Wednesday, February 28, 2007

Day 45 - Nearly done

The Legislature shuts down tonight at midnight. This has been a very good year for taxpayers, education, and transportation.

Starting Monday, we'll be posting summaries every day on major taxpayer issues addressed by the 2007 Legislature. We'll cover the following issues:

Tax Reform
- Individual income tax reform and tax cut
- Sales tax reductions
- Business tax cuts
- Other tax changes
- Impact on households

When measuring impact on households, we'll look at changes in terms of effective tax rates and dollar amounts. As basis for comparison, we'll use the tax system that existed prior to last year's changes. This will quantify the cumulative effect of last year's tax changes and this year's tax changes.

Education Reform
- Vouchers
- Differential pay
- Other changes

Transportation Reform
- Congestion pricing
- Earmarking
- Non-earmarked general fund sources for transportation

Government Growth
- Minimum school program
- Total K-12 education
- Total budget

Monday, February 26, 2007

Day 43 - Responding to former state senator Karl Swan

In Sunday’s Tribune, former Utah state senator Karl Swan (D -Tooele) inaccurately disputed some comments made previously in the Tribune by House Majority Leader Rep. Dave Clark (R-Santa Clara).

Swan incorrectly suggested the following:

- False claim #1: Recent increases in Utah per student spending are possibly “no more than a maintenance of the status quo” because recent increases may not offset increases in enrollment and inflation

- False claim #2: Utah doesn’t need to double income taxes in order to reach the national average. (Actually, Swan employs a “straw man” argument and argues that Utah doesn’t need to double income taxes to make a “significantly stronger commitment” to public education, even though Clark’s original comment specifically referred to increasing Utah spending to the national average. Click
here to read a good definition of straw man argument in Wikipedia.)

- False claim #3: The high percentage of public land ownership does not hinder Utah’s ability to fund education because Utah’s economy benefits from mineral lease revenues from federal lands and Utah receives payment from the federal government to offset the federal government’s tax exempt status.

We’ll address the first point next week in our Taxing Times newsletter once we receive the final budget numbers. However, one thing is clear at this point: recent education increases have been huge and will more than offset inflation and population growth.

What would it take to reach the national per student spending average?
Rep. Clark is right on this issue. Utah would need to double individual income taxes (or the dollar-equivalent thereof in some other form of taxes such as property taxes) to reach the national per student spending average. The math is very straight forward.

According to the National Center for Education Statistics (NCES), spending per student in 2004 was as follows

U.S. . . . . . . . .$8,310
Utah . . . . . . . .$4,991
Difference. . . . $3,319

Also according to NCES, Utah’s enrollment was 495,981 in FY04. Multiplying Utah’s enrollment by the difference in per student spending yields $1,646,160,939.

According to the Utah State Tax Commission, Utahns paid $1,699,183,228 in individual income taxes in FY2004. Therefore, adding an $1,646,160,939 to FY2004’s income tax collection would be a 96.9% increase, or virtually doubling income taxes.

Of course, the needed increase varies slightly from year to year, and the amount varies depending on whose numbers are being used (NCES, Census, NEA). Using the NEA’s numbers for FY05, the would-be increase in individual income taxes would be 92.7%, or nearly doubling income taxes.

A 96.9% increase in individual income taxes would be significant. According to calculations by the Utah Taxpayers Association, a Utah family of four with an income of $62,032 (the median income for a Utah family of four according to the Census Bureau), pays about $2,300 in individual income taxes under the system that was passed in the last special session (assumes deductions equal 20% percent of AGI excluding state income taxes paid). A 96.9% increase would mean that a typical Utah family of four would have to pay an additional $2,224 per year.

Property taxes would have to be increased on top of that in order to build hundreds of new school buildings to accommodate the additional teachers being hired.

What about the public lands issue?
Swan argues that Utah benefits from federal land ownership due to mineral lease payments and therefore is not being harmed by the federal government’s tax exempt status.

However, land is generally subject to property taxes even if it generates an economic benefit. For example, businesses are subject to property taxes (unless they get an RDA in which their property taxes are rebated back to the business) even though they create jobs, goods, and services and pay corporate income taxes and sales taxes on inputs.

Swan also mentioned that Utah receives in payment in lieu of taxes from the feds. In 2006, it was barely more than $20 million, a small amount considering how much land the feds own in Utah.

Finally, contrary to Karl Swan's claims, Rep. Clark's comments on New Jersey were not based on information that the Utah Taxpayers Association provided to him.

Mike Jerman
Andrew Stephenson

Wednesday, February 21, 2007

Day 38 - Differential pay for teachers

Currently, a Utah teacher's salary is based on two factors: how many years experience and what level of education a teacher has. Click here to see an example.

Teacher performance is not a factor in determining teacher pay. Also, school districts do not differentiate between teachers in hard-to-fill positions such as science, math and special education and positions that are not hard to fill. If a calculus teacher and a dance teacher have the same level of education and the same amount of experience, they get paid the same.

This type of compensation system is not found in the private sector for one main reason: it's not a financially sound way to run an organization.

Fortunately, the Legislature is considering a bill that will improve the current system. Rep. Ronda Menlove (R - Garland) is sponsoring HB381 which would add $5,000 to the salaries of teachers in critical shortage areas such as

- Math III/IV, chemistry, physics, integrated science

- Special education, including mild/moderate, severe, pre-school, and visually impaired

- Speech language pathologists and audiologists

The fiscal note for this part of HB381 is $21,150,000. The program will be administered by the Utah State Office of Education and will be a below-the-line item in the Minimum School Program (which means it won't be included in the WPU).

HB381 also requires the State Office to collect and maintain data relevant to teacher recruitment.

Opponents of this program argue all teachers should get the same pay increases regardless of subject area and performance, but this defies basic economic principles. If public education is having difficulty hiring math teachers but not PE teachers, public education should pay math teachers more. Teacher pay should be based on supply and demand, just like it is for everyone else.

Performance pay will be addressed next year.

HB381 also appropriates $2,350,000 for rural school districts that have difficulty filling teaching positions due to their remote locations.

HB381 appropriates $5 million for beginning teacher induction programs.

Disclaimer: Like all legislation, HB381 may eventually be modified, meaning that the above points may no longer be 100% relevant.

Sunday, February 18, 2007

Day 35 - Reducing telephone taxes

Few things are taxed as heavily as telephone service. Rep. Wayne Harper is sponsoring HB238 which would reduce the municipal telecommunications license tax from 4.0% to 3.5%. This would reduce local telephone taxes by $5.5 million annually.

Telephone service is subject to numerous taxes:
- 4.75% state sales tax
- 0.25% county sales tax (0.0% in three counties)
- 1.0% city sales tax
- Mass transit and ZAP tax
- 4.0% municipal telecommunications license tax
- 3.0% federal excise tax (partially repealed)
- Poision control tax (fixed amount per line)
- State 911 tax ($0.13 per line)
- Local 911 tax ($0.65 per line)
- Telecommunications relay service fund ($0.10 per line)
- Federal uniform service fund (rate changes periodically)
- Utah uniform service fund (rate changes periodically)

Not all of the items on a phone bill are subject to all of these taxes.

Taxes on taxes
Amazingly, some of these taxes are subject to taxes. For example, the federal and state uniform service fund and the municipal telecommunications licenses tax are subject to federal excise tax as well as state and local sales taxes.

Municipal telecommunications license tax (MTLT)
The MTLT has an interesting history. Previously, it was part of the utility franchise tax (UFT) which was (and still is) applied to natural gas and electricity. The utility franchise tax maximum rate is 6% (per state statute) although some cities charge a lower rate and some do not impose the tax at all. A similar 5% tax (per federal law) is imposed on cable tv.

The original premise for the UFT was to compensate cities for the costs imposed by utility companies when utilities tear up roads. However, cities have been imposing additional charges when utilities cut into roads. Cities now use UFT revenues for general goverment purposes, just like they do with sales and property taxes.

In 2003, Sen. Curt Bramble sponsored SB23 which eliminated the 6% utility franchise tax on land lines and implemented the 4% MTLT. While lowering the rate from 6% to 4%, the base was broadened to include cell phones. Some cities had been imposing a $1 per month tax on cell phones, but SB23 eliminated this tax.

The rate was set at 4% with the understanding that the rate may be reduced depending on the amount of revenue generated. With revenues coming in higher than expected, Rep. Harper is proposing reducing the rate to 3.5%.

Disclaimer: Like all legislation, HB238 may eventually be modified, meaning that the above points may no longer be 100% relevant.

Thursday, February 15, 2007

Day 32 - R&D Tax Credit

Utah will become a more attractive state for research and development if SB171 passes. Sponsored by Sen. Stephenson, SB171 improves Utah's R&D tax credit as follows:

- A new tax credit without carry forward equal to 5% of all qualified research expenses (QRE) as defined by the IRS

- An increased credit equal to 8% of incremental QRE above a base year, up from the existing 6%.

The R&D tax credit calculation is far too complicated to fully explain here, but Utah's current credit is tied to the federal R&D credit which is based on incremental R&D expenditures over a base year. Sales volume is also a component of the formula. Unfortunately, the federal credit calculation penalizes companies with rapidly growing sales. SB171 corrects this problem by adding the additional 5% credit based on total QRE, independent of incremental R&D expenditures and sales volume.

Research and development activity creates high-wage jobs, improves productivity, and is export-oriented, all of which are critical elements in Utah's economic development.

Disclaimer: Like all legislation, SB171 may eventually be modified, meaning that the above points may no longer be 100% relevant.

Wednesday, February 14, 2007

Day 31 - Tax Expenditure Report?

Rep. Mike Morley (R - Spanish Fork) is sponsoring HB89 which 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. Click here to read more information about this good bill.

We've been hearing chatter that there will be an attempt to amend HB89 by requiring the state to generate a so-called "tax expenditure report".

What is a tax expenditure report?
Spending groups argue that tax exemptions, credits, deductions, and exclusions are really forms of government expenditures. In other words, if government lets taxpayers keep more of their own money by exempting 45% of a primary residence valuation from property tax, that is no different than if government had charged taxes on 100% of primary residence valuations and had appropriated increase for government programs.

A tax expenditure report would summarize all of the exemptions, credits, deductions, and exclusions and label these as government expenditures.

Is this a good idea?
A list of tax exemptions is not a bad idea. In fact, the Tax Commission already lists sales tax exemptions and reductions to individual income tax base in its annual report.

However, the problem with the "tax expenditure" idea is terminology. State and local tax exemptions are literally worth billions of dollars every year, whether it is the aforementioned 45% residential exemption or the exclusion of medical services from sales taxes or the deductibility of mortgage interest and charitable contributions from income taxes.

While some of these deductions and exemptions are difficult to justify, calling these exemptions a "government expenditure" is problematic. Obviously, letting people keep their own money through deductions is not the same as if government had spent that money, mainly because reductions in tax bases are largely offset by increasing tax rates. Tax rates and tax bases are connected. For example, states that exempt food from sales taxes generally have higher sales tax rates.

Moreover, exemptions and credits allow individuals and businesses the discretion to spend their money how they want, whether it means buying a bigger house and getting a larger property tax break in absolute dollar amounts or spending more on charitable contributions and getting a bigger income tax break (Of course, they could do both). Individual taxpayers would lose this discretion if these exemptions were eliminated and government spent the difference, which could explain some of the motivation behind the tax expenditure report in the first place.

While some of these exemptions negatively distort economic decision making and/or do not promote economic growth as well as an overall rate reduction would, the discretion of taxpayers to spend dollars due to tax exemptions clearly disqualifies these dollars as government expenditures.

We've generally supported broad tax bases (and lower tax rates), but we've never argued that reductions in tax bases are the same as if the state had actually spent these dollars directly in government programs. By lowering tax rates as bases are broadened, taxpayers continue to have the freedom to spend their money as they see fit.

Tuesday, February 13, 2007

Day 30: Truth in Bonding

Rep. Greg Hughes is sponsoring HB393, also known as Truth in Bonding.

HB393 will require local governments to disclose to voters the property tax impact if proposed bonds are approved by voters, unless the impact is less than $15 per year on a primary residence of average value. The following language will appear on the ballot proposition

The (name of the taxing entity) passage of the proposition means that the tax on a(insert the average value of a residence in the taxing entity rounded to the nearestthousand dollars) residence would increase from $______ to $________, which is$_______ per year.
Passage of the proposition means that the tax on a (insert the value of a business havingthe same value as the average value of a residence in the taxing entity) business wouldincrease from $________ to $_______, which is $______ per year."

HB393 is a good government bill. Most taxpayers probably thought such a requirement already existed. Last year, the Salt Lake County council voted to place an $895 million bond on the November ballot. The proposed ballot language did not indicate the impact of bond approval to property owners. (The county later withdrew the proposed property tax-backed general obligation bond and proposed a 0.25% sales tax increase instead, which voters approved.)

When voting on a proposed bond, taxpayers need to know the cost of proposed bonds to their homes and businesses.

In other news, the 2007 legislative session is now two-thirds over, but most of the work remains to be done. The new revenue projections will probably increase the size of the tax cut.

Disclaimer: Like all legislation, HB393 may eventually be modified, meaning that the above points may no longer be 100% relevant.

Monday, February 12, 2007

Day 29 - Gas tax increase?

Rep. Wayne Harper is sponsoring HB158 which would increase gas taxes by two cents every two years from July 1, 2009 until December 31, 2018. Currently, the state gas tax is 24.5 cents per gallon, and if this bill is approved, the gas tax will be increased to 34.5 cents per gallon by July 1, 2017. Using 2007 as the base year, this would be an annualized increase of 3.5% over a ten year period.

The federal gas tax is currently 18.4 cents per gallon gasoline and 24.4 cents per gallon for diesel.

Do gas taxes need to be increased?
Gas taxes need to be periodically increased for inflation since the gas tax is a fixed amount per gallon. Sales and income taxes, on the other hand, automatically increase over time due to inflation and population growth.

How much revenue will 2 cents per gallon generate?
Each cent-per-gallon gas tax increase raises an additional $14 million per year. Therefore, a two cent-per-gallon tax increase would yield $28 million per year.

How does Utah's gas tax compare to other states?
The American Petroleum Institute ( collects data on state gas taxes. State comparisons are a little tricky since some states impose local gas taxes and some states impose sales taxes in addition to gas taxes. According to API's data of October 2006, Utah's gas tax of 24.5 cents per gallon is a little below the national average of 27.1 cents per gallon (Note: this is a volume-weighted average which means that larger states impact this average more than smaller states).

As a percent of income, Utah's gas tax burden (0.55%) is actually higher than the national average (0.37%) even though the cents-per-gallon tax is lower in Utah than the national average. (Source: Utah Taxpayers Association). This probably attributable to Utahns driving longer distances than residents of other states.

Is now a good time to raise the gas tax?
Yes. The Legislature is already committed to cutting general taxes by $210 million. Overall, the gas tax increase will be more than offset by the reduction in income and sales taxes.

When the state increased the gas tax in the late 1990s, the state also reduced the state sales tax rate.

Utah needs to spend more on transportation, and user fees are a good source of revenues for roads.

Disclaimer: Like all legislation, HB158 may eventually be modified, meaning that the above points may no longer be 100% relevant.

Friday, February 09, 2007

Day 26 - HB203: focusing on real economic development

Rep. Scott Wyatt is proposing legislation that will positively impact local government economic development decisions.

Most Utah mayors and city councilmembers would rather have a grocery store move into their city than have a company like Microsoft, Oracle, or Boeing open a facility in their city. This is unfortunate because real economic growth is dependent on industries that pay high wages, export goods and services, and improve productivity, such as IT and manufacturing. Retail does not create economic growth but rather responds to economic growth. Retail happens on its own. It does not need to be subsidized.

While some of this preference for retail can be attributed to economic illiteracy, the real driver in these decisions is the current distribution formula for municipal sales tax revenues.

When a taxable purchase is made, a 1.0% city sales tax is imposed (along with 4.75% from the state, 0.25% in most counties, and in some cases additional "boutique" sales taxes such as ZAP and mass transit). Revenues from the 1.0% city sales tax are distributed 50% based on population and 50% based on point of sale. The 50% point-of-sale component incentivizes cities to focus on attracting retail to their cities instead of focusing on high-wage exporting industries like IT and manufacturing. Only a very small portion of a typical IT or manufacturing company's sales occur within the city in which the company is located. Therefore, most cities are unfortunately not interested in these types of companies, even though these are exactly the kind of companies our state's economy needs.

Rep. Scott Wyatt is sponsoring HB203 which would allow voters in counties of the third class or smaller to change the revenue distribution formula generated by the 1.0% local option sales tax.

HB203 would allow qualified counties to increase the population component in the revenue distribution formula of the 1.0% local option sales tax if the following occurs:

- Two-thirds of local governments, consisting of all of the cities in the county and the county government itself, agree to submit a proposal to voters to increase the population component in the sales tax distribution formula. (Counties with seven or fewer cities would require 100% approval)

- A majority of voters in the county approve the proposal in a general election.

By decreasing the point-of-sale component, cities will have less incentive to subsidize retail. Rep. Wyatt's bill is a sound approach to correcting the current problem of cities incentivizing business activity that does not need to be incentivized.

Disclaimer: Like all legislation, HB203 may eventually be modified, meaning that the above points may no longer be 100% relevant.

Thursday, February 08, 2007

Day 25 - Bad news on soccer stadium

The good news is that the soccer stadium debate is finally drawing to a close. The bad news is that taxpayers will be subsidizing a professional sports arena.

Whose tax dollars are these?
Stadium proponents argue that these subsidies are not really OUR tax dollars since hotel taxes are largely paid by out-of-state tourists. Make no mistake: these are our tax dollars. When government collects revenues from any source, they become our tax dollars.

State and local governments collect a lot of revenues from "outsiders", but no one suggests wasting these tax dollars on a soccer stadium. Most of the state corporate income tax is paid by out-of-state shareholders. The state constitution requires that state corporate income taxes ($380 million in FY2006) be spent on K-12 and higher education. (Note: corporate income taxes are eventually passed on to shareholders, employees, and customers, but the tax incidence is definitely shareholders, most of whom live out of state).

About 7% of all general sales taxes are paid by tourists. Currently, these revenues are spent on general government programs such as higher education, transportation, health, and corrections.

Mining severance taxes are largely exported to out-of-state consumers and shareholders. Currently, mining severance tax revenues are used for general state purposes.

Bottom line: the state receives hundreds of millions of dollars from out-of-staters, but the state fortunately spends these dollars for legitimate purposes.

Is this really economic development?
Hotel taxes should be spent on promoting tourism, and spending hotel taxes on a soccer stadium is not an effective way to promote tourism. The total subsidy for Real will reach or exceed $30 million (excluding parking garage) when subsidies from Sandy and other local governments are eventually included. Most of the economic activity that will occur at and around the stadium will be locally driven retail, entertainment, and office space. This activity will occur on its own in some form in Utah without subsidy. Utahns won't be eating more food or buying more consumer goods simply because a soccer team is playing in Utah.

Subsidy proponents argue that subsidizing the stadium promotes economic growth because World Cup qualifiers and matches with Real Madrid will attract out-of-state tourists. However, consider the following:

- It will take several years before enough qualifiers and Real Madrid games are played before the taxpayer "investment" is recouped.

- Considering Real's speculative and unrealistic financial assumptions, taxpayers should be skeptical about claims that a lot of Real Madrid and WC matches will be played in Utah.

- Instead of using millions to subsidize Real's stadium (or infrastructure, as supporters insist on calling it), the state would get a bigger return using hotel tax revenues for advertising and other tourism promotion. State tourism officials have demonstrated that the economic return of tourism promotion is exceptionally high.

Subsidizing stadium infrastructure?
Subsidy proponents argue that the tax dollars aren't being used for the stadium but rather for the land and infrastructure. Let's make a couple of points clear:

- Businesses are expected to pay for their own land and infrastructure. Should state and local governments cover the cost of land and infrastructure for all new businesses, particularly businesses like Real that are primarily geared towards local retail and entertainment?

- Whether the dollars are spent on the stadium or land/infrastructure isn't really that significant because these are still tax dollars.

Proponents argue that the state will own the land. When did the state get into real estate speculation? How much will the land be worth with an empty, unwanted stadium on it?

Finally, if this really made a lot of economic sense, why aren't private investors funding 100% of the cost?

Wednesday, February 07, 2007

Day 24 - Senate individual income tax proposal

Sen. Wayne Niederhauser presented SB223 in Senate Revenue and Taxation this morning. The governor's office anticipates that 80% of taxpayers will switch to the new tax system as proposed in SB223. If passed, SB223 would reduce individual income taxes by $102 million. Even with this tax cut, government expenditures for transportation and education and almost everything else will continue to grow significantly.

Proposed changes
- A flat tax rate of 5%, down from the current 5.35%

- Phased-out credits

. . . - 6% of either federal standard deduction or itemized deductions (excl state income tax paid)

. . . - 6% of 75% of federal personal exemptions

. . . - credits are phased-out at 1.5 cents per dollar of AGI starting at $28,000 for a married couple

- No changes to the current bracketed system

The rate reduction from 5.35% to 5.0% will induce 6% of taxpayers to switch to the new system while the credits will induce 74% to switch to the new system.

Why is this a good idea?
Tax competition has been driving state individual income tax rates down. According our analysis using data from the CCH State Tax Handbook and the Federation of Tax Administrators, top marginal state individual income tax rates have decreased 25% in the past two decades:

1985 . . . . .7.12%
2006 . . . . 5.32%

Click [here] to read more about this.

Also, a tax cut is in order since state government revenues have been growing rapidly. Click [here] to see our report on state government growth.

Disclaimer: Like all legislation, SB223 may eventually be modified, meaning that the above points may no longer be 100% relevant.

Tuesday, February 06, 2007

Day 23 - Half way there

At noon today, the Legislature officially reached the half-way point of the 2007 general session.

So far, we have not had any pitched battles with the Utah League of Cities of Towns and the Utah Association of Counties. We have contacted the League and UAC to schedule an emergency meeting to rectify this situation.

OK, bad joke, but it is nice not to have to fight these guys this year, except maybe Rep. Scott Wyatt's bill (see below).

So far, we haven't found a lot of bills to oppose, except for

- Sen. Hickman's proposal to exempt higher education operations from the spending limit.

- Rep. Harper's bill to reduce gas taxes and impose sales taxes on gasoline purchases.

- Rep. Newbold's bill to subsidize Real Salt Lake's stadium (we'll post more on this later)

In the next couple of days, we'll be posting on the following issues:

- Gov. Huntsman's revised individual income tax proposal, which seems to have generated a lot of support in the Senate and opposition in the House. House Republicans don't like Huntsman's phased out credit or the optional credits for charitable contributions and mortgage interest.

- A Truth-in-Bonding bill by Rep. Greg Hughes

- Rep. Scott Wyatt's bill to change the distribution formula for revenues generated by the 1.0% municipal sales tax. We'll be fighting the League on this bill. We support it. They don't.

Monday, February 05, 2007

Day 22 - Finally!

Last Friday, the Utah House of Representatives finally passed a broad-based voucher bill (HB148). Fortunately, the House did not buy the doom and gloom that voucher opponents were preaching. The Senate will pass HB148 sometime within the next week or so, and Governor Huntsman will sign the bill. Then the UEA or one of their designees will challenge the law in court. Once the Utah Supreme Court approves the law, there will most likely be an attempt within the state education apparatus to obstruct the law’s implementation. The battle for education reform is never ending, but taxpayers made significant progress last week.

As the intensity of the voucher debate fades, we’ll be spending less time on this issue. We’ve already addressed several of the issues that voucher opponents have cited:

- fairness for taxpayers without children
- alleged subsidies for private schools
- so-called fixed costs and fiscal impact of vouchers on public education

We briefly address a couple more objections.

Will private schools raise tuition?
Voucher opponents have argued that private schools will raise tuition by thousands of dollars because the average voucher amount will be about $2,000.

This argument is flawed because the largest voucher amounts will go to the poorest students while the smallest voucher amounts ($500) will go to students from higher income families. According to voucher opponents’ arguments, current private school students come from high income families. Therefore, private schools will have minimal opportunity to raise tuition since the existing private school client base will be eligible for vouchers of small amounts. If private schools raise tuitions by thousands of dollars, they will price out existing customers and some of the low income students receiving vouchers and other forms of financial assistance.

Moreover, if voucher opponents are correct, they should also be arguing that elimination of Pell Grants will cause universities to lower tuition.

What about vouchers for other government services?

Voucher opponents argue that vouchers are bad policy because home owners do not have the opportunity to opt out of paying taxes to the local police department if they buy their own security system nor do they have to option of choosing which fire department will respond if their house catches fire.

As we’ve noted previously, some government services are not easily “voucherized” or suited for choice and competition, just as some private sector endeavors like electricity and natural gas distribution are not suited for competition. Diverting public school enrollment to the private sector at less than half the cost of educating those students in the public sector without harming those who remain in the public school system clearly benefits taxpayers. If someone figures out a way of diverting existing customers of government public safety services to the private sector while saving tax dollars and benefiting those that continue to receive government public safety services, we’ll support that also. However, just because choice and competition are not practical in some areas of government services, does not mean it is not practical in K-12 education.

Some additional comments on the fiscal impact
We’ve already commented on the fiscal impact of vouchers, but we would like to add a few more observations.

The absolute worst case fiscal scenario would be that only current private school students would use the voucher and no existing or future public school students would switch to private schools because of the voucher. Since all existing private school students come from high income families – that’s what voucher opponents tell us – existing private school students would receive a $500 voucher per student. Since there are about 16,000 private school students in Utah (plus or minus a couple hundred), the worst case fiscal impact would be about $8 million, and that assumes that ALL current private school students would be eligible for vouchers in year one.

In FY2008, Utah public schools will be spending more than $4 billion, and that includes capital and debt service that are excluded in most media reports on public education. Therefore, even in the worst case scenario, the voucher impact would be 0.2% of total spending.

Of course, this is the worst case scenario, and it’s an unrealistic scenario. The actual fiscal impact will be much less than the $8 million. In fact, if enough low income students use a voucher, the fiscal impact will be positive. For example, if a student switches to a private school because of a $3,000 voucher, taxpayers save more than $3,300 because the state spends more than $6,300 per student (FY2005) to educate students in public schools. In FY2008, the per student amount -- including capital and debt service -- will be more than $7,000, which means the savings would be at least $4,000.

If 2,000 students receive vouchers of $3,000 each, the savings to taxpayers in FY08 would be $8 million, which offsets the $8 million impact of current private school students receiving vouchers.

But are there really any savings if education costs are fixed?
Education costs are not fixed. In growing areas, additional schools have to be built, additional teachers need to be hired, and new equipment needs to be purchased. There are no capital or operating fixed costs associated with schools that haven't been built yet. Diverting a portion of enrollment growth to the private sector at a lower cost per student saves tax dollars.

Education costs are not fixed in areas with declining enrollment either. In recent years, enrollment and enrollment-related funding have shifted from districts like Salt Lake, Granite, Murray, and Provo and shifted to districts like Alpine, Nebo, and Tooele. Have these growing districts "harmed" declining enrollment districts? No, in fact we'll present data that show

- declining enrollment districts spend more on instruction per student than growing districts (even after adjusting for poverty-driven federal dollars)

- instructional spending per student has grown at similar rates in declining enrollment districts as in growing enrollment districts

- growing districts have had much higher property tax increases than declining enrollment districts.

Thursday, February 01, 2007

Day 18 - Expanding the sales tax exemption for business inputs

Exempting business inputs from sales taxes is one of a half a dozen or so basic tax policy principles that nearly all economists, liberal and conservative, accept. Earlier this year, we posted some reasons why exempting business inputs from sales taxes enjoys widespread support. Click [here] to read more.

This year, SB142 is a proposal to expand the existing sales tax exemption for business inputs to include mining equipment purchases. Oil and gas equipment will not be exempt. Currently, the input exemption includes telecommunications, semi-conductors, agriculture, and manufacturing.

Utah's economy benefits greatly from mining. According to the 2007 Economic Report to the Governor,

- average wages in Utah's mining and natural resources industries are 75% higher than the average Utah non-agricultural wage, even higher than the average wage in the IT industry.

- metals and minerals accounted for 50% of Utah's exports in 2006 and consistently account for more than 30% of Utah's exports year after year.

Some have argued that mining equipment should not be exempt because companies cannot move their mines to another state or country, unlike a manufacturer which can move its facility elsewhere. However, Utah's mining operations are owned by multi-state and multi-national companies which have several options when deciding where to invest their profits. They do not have to invest in Utah, but it is in Utah's best interests that they do.

Arizona, Colorado, Idaho, and Montana already exempt mining machinery and equipment from sales taxes.

This year, House Republicans have proposed a $300 million tax cut, and Senate Republicans have proposed a $150 million tax cut. Expanding the sales tax exemption for business inputs to include mining has a fiscal note of $7.4 million, plus a couple million in local impact. With state government revenues growing even more rapidly than the economy (click here to see our report on state government growth), now is an excellent time to expand the sales tax exemption for business inputs.

Disclaimer: Like all legislation, SB142 may eventually be modified, meaning that the above points may no longer be 100% relevant.