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%.
