Wednesday, May 30, 2007

Transportation Reform

The Deseret Morning News has an article on gas taxes. Not surprisingly, most Utahns are not supportive of increasing gas taxes.

The article mentioned the Utah Taxpayers Association's transportation reform proposal which includes

- Increasing gas taxes while cutting individual income taxes
- Congestion pricing
- Prioritizing rails and roads projects based on cost-effectiveness of reducing congestion
- Corridor preservation

Obviously, a newspaper article can't cover every issue in transportation reform so there was at least one point that was left out. The article didn't mention that the transportation lobby will be pushing for increasing sales taxes every five to ten years for the next couple of decades. People we've talked to on the Hill anticipate that sales tax rates will reach 7.5% or even higher by 2020. Currently (2Q 2007), sales tax rates are 6.85% in most of Salt Lake County and 6.5% in most of Utah County.

When evaluating transportation funding proposals, taxpayers need to be aware of the proposed sales tax increases that the transportation lobby is pushing.

Spending groups like to push for sales tax increases because they are the taxes most likely to be approved by voters. Sales taxes are not very visible, and taxpayers do not receive a statement showing how much sales taxes they pay in a given year . A typical Utah family pays more in sales taxes than in property taxes, but most taxpayers are completely unaware of that. Sales taxes are also very regressive.

The article provided an example of some of the head-in-the-sand thinking surrounding the transportation debate in Utah. A "disgusted" Richard Drake of Millcreek was quoted in the article as calling increasing gas taxes a "hare-brained idea" and suggested increased reliance on state sales taxes to fund transportation projects. Increased reliance on sales taxes for transportation is a bad idea. Unlike increased gas taxes or congestion pricing, sales taxes do not provide financial incentives for commuters to change driving habits.

Previous posts on transportation issue:
- Responding to the Tribune on gas tax increase
- USDOT supports congestion pricing
- Raise state gas tax, cut state income tax
- There has to be a better way to fund transportation
- $500 million tax increase -- or more -- for highways
- Responding to Bryan Gray as the Davis County Clipper
- TRAX to the airport?
- Are toll roads double taxation?
- Responding to the critics
- Congestion pricing in Sweden

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Thursday, May 24, 2007

Vouchers: Let the people decide?

Note: The following is in response to voucher opponents who complain that voucher supporters do not intend to abide by the vote of the people if vouchers are rejected.

Voucher opponents, confident that they will prevail in a popular vote, are demanding "Let the people decide on vouchers".

What they really mean is "Let the people decide on vouchers, unless they vote in favor of vouchers. Then let the courts decide." Everyone knows that, if vouchers are approved by the voters, many of the same people and groups who are yelling "Let the people decide" will wait a full two nanoseconds before yelling "Let the courts decide."

Most voucher opponents will not abide by a decision of the people if the voters support vouchers. Here's how the 5-step process works.

1. Let the Legislature decide? Yes, unless they decide to support vouchers.
2. Let the people decide? Yes, unless they decide to support vouchers.
3. Let the state courts decide? Yes, unless they decide to support/uphold vouchers.
4. Let the federal courts decide? Yes, unless they decide to support/uphold vouchers.
5. Let voucher opponents decide? Yes, even though they are a minority, there are enough of them to justify stopping the program.

This is how our political process works (at least the first four steps), but let's make sure we understand what is meant by "letting the people decide."

A little too confident about victory in a popular election?
In 2004, supporters of a statewide sales tax increase to preserve open space and build convention centers were confident of victory. The polls showed overwhelming support, about 2 to 1 in the early and intermediate stages of the campaign. They had the money, organization, smart consultants, and overwhelming media support.

The mantra was "Let the people decide because we don't like the Legislature's decision not to impose this tax increase."

Right after the polls closed on election night, Dan Jones confidently and cheerfully predicted that Initiative 1 would pass. Supporters partied on TV in a swanky downtown hotel, and opponents sat at home watching the results come in on their lap tops. When the dust settled, support for the tax increase came in at 45.1%. Even opponents were surprised.

Since steps three and four were not available, supporters of the tax increase went straight to step five and argued that even though they didn't get 50%, they got 45% and that was enough support to convince the Legislature that "something" had to be done about open space.

Monday, May 21, 2007

Provo Daily Herald: an example of economic illiteracy

Economic illiteracy continues to plague policy debate in Utah as evidenced by a recent editorial in the Provo Daily Herald.

Last week, the Daily Herald sang the praises of Orem’s recreation and arts tax, claiming that increasing taxes to support arts and entertainment promotes economic growth. The following quote from the Herald editorial board is a perfect illustration of the economic illiteracy the Utah Taxpayers Association has been fighting against over the years.

“Cultural programs do more than just enrich lives. Many outsiders coming to a concert or a play will go out to dinner or go shopping while they're in town. Such activities bolster the economy and, fittingly, boost CARE tax revenues.”

The many “outsiders” that the Herald is talking about are not from New York City, Chicago, or Vienna. They are almost entirely from other communities within Utah. Raising taxes to subsidize entertainment and arts venue so that Utahns can spend money at these venues does not promote economic growth. This is just shuffling existing and future economic activity around within the local economy. As long as people have money in their pockets, locally-driven entertainment and recreation expenditures will occur even if government does not subsidize venues. People are not going to spend more money than they otherwise would just because government has created some entertainment and recreation venues.

If demand for recreation and entertainment venues increases, the private sector will respond by expanding capacity.

If the goal is to increase consumption, the Herald should be advocating tax cuts, which would give consumers more money to spend.

Too many mayors and city councilmembers equate subsidizing locally-driven retail, recreation, and entertainment with economic development. As a result, one Utah city offers subsidies to incentivize a retail, recreation, or entertainment development to locate in the city in order to divert locally-driven economic activity from neighboring cities, and the neighboring cities respond by doing the same thing.

It's really not much different than desert tribes stealing camels from each other. At the end of the day, the number of camels in the desert isn't any greater than it otherwise would be. They've just been shuffled around.

What is real economic development?
Long-term economic growth is more dependent on production and increases in productivity than it is on consumption.

Once government establishes the basics for economic growth – rule of law, property rights, etc -- real economic development is driven by two factors: increasing business and worker productivity and exporting goods and services.

Productivity increases when output increases per unit of input. This is driven by investments in technology, education, machinery, telecommunications, transportation and other areas.

Export-oriented businesses such as IT, manufacturing, and natural resources pay high wages and import wealth into our state.

Fortunately, most state legislators understand this, but too many local government leaders and small town newspaper editors do not.

Thursday, May 17, 2007

The Fiscal Impact of School Choice Programs

The pro-voucher Friedman Foundation recently released a study demonstrating that school choice programs have saved school districts and taxpayers $444 million from 1990 to 2006. Click here to see the report.

Dr. Susan Aud, who prepared the study, wrote "to keep our analysis conservative, we have not only excluded from our analysis all reductions in cost outside the category of current expenditures, but we have excluded all reductions in current expenditure costs other than instructional costs." In other words, when calculating savings, the study does not include capital and debt service costs and non-instructional operating costs such as administration, transportation, and facility maintenance.

Aud also wrote "[w]e make this conservative assumption to ensure that our analysis takes into account the widespread complaints brought by school choice opponents about fixed costs." This is a very conservative approach, especially from a Utah perspective, since Utah's school enrollment is rapidly increasing and nearly all educational costs -- except for district administration and possible some others -- are clearly variable. Even in areas where enrollment is not growing, costs are variable in the long run due to the possibility of consolidating schools.

Friedman's study accounts for the costs of providing vouchers to students who were attending or would have been attending private schools even without vouchers.

If Friedman says that vouchers save money, why did the Legislative Fiscal Analyst say vouchers would cost money in Utah?
When preparing the fiscal note, the fiscal analyst did not even include any savings due to students leaving public schools for private schools due to vouchers, even though he admitted that there clearly would be savings.

Tuesday, May 15, 2007

Responding to Tribune editorial on gas tax increase and income tax cut

On Sunday, the Tribune wrote this editorial in response to this proposal by the Utah Taxpayers Association. The Tribune got a couple of items wrong.

Do tax burdens have to be increased to fund transportation?
The Tribune wrote that the association’s proposal “doesn't solve the biggest problem, which is how to raise new money for roads”. The Tribune incorrectly assumes that the only way to “solve the biggest problem” is to raise taxes. There are alternatives.

Raising gas taxes – while cutting income taxes -- coupled with congestion pricing will slow the growth in vehicle miles traveled. Congestion pricing also increases the effective capacity of existing and future transportation infrastructure by shifting discretionary traffic to off-peak hours and getting commuters to change their driving habits to include more carpooling, telecommuting, leaving earlier or later or work, or living closer to work.

Corridor preservation and prioritization of rails/roads projects based on cost-effectiveness of reducing congestion will ensure that tax dollars are more efficiently spent than they are right now, which means more congestion can be alleviated with the same amount of dollars.

Instead of reflexively calling for tax increases, elected officials and opinion leaders should first ensure that existing transportation dollars are efficiently spent.

Could this proposal “move revenues away from general government services, including health care and virtually everything else the state does, and toward transportation”?
No. All major areas of government continue to receive the same amount of funding, including general government. In terms of revenues, everything balances out:

- the increased gas tax revenue for transportation is offset by transferring an equal amount of general fund money out of transportation into general government (which includes higher education).

- the increased general fund revenue for general government (which includes higher education) is offset by transferring the same amount of income tax money out of general government (specifically higher education)

- the increased income tax revenues for K-12 is offset by an income tax cut.

The above transfers demonstrate how fungible state government revenues really are.

However, since gas taxes can’t be appropriated for general government and since general taxes would be cut, doesn’t that reduce the amount of state revenues that potentially could be used for general government?
This is an unrealistic concern because the trend over the past twelve years has been to increasingly shift general fund revenues from general government to roads, not the other way around. Therefore, fears that general state government like Medicaid will be “short-changed” due to the state's increasing reliance on gas taxes, which can’t be appropriated for general government, are unrealistic since no one expects the state to start shifting general fund dollars from transportation to general government (unless transportation receives more gas tax revenues, which is our proposal).

Moreover, slowing the growth in vehicle miles traveled by raising gas taxes and implementing other transportation reforms will allow more funding to be spent on general government or, Marx forbid, allow the Legislature to enact a net tax reduction, or both.

Third, even with the transfer of $350 million in general funds from transportation to general government, hundreds of millions of general fund dollars will continue to be spent on roads. This means that the state will still have the flexibility of transferring general fund dollars from transportation to fund general government.

Some might argue that most of the remaining general fund money in transportation would be “one-time” money, but about $34 million would not be. Besides, transportation has been receiving “one-time” money every year for several years, and the amount continues to grow.

Moreover, the 25 cent-per-gallon gas tax increase would be phased in over a couple of years. This means that the amount of ongoing general funds appropriated and earmarked for transportation would be much higher than the FY08 amounts, meaning that significant amounts of general funding would be used for transportation, even after shifting $350 million in general funds from transportation to general government.

Therefore, even after shifting $350 million in general funds out of transportation and into general government, sufficient general fund money would be left in transportation which would still allow the Legislature to shift tax dollars to general government.

Why not cut sales taxes instead?
Some would argue that sales taxes should be cut instead of income taxes because the transportation subsidy is coming from sales taxes. First of all, an offsetting sales tax cut would be better than no tax cut at all.

However, cutting income taxes is a better way to promote economic growth than cutting sales taxes. In a globally competitive economy, cutting state income taxes increases the incentive to produce and invest locally while cutting sales taxes increases the incentive to increase consumption, and most of the products we consume are made elsewhere. In the long run, economic growth will be higher if Utah incentivizes production over consumption.

Arguing that sales taxes should be cut because “that’s where the subsidy is coming from” ignores the fact that state general revenues are largely fungible. Even though sales taxes are being used to fund transportation, shifting sales taxes from higher education increases the diversion of income taxes from public
education to higher education.

Is the Tribune correct in assuming that it is "unlikely that most low-income people would file just to get a refundable credit."
No. About 75% of low income people eligible for the federal earned income tax credit apply. Participation rates for state-level refundable credits for low income households varies from 60% to 90%.

Wednesday, May 09, 2007

Taxing Services?

Yesterday, the The Salt Lake Tribune editorial board called for imposing sales taxes on services. The Tribune wrote "Ours is increasingly a service economy. The tax system should reflect that. "

The proposal probably won't get very far, but here are some points to consider.

1. Despite the increasing size of the service economy, the sales tax base is closely tracking inflation and population growth. In 1996, taxable sales in Utah were $25.844 billion. In 2006, taxable sales had increased to $44.795 billion, an annualized increase of 5.7%. This is slightly higher than annualized combined inflation and population growth of 5.1% from 1996 to 2006.

If the 3-percentage point reduction in the state sales tax rate on food had been in place in 2006, the annualized growth rate in Utah's effective sales tax base would have been around 5.0%, just barely lower than combined inflation and population growth.

2. Most economists argue against imposing sales taxes on business-to-business services. Taxing business inputs leads to tax pyramiding which hides the true cost of government because businesses pass these taxes on to consumers in the form of higher prices, to shareholders in the form of lower dividends and stock prices, and to employees in the form of reduced compensation.

Some liberal economists argue that taxes on business inputs are a regressive tax since, they argue, these taxes are passed on to consumers in the form of higher prices.

Moreover, taxing business-to-business services such as accounting, IT, legal, and advertising places smaller businesses at a disadvantage to larger businesses because larger businesses perform a lot of this work in-house which means it would not be subject to sales taxes.

3. According to the Council on State Taxation (COST), the lion's share of household services (66%) is medical. Most elected officials would be reluctant to impose sales taxes on medical services.

4. Utah already taxes a lot of services including automobile repair (11% of total household service purchases according to COST), amusement and recreation services such as movies, athletic events, concerts (6% of total household service purchases according to COST).

Utah imposes sales taxes on most repairs of personal property, including household appliances such as washing machines, dryers, refrigerators, as well as computers, copying machines, and automobiles. Repairs of items that are attached to real property such as hot water heaters, furnaces, HVAC, dishwashers, and built-in microwaves are not subject to sales taxes.

Monday, May 07, 2007

USDOT supports congestion pricing

David Horner, Chief Counsel in the Federal Transit Administration of the U.S. Department of Transportation, addressed the attendees of the 2007 Utah Taxes Now Conference regarding the benefits of congestion pricing.

The costs of congestion
Using data from the Texas Transportation Institute, Horner noted that Americans annually experience 3.7 billion hours in traffic delay and waste 2.3 billion gallons of fuel due to congestion. USDOT’s own analysis concludes that the total economic cost due to congestion is nearly $200 billion per year.

Congestion pricing: what it is and how it works
Congestion pricing is a form of variable tolling which expands the effective capacity of existing and future transportation infrastructure by charging motorists user fees to drive on roads during periods of congestion. Most state transportation costs are related to expanding road capacity to handle morning and afternoon rush hour traffic. Congestion pricing reflects the true cost of providing this capacity by charging user fees to motorists who drive during peak congestion hours.

By exposing the real cost of providing transportation infrastructure, congestion pricing encourages efficient use of transportation infrastructure which incentivizes commuters to carpool, telecommute, live closer to work, or leave earlier or later for work. Horner added that more than 50% of all rush hour traffic is discretionary (not commuting to and from work). Discretionary traffic during rush hour would be reduced if congestion pricing were implemented.

Horner noted that congestion pricing enjoys consensus approval among economists as the single most viable approach to reducing congestion. Horner also mentioned that congestion pricing is no longer just a theory as demonstrated by positive results in the U.S. and internationally. Existing technology – dashboard/window mounted transponders -- allows easy implementation and eliminates the need for toll booths.

Congestion pricing’s track record
Horner used examples in Stockholm, London, and Singapore to illustrate congestion pricing’s positive impact.

- Stockholm: reduced traffic by 25% in downtown, increased transit ridership by 5%, reduced vehicle emissions by 14%

- London: increased vehicle speed by 37%, reduced delays by 30%

- Singapore: reduced traffic by 13% and increased vehicle speed by 22%.

What about congestion pricing on existing interstate highways?
Horner emphasized that the federal government does not prohibit congestion pricing on existing interstates but requires that states obtain approval from the USDOT before implementation. States cannot implement congestion pricing on existing interstates unilaterally.

Tuesday, May 01, 2007

Raise state gas taxes, cut income taxes

The Utah Taxpayers Association is proposing a four-pronged approach to addressing state transportation issues. These prongs are

1. Congestion pricing
2. Transportation corridor preservation
3. Prioritization of rails and roads projects based on cost-effectiveness of reducing congestion.
4. Significantly increasing gas taxes while cutting income taxes to maintain revenue neutrality

We've discussed these issues in previous posts, and we'll discuss them even more in the future. Today, we would like to discuss the fourth prong, increasing gas taxes while cutting income taxes. This would be revenue-neutral and would not decrease K-12 education spending even though individual income taxes would be cut.

Why raise gas taxes?
Up until the early 1990s, Utah relied almost entirely on gas taxes and other user fees to fund state transportation needs. In FY2008, the state will be spending almost $790 million from the state general fund (about 88% sales taxes when earmarks are included) on transportation. The split between one-time and ongoing revenues is about 50-50.

Like congestion pricing, gas taxes expose government's real cost of providing transportation infrastructure and maintenance. As the user cost increases, the growth in usage is reduced. Basic economics tells us that anything that is underpriced gets overused.

Moreover, slowing the growth in vehicle miles traveled is good for the environment.

Sales taxes, on the other hand, do not encourage efficient use of transportation infrastructure.

How can K-12 spending be protected while cutting income taxes?
The proposal would be implemented as follows:

  1. Increase gas taxes by 25 cents per gallon. This would generate $350 million in gas tax revenues, which is a little less than the amount of ongoing general fund dollars in the FY08 transportation budget.
  2. Shift $350 million in general fund dollars from transportation to higher education
  3. Shift $350 million in income tax dollars from higher education to K-12 education. (In FY08, higher education appropriations include $836.9 million in income tax dollars of which $760.4 million is for operations and $76.4 million is for capital).
  4. Cut income taxes by $350 million
What would the individual income tax cut look like?
A $350 million individual income tax cut would be a 14% reduction based on the GOPB FY2008 estimate of $2.545 billion in individual income revenues. The reduction could be achieved by a combination of the following:
  1. Lowering the 5.0% individual income tax rate
  2. Increasing the credit amounts
  3. Slowing the phase out of credits based on income
  4. Make credits refundable (helps low income)