Generation - sponsored by Sen. Howard Stephenson. SB13 now goes to the Senate second reading calendar for floor debate.

SB13 reauthorizes and expands and the existing renewable energy tax credit. The credit consists of two parts:

- Reauthorization of the investment credit for residential and small commercial (mostly agricultural) projects in which 25% of system construction and installation costs can be claimed as an income tax credit up to a maximum of $2,000 for residential projects and 10% of costs up to $50,000 for small commercial projects. Investment credit is not refundable.

- Creation of a new production credit of 0.35 cents for each kilowatt-hour produced for large commercial projects. Credit is refundable but cannot be carried forward or carried back.

SB13 expands the renewable energy credit to include geothermal sources.

Fiscal note is $1.2 million in year one and $2.8 million in year two.

Renewable energy producers can invest in many different states. SB13 encourages these companies to invest and produce in Utah.

Disclaimer: Like all legislation, SB13 may eventually be modified, meaning that the above points may no longer be 100% relevant.

Posted by Utah Taxpayer at 9:12 AM | Permalink | Comments

Yesterday, the Utah Senate voted to weaken Utah’s already weak state spending limit. SB90 (Hickman) exempts the entire higher education budget (except the Board of Regents budget) from the state spending limit. Currently, higher education capital expenditures are exempt from the spending limit, but higher education operations are not.

Utah’s spending limit is already very weak. In the FY07 pre-supplemental budget, only 43.7% of general and education funds (including GF earmarks) was subject to the spending limit. If higher education operations had been exempt in the FY07 budget, only 30% of the general/earmarked/education fund would have been subject to the spending limit.

So how did this happen? During discussion in the Senate Education Committee and on the floor of the Senate, SB90 was described as a bill that appropriates $10.5 million to higher education. The bill’s main point – exempting higher education operations expenditures from the state budget – was never mentioned.

Disclaimer: Like all legislation, SB90 may eventually be modified, meaning that the above points may no longer be 100% relevant.

Posted by Utah Taxpayer at 1:47 PM | Permalink | Comments

How fast is state government growing? Our calculations show that state government expenditures are growing very rapidly. The Utah Senate Majority blog says government employment is growing slower than overall employment growth. So who's right?

Government expenditure growth
We released a report recently that showed state government expenditures are growing at a very high rate. Here is a very brief summary of annualized education/general fund expenditure growth, including earmarks:

FY07 to FY08: . 14.8%
FY06 to FY07: . 21.8%
FY05 to FY06: . . 7.6%
FY04 to FY05: . 11.2%
FY01 to FY08: . . 7.1% (annualized, includes 3 years of recession)
FY93 to FY08: . . 7.7%

Click [here] to view the report.

Government employee growth
The Utah Senate Majority blog states that state government employment grew slower (1.88%) than total Utah job growth (4.7%) during the December 2005 to December 2006 time period. This is interesting information, but using this data to argue that government is not growing very fast presents several problems.

- The cited data points cover a very short time period (one year). Government and private sector job growth for FY07 and FY08 are not currently known.

- Government employee growth is not the bottom-line measure for government growth, although it is an important statistic to track. The bottom-line measure for government growth is expenditure growth, which our report shows to be very high.

So-called "one-time" capital expenditures
Tracking government employee growth doesn't tell the whole picture because it does not adequately capture growth in capital projects such as roads and buildings. Spending hundreds of millions of dollars on new roads does not lead to huge increases in the number of government employees, but capital expenditures are still tax dollars. In Governor Huntsman's proposed 2008 budget, more than $900 million in ongoing and one-time cash is being proposed for roads and buildings.

Sometimes, these capital projects are dismissed as being one-time projects and should not be counted when determining government expenditure growth. However, there are two HUGE problems with this type of thinking:

- So-called one-time expenditures are still tax dollars

- These projects, particularly roads, are NOT one-time expenditures, at least not from a long-term structural perspective. The state anticipates spending hundreds of millions of dollars annually on roads for the next several decades.

Posted by Utah Taxpayer at 2:55 PM | Permalink | Comments

Opponents of meaningful parental choice have used several arguments against vouchers. We address two of those today, and we’ll address the others in the next couple of weeks, especially the opponents’ favorite objection, so-called fixed costs.

Vouchers and childless families and individuals
The anti-voucher argument du jour claims that vouchers are unfair because childless families and individuals will not receive vouchers. The argument has logical problems.

- Taxpayers, including childless individuals, are currently (FY05) paying $6,309 per year to educate other people’s children in public schools (figure includes capital, debt service, and school lunch which are normally excluded in official government statistics on education spending). A voucher, on the other hand, would cost taxpayers, including childless taxpayers, less. The average voucher amount will be less than $3,000, which provides a savings for all taxpayers, including childless taxpayers. Keep in mind that the voucher will be means-tested which means that the vast majority of voucher recipients are currently attending public schools or would be attending public schools if they were old enough.

-If vouchers are unfair because childless taxpayers don’t receive a voucher because they have no children to send to private school, should childless taxpayers be exempt from paying for public education because they don’t have any children in public schools? Of course, the answer is no. All taxpayers – including childless individuals -- benefit from other people’s children being educated, whether that includes public or private education.

Vouchers, competition, and fire departments
Voucher opponents have argued against pro-voucher assertions that competition improves the product. Opponents argue that competition between fire departments and sewer districts is impractical therefore competition between schools would be impractical.

OK, so competing fire departments and sewer districts may not be practical, but does that mean competition is universally impractical? Competition and choice work very well in higher education. Operationally, K-12 schools are more like colleges than they are like sewers?

Competition works well in the private sector, but even in the private sector there are exceptions, particularly natural gas and electricity distribution. Should the entire private sector be monopolized because certain segments need to be monopolized?

Vouchers and subsidies for private schools
We’ve addressed this issue previously. Please click [here] to read more.

Posted by Utah Taxpayer at 9:17 PM | Permalink | Comments

Rep. John Dougall and Rep. Merlynn Newbold proposed bills in today's House Revenue and Taxation Committee that would cut taxes and slow the growth in government spending. Even with significant tax cuts, taxpayer funding of education and other government functions will continue to increase significantly.

Both bills passed out of committee.

HB123 (Dougall)
Rep. John Dougall, chair of House Revenue and Taxation Committee, is proposing reductions in individual income tax and the elimination of the remaining state portion of the sales tax on food. Details are:

- Reduce flat tax rate from 5.35% to 4.9%
- Implement non-refundable credit of $475 (4.75% x $10,000)to flat tax
- Reduce top rate on traditional system from 6.98% to 6.9%
- Reduce state sales tax rate on food from 2.75% to 0.0%.

The fiscal note gets a little tricky because there is a one-time retroactive tax cut for tax year 2007 of $43.2 million that occurs in FY08 but not in FY09. Also, there is a transfer from the general fund to the education fund of $70.8 million in FY08 and $84.2 million in FY09. This transfer covers the $475 credit. After the transfers are accounted for, the fiscal impact would be $322.3 million in FY08 and $302.7 million in FY09.

The fiscal impact of removing the remaining state portion of the sales tax on food would be $106 million in FY08 and $110 million in FY09. A middle-income family of four would save about $140 to $150 per year.

Dougall's proposal will undoubtedly be modified, but it is a very good place to start talking about tax cuts. Is the credit too low? Our calculations show that most taxpayers earning under $70,000 will continue to use the existing system, especially if the top marginal rate is reduced from 6.98% to 6.9%.

So far, Governor Huntsman and Rep. Dougall have proposed major tax changes. Tax reform discussions will focus on the following parameters:
- fiscal impact
- flat tax rate
- credit amount
- credit refundability (Huntsman's proposal has refundability. Dougall's does not)
- credit phase-out (Huntsman credit is phased out. Dougall credit is not)
- top marginal tax rate for traditional system

HB282 (Newbold)
Rep. Newbold's bill would remove local "boutique" sales taxes such as mass transit, roads, and ZAP on unprepared food purchases. The fiscal impact on local governments -- mainly transit districts -- would be approximately $17 million. County-option and city/local-option sales tax rates of 0.25% and 1.0% would not be impacted by this legislation.

In Salt Lake County, for example, sales tax rate on food would be reduced by 0.85 percentage points (0.75 percentage points for transit/roads and 0.10 percentage points for ZAP).

There are two unique provisions to the bill. Counties with rural hospital tax would be held harmless by a state general fund transfer, and resort communities will be allowed to raise their resort communities sales tax rate. Normally, food purchases account for 10% of the sales tax base, but the percentage is higher for the resort communities sales tax since cars and other personal property are already exempt from this tax.

Disclaimer: Like all legislation, HB123 and HB282 may eventually be modified, meaning that the above points may no longer be 100% relevant.

Posted by Utah Taxpayer at 2:23 PM | Permalink | Comments

Posted by Utah Taxpayer at 6:28 PM | Permalink | Comments

Rep. Mike Morley is sponsoring HB89, officially known as the Government Assistance Expenditure Report. The bill was unanimously approved by the House Government Operations Committee and will now go to the House floor for debate.

HB89 requires the Legislative Fiscal Analyst to submit an annual report of state and federal expenditures for financial assistance and services to low-income individuals and families.

The report would include expenditures for programs such as

- Medicaid
- CHIP
- General assistance
- TANF
- Food stamps
- Free and reduced price lunch
- WIC

Why is HB89 needed?
Currently, elected officials and taxpayers can readily determine how much is being spent on transportation, higher education, and public education because this information is easily found in the governor's and the legislature's budget documents. However, similar information regarding expenditures on government assistance programs is not readily available to elected officials and taxpayers. HB89 corrects this problem by summarizing these expenditures in one report. Since a large portion of state spending is targeted towards low-income households, lawmakers and taxpayers have an interest in having a fundamental understanding of how much is being spent on government assistance programs.

Possible floor amendment?
We anticipate that a legislator will propose an amendment from the House floor that will require the compilation of a so-called "tax expenditure" report. We'll have more information on that in a separate post.

Posted by Utah Taxpayer at 3:59 PM | Permalink | Comments

The Senate Revenue and Taxation Committee unanimously voted to move SB18 and SJR2 -- both sponsored by Sen. Lyle Hillyard -- to the Senate second reading calendar for floor debate. This is good news.

What the bills do
SB18 creates the Oil and Gas Severance Tax Holding Account. Oil and gas severance taxes above $41 million will be deposited in this account. In FY2006, the oil and gas severance tax generated $71.5 million which means that $30.5 million would have been deposited in the holding account had SB18 already been enacted.

SJR2 is a proposed constitutional amendment. If passed by two-thirds of each house, signed by the Governor, and approved by a majority of voters, oil and gas severance tax revenues in excess of $41 million will be deposited into the permanent state trust fund created in conjunction with the November 1998 settlement with tobacco companies. Interest from the trust fund can be spent annually by the Legislature. To spend the principal, three-fourths approval of each house and concurrence from the governor are needed.

If SB18 becomes law but SJR2 does not, the holding account will still be created, but the principal will not have the same level of protection. Future legislatures and governors could access the principal and/or eliminate the account with a simple majority in each house and support of the governor.

Why does Utah impose severance taxes on oil and gas
Some tend to describe severance taxes as a tax on natural resources, but the rational basis for the tax is that an economic resource -- which happens also to be a natural resource -- is being depleted.

Why are SB18 and SJR2 good ideas?
Currently, severance tax revenues are deposited into the general fund. Depositing at least a portion of these revenues into a restricted account or a constitutional trust fund makes sense for at least two reasons:

- Considering the rational basis for the severance tax, which is to offset the permanent depletion of an economic resource, placing these revenues into a trust fund creates a permanent asset that offsets a permanent depletion. Wyoming and other states have created permanent trust fund for their severance tax revenues and now have a permanent asset that yields annual interest.

- Severance tax revenues are very volatile, and using volatile revenue sources to fund ongoing general fund expenditures is not good tax policy. In FY2002, oil and gas severance taxes were $18.9 million but increased to $71.5 million in FY2006.

Possible amendments
In addition to severance taxes on oil and gas, Utah imposes severance taxes on metals such as copper and beryllium. Traditionally, these revenues have been much lower than oil and gas severance taxes, but revenues have increased in recent years from $4.9 million in FY2002 to $17 million in FY2006. Sen. Howard Stephenson mentioned the possibility of including these revenues in the trust fund as well, and Sen. Hillyard expressed interest in amending his bill to include these.

For more information about severance taxes
The Utah Taxpayers Association annually publishes a Utah Tax Summary containing information on Utah's major state and local taxes. Click [here] to view the document and go to pdf page 7 of 16 to get more details on oil and gas severance taxes. Page 8 of 16 has information on metal severance taxes.

Disclaimer: Like all legislation, SJR2 and SB18 may eventually be modified, meaning that the above points may no longer be 100% relevant.

Posted by Utah Taxpayer at 4:45 PM | Permalink | Comments

State government growth is frequently understated because growth rates do not account for two factors: supplemental appropriations and earmarked general fund expenditures. In the explanation below, you'll see how a 17% increase in state government expenditures eventually ends up being a 21.9% increase.

Every year, the Legislature works on two budgets: the current year budget and next year's budget. Next year's budget gets nearly all of the attention, but the current year budget also deserves attention because supplemental budgets increase government spending but the increase is usually not noted by elected officials or the press.

Supplemental appropriations to the current year budget are typically surpluses from the previous year's budget. Usually, they are spent on capital projects.

The 2007 Legislature will be adding supplemental appropriations to the FY2007 budget and drawing up the FY2008 budget which starts July 1st, 2007. When the dust settles at the end of the session, the Legislature will calculate government spending growth by calculating the difference between the FY2008 budget and the FY2007 budget. However, there is a problem with this approach: the FY2007 budget includes supplemental appropriations but the FY2008 budget does not include supplemental appropriations and will not until next year. Next year when the Legislature is determining supplemental appropriations for FY2008, no one will be focusing on the growth in FY2008 but will instead be focusing on the growth in the FY2009 budget.

To illustrate this example, let's go back to the end of last year's legislative session which ended in March 2006. When the session concluded, the state claimed that FY2007 appropriations were 17.0% higher than FY2006 appropriations. However, ten months later, the Governor is proposing more than $114 million in FY2007 supplementals. If the supplementals are approved, the FY2007 budget will be 19.7% higher than FY2006.

However, even this doesn't cover all of the increase. The Legislature and the Governor do not consider earmarked general funds to be part of the general state budget. (This is bad policy, by the way). In FY2007, earmarked general sales tax revenue will be more than $215 million, up from $103 million in FY2006. When earmarked sales taxes are included for both years, FY2007's budget will be 21.9% higher.

That's right: 21.9% state government growth in one year, and unless you read this blog, you won't know about it. Most legislators are completely unaware of this.

Posted by Utah Taxpayer at 1:04 PM | Permalink | Comments

Rails/roads prioritization – Rep. Wayne Harper
The legislature took a major step in transportation reform during the September special session by requiring local governments in Salt Lake County to develop a prioritization process for evaluating road and rail projects with emphasis on cost effectiveness of reducing rush hour congestion. However, some additional tweaks are still needed.

Other
Severance tax trust fund –Sen. Lyle Hillyard
Click [here] to read about this bill. Separately, there will be a proposal to earmark some severance tax revenues for specific projects. We'll have more on that later.

Government assistance report - Rep. Mike Morley
This bill will summarize state expenditures for welfare program such as Medicaid, free and reduced price lunch, general assistance, and many other programs.

Truth-in-Bonding – Rep. Greg Hughes
This bill will require that local governments specifically and clearly state in the ballot language what the impact to property owners will be if a proposed bond is approved by voters.

Posted by Utah Taxpayer at 7:35 AM | Permalink | Comments

The 2007 General Session of the Utah Legislature begins on Monday and ends on February 28th.

We'll be blogging every day except Sunday.

We're always accused of having an agenda, and next Monday we'll post it here.

Posted by Utah Taxpayer at 10:57 AM | Permalink | Comments

So far, only one opponent of congestion pricing has publicly stated how he would like to fund expansion of Utah's transportation infrastructure. Sen. Ed Mayne (D- West Valley City) has proposed raising the statewide sales tax rate by one full percentage point. In FY2008, that would generate nearly $500 million.

A one-percentage point increase in the sales tax rate would be FOUR times higher than the sales tax rate increases that were recently approved by voters in Utah and Salt Lake Counties.

Even though the good senator's proposal has serious flaws, we give props to Sen. Mayne for being honest and upfront with taxpayers. Most opponents of congestion pricing have proposals similar to Mayne's but will not express these publicly. Some are even whispering about a two-percentage point increase in the statewide sales tax rate. That would be a $1 billion per year tax increase.

It will be interesting to see what kind of mental gymnastics congestion pricing opponents will perform when they are asked to explain why congestion pricing is a double tax but raising sales taxes by $500 million (or more) isn't a double tax.

Why are general sales tax increases for roads a bad idea?

- Unlike congestion pricing, general sales tax increases do not provide financial incentives for drivers to use transportation infrastructure more efficiently by telecommuting, car pooling, living closer to work, and/or leaving earlier or later for work. As a result, the state will spend more dollars on expanding highway capacity if general taxes are raised than if congestion pricing is implemented.

- Increased reliance on sales taxes requires those taxpayers that use state transportation infrastructure efficiently to subsidize (even more) those taxpayers that don't.

- Sales taxes are not very visible because, unlike property and income taxes, taxpayers do not receive a statement from the government as to how much they have paid or need to pay. Sales taxes are government's way of pretending not to tax us, and taxpayers' way of pretending not to pay.

- A $500 million per year tax increase will impose $155 million in new taxes on business purchases (which businesses pass on to consumers in the form of increased prices) and $345 million on households. In FY2008, Utah will have about 900,000 households which means the $345 million tax increase will equal on average to $383 per household. Obviously, the variability in the impact per household will be high, with some households paying a lot more than others.

By keeping quiet, opponents of congestion pricing are merely delaying the day of reckoning. They will eventually have to publicly state how they plan to fund expansion of transportation infrastructure.

Posted by Utah Taxpayer at 3:00 PM | Permalink | Comments

We thought we had heard all of the arguments against congestion pricing, but along comes Bryan Gray of the Davis Clipper to offer some really bizarre arguments.

Interest groups frequently use newspaper editorials as part of their PR campaign to give legitimacy to their cause. Gray’s arguments against congestion pricing are so strange that we doubt our opponents will embarrass themselves by using them, but we can always hope.

Gray’s argument against congestion pricing boils down to this: congestion pricing is bad because we don’t charge people extra to hike on the Bonneville Shoreline Trail at certain times of the day nor do we charge people extra to use the library at certain times of the day.

Here’s why Gray’s comparison is bad.

- Providing incentives to commuters to use highways more efficiently by car pooling, telecommuting, living closer to work, and leaving earlier/later for work will save tax dollars by allowing the state to slow the growth in highway expenditures. Charging higher rates at certain times of the day to use trails will not reduce taxpayer expenditures for trails.

- No one is talking about raising taxes by $500 million or more per year to handle trail and library infrastructure.

- The state is not diverting hundreds of millions of dollars in general fund revenues from higher education in order to address safety and congestion problems with libraries and trails. In Gov. Huntsman's FY2008 budget proposal, $700 million in general fund revenues are being appropriated for roads.

Gray obviously hasn’t noticed that we have a serious transportation problem in Utah, and the seriousness of the transportation problem impacts Utah’s economy much more than any of the problems associated with libraries and trails.

Gray also tries to compare congestion pricing to a proposal that would allow parents to place children in smaller classes if they would pay extra. Of course, this analogy has several problems.

- Education is an entitlement enshrined in the state constitution. Driving on a freeway is not.

- Congestion pricing is a means to get people to change driving habits in order to reduce taxpayer costs whereas charging parents extra so their children can attend smaller classes does not change behavior and therefore does not reduce taxpayer costs.

Gray shares one thing with nearly all opponents of congestion pricing: he won’t tell the public how he plans on funding highway construction. Opponents use illogical arguments (click here and here) when criticizing congestion pricing, but they are reticent on how they would cover the costs of building new roads. By creating incentives for commuters to carpool, telecommute, leave for work earlier or later, and live closer to work, congestion pricing will allow us to address transportation problems while spending less than if the state were to rely on increasing general taxes.

Posted by Utah Taxpayer at 9:57 AM | Permalink | Comments

One of the fundamental principles of sound tax policy concerns the taxing of business inputs to production. The term “business inputs” refers to purchases that businesses make as a part of their operations. This includes many items such as computers, software, production equipment, and office equipment.

Tax policy experts nearly universally agree that sales taxes should be imposed at the final stage of consumption and not during the various stages of production or development. Experts cite various reasons for this:

- Taxing business inputs leads to “tax pyramiding” in which taxes are imposed on taxes during the various stages of production. This hides the true cost of government since these taxes are hidden in the price of goods and services that we purchase. Businesses may also decide to pass these taxes on to employees in the form of reduced compensation or on to shareholders in the form of reduced dividends or share prices.

- Taxing business inputs discourages investment by increasing the cost of investment. Investment in production is a key driver of economic growth, and government should be encouraging business investment, not discouraging it.

- Taxing business inputs places smaller businesses at a disadvantage to larger businesses. A very large business produces much of its own inputs from within which means that these inputs are not subject to sales taxes. A smaller business acquires a larger percentage of inputs from outside the company which means that these purchases – unless otherwise explicitly exempt – would be subject to sales taxes. This disparity would especially be applicable to business services such as accounting and advertising since most small business acquire these services from outside the company. Fortunately, these types of services are exempt.

- Tax revenues on business purchases are very volatile, especially compared to taxes on final consumption. During the past recession, taxable business purchases in Utah decreased 7.9% from 2001 to 2003 while taxable retail sales increased 6% during the same time period.

Exempting business inputs from taxation essentially extends the existing practice of exempting items for resale and items that become part of a final assembly (circuit boards, paint, bolts, etc.).

Exempting ALL business inputs from taxation would impact (static analysis) Utah state and local revenues by about $700 million, based on 2006 estimates. Since this amount is significant, the Legislature has targeted exemptions for certain types of businesses, particularly those that pay high wages and compete in international markets and those that improve business and worker productivity. Manufacturers receive sales tax exemptions for production equipment with a useful life of three years or more and also receive sales tax exemptions for energy consumed during the production process.

The legislature specifically exempted manufacturing for several reasons.

- Manufacturing is an internationally competitive industry.
- While many types of businesses have to locate near customers, manufacturers can locate their facilities nearly anywhere. Manufacturers do not have to produce in Utah.
- Manufacturing exports goods and services and imports wealth into the state.
- Utah manufacturing wages are 21.7% higher than the average Utah non-agricultural wage (2006 Economic Report to the Governor, page 56).

Telecommunications equipment with a useful life of one year or more is also exempt from sales taxes. Economic development depends on investment in telecommunications infrastructure because business productivity heavily depends on telecommunications. Also, government-owned telecommunications ventures such as iProvo and UTOPIA are exempt from these (and other) taxes, and exempting companies such as Qwest, Comcast, and wireless companies from this tax makes the playing field a little less uneven.

Finally, many have complained that businesses get all of the sales tax exemptions, but the reality is quite different. In FY2005, businesses received about 45% of all sales tax exemptions, according to calculations by the Utah Taxpayers Association using data from the Utah State Tax Commission. In future years, the business portion will probably decrease as the sales tax rate on food is reduced.

To read about property tax exemptions, click [here]

Posted by Utah Taxpayer at 9:56 PM | Permalink | Comments