Utah Taxpayer

Founding staff skipping out on iProvo, UTOPIA

2008-03-03T17:29:00.000-07:00

Utah’s 2 largest municipal telecom systems are struggling to maintain their senior staff. UTOPIA’s founding executives—Paul Morris (Executive Director), Roger Black (COO) and David Shaw (General Counsel)—have all left in the last six months, and iProvo has failed to hire a telecommunications manager for more than a year. Filling these positions will prove challenging. Not only will these potential executives have to solve UTOPIA’s and iProvo’s persistent financial problems posting), but qualified and interested applicants will be few and far between.

Centerville City Council member Paul Cutler and Orem City Manager Jim Reams have been hired as interim directors, but the UTOPIA board is actively seeking a new executive director and accountant. As with so many other aspects of UTOPIA’s life cycle, iProvo’s experience suggests serious problems. Initially a triumvirate of Kevin Garlick (Energy Director), Paul Venturella (Telecommunications Director) and Mary DeLaMare-Schaefer (Communications and Marketing Manager), were to run iProvo. Only Kevin Garlick remains. Venturella jumped ship in February 2007, and DeLaMare-Schaefer left in June 2007.

For more than a year, iProvo has actively sought to hire a new telecommunications manager. The problems they’ve faced are so significant that Provo’s HR manager participated in an iProvo summit last December just to announce new strategies to fill this position. Another 3 months later, the position remains unfilled.

Given the similarity of their services, there’s no doubt that they are competing with each other, and with the private sector, to fill these positions. And since iProvo’s job posting has already languished for more than a year, it’s hard to imagine that UTOPIA’s entry into the fray will make it any easier for either municipal telecom system to fill the position.

The cost of smaller class sizes

2007-12-27T08:20:00.000-07:00

Since the Legislative Auditor General released his report on the funds the Legislature appropriated to reduce the average class size in Utah, the pundits have been wringing their hands. Apparently to everyone’s surprise and dismay, Utah class sizes are still the largest in the nation. For anyone even vaguely familiar with Utah, this audit only confirmed what we and many in the business community have said for years about Utah education: class size reduction is an unrealistic goal in Utah.

The educational merits or demerits of class size reduction have been debated for years. Parents intuitively prefer them, but the large scale tests of class size reduction show little improvement in student achievement unless average class size gets down to about 15. The cost of achieving that average class size would be monumental. And there are a host of other education proven reforms that would provide much larger gains in student achievement at a fraction of the cost.

Utah’s average elementary class size is 26. In addition, Utah classrooms will swell by more than 160,000 over the next decade. On top of that, published reports indicate that Utah began the current school year with hundreds of vacant teaching slots.

This teacher shortage means that Utah’s current average salary and benefits package of $55,034 per year is not attracting enough applicants to meet existing demand. Those vacant teaching positions, plus the others necessary to bring Utah’s average class size to 15, would be even more expensive. For illustration purposes, however, we’ll assume the cost only goes up to $60,000. That means Utah would have to spend another $516 million every year just to hire the 8,600 teachers necessary to get Utah class sizes down to 15.

That calculation ignores the on-going surge in Utah enrollment. When the 160,000 new students hit Utah schools over the next 10 years, Utah will need another 6,222 elementary teachers to maintain an average class size of 15. Assuming the same $60,000 total compensation package for these teachers means Utah would pay $373.3 million for these teachers. All told, Utah would need to hire nearly 15,000 more teachers, at a total ongoing cost of $889 million.

Add in the capital costs necessary for each of these teachers to have their own room, and the cost of reducing class size to 15 becomes staggering. As our October study, “Education Growth Projections in Utah: 2008-2022,” showed, Utah taxpayers will have to purchase $6.365 billion in land and buildings to house the surge of students entering Utah schools. If reducing average class size to 15 requires the same proportional increase in capital costs as this analysis projects in salaries and benefits, those capital costs could easily exceed $10 billion.

How much would meaningful class size reduction cost? This analysis shows we’d have to increase ongoing education spending by nearly $900 million per year. And our capital costs would dwarf that increase. Given class size reduction’s mixed record in raising student achievement and Utah’s unique demographics, class size reduction seems a fool’s errand.

Would it be possible, even laudable to instead increase average teacher pay, and thereby attract the best and the brightest into Utah’s classrooms? When smaller class sizes are what increase the number of teacher union dues payers, don’t expect the unions to make teacher pay a higher priority than class size.

Why the Cottonwood Mall RDA is just plain wrong

2007-12-06T10:00:00.000-07:00

In our last post, we noted why the Cottonwood Mall RDA is such a risky gamble. In this post, we’ll describe why the Cottonwood Mall RDA isn’t just risky—it’s just plain bad policy.

The proposed Cottonwood Mall RDA will not create one job, not one residence. Not one. Every square foot of retail and residential space General Growth Properties (GGP) plans on putting in this space will be built somewhere by someone without a subsidy. That’s because residential and retail development follows population and disposable income. Houses and retail developments will naturally go where people are and have money to spend. Subsidizing a developer to build residential or retail space in this place simply rearranges where this retail and residential space goes. In essence, GGP wants to take nearly $100 million—most of it from the Granite School District. In exchange, they’re not giving a single thing—because this retail and residential space will be done whether a subsidy is provided or not.

Holladay says the revenue stream they are projecting amounts to “found” money. That is simply not true. Holladay City and GGP didn’t discover hundreds of thousands of dollars just waiting for a right-thinking “investor” to pick up. They want to steal this retail and residential development from another city, perhaps Taylorsville, South Salt Lake, West Valley City or Magna, and put it on their land.

GGP says that this is the only project that will allow them to earn the kinds of returns on their investment that they expect, and even then they aren’t going to receive the double-digit return they typically aim for. That may be true—but should education taxes be used to subsidize GGP’s profits? We already spend less per student than any other state in the nation.

GGP and Holladay say that this site will remain vacant, or nearly so, without this RDA. GGP has even gone so far as to say that without it, they’ll tear down the buildings, challenge the property valuation, just to reduce their tax liability. To a certain degree, they’re being disingenuous on this point: GGP told the Taxing Entities Committee (TEC) that they wouldn’t sell this property for the approximately $30 million the site is currently valued at, even if the RDA doesn’t go through. (We’ll return to this point in a minute.)

We’re not engineers, so we’ll take their word when they say there are substantial infrastructure costs that have to be borne before that land can be built on. But to assume that no one will build on that site for the next 20 years is just absurd. As Holladay Mayor Dennis Webb noted at last Wednesday’s TEC meeting, the LDS Church is putting $1 billion into the City Center project without any taxpayer subsidies. GGP and Holladay city have noted that Larry Miller might be interested in building on that property. A big box retailer might go on that property. Both of these are plausible uses for that land, and neither of them would require an RDA.

Of course, GGP “doesn’t sell properties,” as they told the TEC last Wednesday. At least, not usually. However, they were quite clear that there are circumstances in which they have sold properties, and would sell this property. The fact that GGP has contemplated a price at which they wouldn’t sell the land means that there is a price at which GGP would sell the land. And for discussions of Larry Miller to mean anything, even as something Holladay would prefer to avoid, they have to mean that GGP would sell the land to Larry Miller, for the right price. In other words, GGP has no more interest in letting that land go undeveloped, giving them no return, than Holladay, Salt Lake County, or the Granite School District does.

Finally, let us point out that this RDA is just the first of 6 or 7 RDAs already in the pipeline that the Granite School Board will be asked to approve in the next several months. On Tuesday Taylorsville asked for another $15 million RDA. If the Granite School Board approves the Cottonwood Mall’s $100 million subsidy, how will they be able to oppose any of these other RDAs?

RDAs can be an appropriate economic development tool. When cities use them to steal residential and retail development from each other, as Holladay is trying to do with this one, they are nothing but a drain on taxpayer dollars. This RDA creates no economic benefit, and will cost taxpayers and school kids tens of millions of dollars. We encourage the Granite School Board to vote no on the proposed Cottonwood Mall RDA.

If all goes as planned . . .

2007-11-29T16:58:00.000-07:00

Holladay is proposing to subsidize retail activity and residential construction that will occur on its own in Salt Lake County even without a subsidy. Using tax dollars to stimulate this type of activity makes absolutely no sense: retail and residential construction respond to local demand, which is a function of population and disposable income. Taxpayers are the losers when cities use tax incentives to steal retail from each other. If this RDA is approved, the Legislature will have to once again consider reforming RDA statutes.

Holladay Mayor Dennis Webb is the foremost cheerleader for the proposed Cottonwood Mall redevelopment. Under the proposal, over the next 20 years Holladay City, Salt Lake County and the Granite School District would give nearly $100 million—$70 million from the Granite School District alone—to General Growth Properties (GGP), the company who currently owns the Cottonwood Mall. In exchange, GGP will upgrade the current site with more than 1 million square feet of high-end retail and residential space.

If all goes as planned, Holladay and GGP claim the city, Salt Lake County and the Granite School District will receive significantly more in property tax revenues when the project is finished, and a smaller increase in property tax revenues while the project is being completed. They’ll be taking those revenues from another city or another school district, but at least Holladay will be getting more property tax dollars. If all goes as planned.

If, if, if. That darn “if” is a real pain. Every developer, every businessman has a different pain threshold. Some are willing to assume a greater risk for the potential of a bigger pay off; others are content to let lucrative deals pass by, because the potential loss would be too painful.

When it comes to assessing those risks, elected officials aren’t quite as careful, at least when they aren’t using their own money. It’s not because they don’t care, or because they want to be cavalier with taxpayer dollars. But just as most people go bankrupt when playing Monopoly, elected officials’ pain thresholds are much higher when they’re using taxpayer dollars.

The Cottonwood Mall redevelopment project is a perfect illustration. Located on major freeways, the Fashion Place and South Towne malls have replaced the Cottonwood Mall as preferred locations for national department stores like Dillards and Nordstrom. Unsurprisingly, this mall has lost all but one tenant; its parking lot is a shamble; and some of the most prized land in the Salt Lake valley has been almost vacant for some time.

Before any upgrades can be done, GGP estimates $100 million of infrastructure work will be necessary to meet various flood plain, fill and other regulations created since the Cottonwood Mall was first built in 1962. GGP is willing to invest some $550 million into this project over the next 20 years; $650 million takes them past their pain threshold. That’s why they want Holladay, Salt Lake County and the Granite School District to put the last $100 million into the project. And if all goes as planned, what is now the Cottonwood Mall probably will be a residential community people aspire to live in. If all goes as planned.

The question is, why should these taxpayer dollars be placed at risk? Why should education taxes from the Cottonwood redevelopment, which would have been used to pay teachers’ salaries on the west side of the Granite School District, be risked to build condos on the east side?

And we can’t ignore the further risks inherent in the political world. Holladay was among several cities who considered splitting the Granite School District in half. They opted not to move forward this year, but it would be foolish to believe that the impetus for separation has disappeared. More likely, those who wanted to split Granite School District are just biding their time, waiting to see how the Jordan split goes. Can the Granite School District in good conscience let education taxes be placed at risk, with such a serious threat to their very existence looming?

Public education advocates readily proclaim that Utah schools are woefully underfunded. If that’s so, how can they afford to risk these education tax dollars? Mayor Webb and GGP say the dollars aren’t at risk, that the increases in tax revenues are guaranteed. If there really isn’t a risk, why is GGP asking taxpayers to cough up $100 million in the first place? Why don’t they just put the last $100 million in themselves?

Even if all does go as planned, this RDA would be a bad idea. That GGP sees a distinct possibility that it won’t go as planned makes this bad idea even worse. But that’s a topic for our next post.

UTOPIA'S FINANCIALS

2007-11-26T11:07:00.000-07:00

Rep. Urquhart and Jesse Harris have recently been discussing questions regarding the financial position of UTOPIA on their respective blogs, www.steveu.com and www.freeutopia.org. Jesse Harris has focused on what he perceives as the dearth of public information on UTOPIA’s financial position. Fortunately, UTOPIA has published much of the data Rep. Urquhart is asking for. Given the dismal story the data tells, however, it’s not surprising UTOPIA doesn’t like to talk about it.

UTOPIA’s original feasibility study projected that they would receive an average revenue per user (ARPU) of $58 (page 16). Page 29 of the same feasibility study anticipates that a take rate of less than 20% would jeopardize the $10.1 million annual sales tax pledges from member cities. Over the 20 years of the UTOPIA bonds, that means UTOPIA pledging members would have to pay $202 million.

During their June 2007 board meeting, UTOPIA’s representatives shared the current state of their finances. Page 2 of their 2007 financials show them with 6,493 customers, and $2.25 million in revenue. (Curiously, UTOPIA still hasn’t published that data online, though they did email these financials when Utah Taxpayers Association asked for it.) That means for 2007 their ARPU was just $29, or half of what they were projecting.

In a recent presentation to the Cottonwood Heights City Council, UTOPIA described their current take rate, both on a system-wide basis, and city by city. On slide 16, UTOPIA indicates that their current system-wide take rate is 16.4%. With their take rate below the break even threshold, and their ARPU just half of what their feasibility study projected, UTOPIA’s financial position seems precarious at best.

Their 2007 financial summary raises other serious questions. While they anticipated receiving $5.25 million in fees from subscribing members, their amended budget shows them only receiving 1/3 that amount, or $1.75 million. Similarly, they projected that they would spend $9.0 million in network operations, but their amended budget shows them spending just half that amount, $4.3 million.

The combination of much lower-than-projected subscriber revenue and much lower-than-projected expenses for network operations suggests that UTOPIA didn’t attract anywhere near the number of retail customers as they anticipated. In all of these cases, UTOPIA made much rosier projections than actual experience justifies. In testimony before the Legislature’s Government Competition and Privatization Subcommittee, UTOPIA general counsel David Shaw explained the dissonance between their projections and reality as the product of “externalities.” Perhaps a better word would be “competition.” Given this dissonance, the Legislature can and should ask whether UTOPIA is a going concern. If they aren’t, it’s hard to see why they should be allowed to expand.

State employee retirement: 30% or 100% taxpayer funded?

2007-09-17T13:18:00.000-06:00

Utah state and local government employees, including school district employees, receive generous retirement benefits. Utah taxpayers cover 100% of the cost of state/local government employee retirement benefits (some employees on the older system chip in some of their own funding).

However, the Utah Public Employees' Association claims differently. In their August/September 2007 newsletter, the UPEA states

Contributions into the retirement system are only funding 30% of the cost; 70% of the cost of the retirement system is funded by investment earnings. Put another way, for every $1 of benefit paid out by [Utah Retirement System], only 30 cents is being funded by the employer (taxpayer).

Obviously, we disagree. The other 70% should also be considered taxpayer funded as well since investment earnings are derived from taxpayer contributions in the first place. This is no different than the investment earnings that individuals and households earn in their own retirement accounts. The earnings are attributed to the investor's account.

Charter Schools Still Receive Less Funding Per Student than District Schools

2007-09-06T18:09:00.000-06:00

In its September 2007 newsletter, the Utah Taxpayers Association has released an analysis of per student spending for district schools and charter schools for FY2006.

After excluding lunch service and non K-12 programs and deducting transportation costs and federal start-up funding, charter schools received $5,329 per student in FY2006 while district schools received $6,001.

While some of the per student funding difference between charter schools and district schools is attributable to different enrollment demographics, more than half of the difference is attributable to charter schools being short-changed on local replacement funding.

Click here to see the report.

Fees + Taxes = Double Taxation?

2007-09-02T21:23:00.000-06:00

Today's Deseret Morning News reports on the increased reliance on entrance fees to fund national and state parks. One of the persons quoted in the article suggested that having to pay taxes and fees is the same as paying twice.

We've heard the same argument with regards to congestion pricing. Such "paying twice" or "double taxation" reasoning leads to some very interesting conclusions.

For example, should cities stop sending residents monthly water bills because federal taxes, state sales taxes, and local property taxes are used to fund water projects?

Should the state eliminate the gas tax (really a user fee) because state and local general sales tax dollars and local property tax dollars are used to fund roads?

Should the state stop charging for lunches in public schools because federal taxes and state liquor taxes are used to fund school nutrition programs?

It's fairly obvious to most people that if government were to eliminate these fees that general taxes would have to be raised elsewhere or government programs would have to be streamlined (including those that were being funded in part by fees).

However, the real question to those who argue that these fees are double taxation is why do government services have to be either 100% funded by general taxes or 100% funded by fees but not a combination of both?

Reliance on user fees makes sense in many instances, particularly if user fees encourage personal responsibility and more efficient use of resources.

Utah's Toothless Spending Limit

2007-08-28T01:08:00.000-06:00

The Utah Taxpayers Association's August newsletter has an article on pages 3 and 4 that explains Utah's spending limit and why it is ineffective at slowing government spending growth.

In FY2008, total expenditures from the general and education funds (including earmarks) increased by 18.3%. The actual increase will be even higher once FY2008 supplementals are determined in the next legislative session.

The spending limit is ineffective because most government spending is exempt from the limit. In FY2008, only 39.7% of combined education/general fund expenditures (including earmarks) will be subject to the spending limit.

Click here to read the article on pages 3 and 4.

Following up on $7,500 per student in FY2008

2007-08-21T19:25:00.000-06:00

We’ve received some questions about our $7,500 per Utah K-12 student spending estimate for FY2008. Click here to see the original post. Here are our answers to the questions we’ve received.

Does your $7,500 estimate include “one-time” money?
Yes it does, as it should. Those who want to minimize the amount taxpayers spend per student try to exclude all sorts of things, such as facility construction, interest, “below the line” items such as Social Security, Medicare, retirement, block grants etc. Now, some want to exclude so-called “one-time” expenditures.

Here’s why one-time expenditures should be included

- One-time expenditures are still expenditures of tax dollars. These are real tax dollars, not pretend tax dollars.

- One-time expenditures will be replaced in succeeding years by additional one-time revenues or by ongoing revenues.

- To exclude one-time expenditures would be to assume that per student spending will be DECREASING in FY2009 because the one-time money would not be replaced. History strongly indicates that FY2009 spending per student – which will also include one-time funds -- will be even higher than FY2008. Only once in the past twenty years has nominal per student spending decreased from one year to the next.

- If these one-time expenditures had been diverted to higher education which would have then diverted general funding to transportation, then the opposition would not be dismissing these expenditures as “one-time”.

- One-time expenditures in the Minimum School Program are less than 4% of estimated school district expenditures in FY2008. Therefore to reach $7,500 per student in FY2009, the legislature would have to add an additional 3% for enrollment growth and 4% to replace one-time funding.

- All budgets have one-time money. A lot of the current one-time money is from budget surpluses, and these budget surpluses are the result of conservative revenue estimates by the state. If the state were less conservative in estimating revenue, then a lot of the one-time money in the FY2008 budget would automatically become ongoing money. During recessions, one-time money comes from transfers from the Rainy Day Fund and the “working” Rainy Day Fund (cash for capital projects).

What about federal money?
Our estimate includes federal money, as it should. Afterall, Utahns pay federal taxes just like everyone else. A voucher program that results in educating students at a lower cost to federal taxpayers makes sense just as a voucher program that educates students at a lower cost to state and local taxpayers.

Besides, most federal dollars are driven by poverty levels. Therefore, if voucher opponents are going to argue that vouchers are going to result in “loss” of federal dollars, then they must be assuming that low income students will be using vouchers. Besides, federal dollars for K-12 education are generally allocated to the states based on Census Bureau poverty levels.

What about adult education?
No, our estimate does not include adult education or fund 23 expenditures. Even though these are tax dollars, this would not be an appropriate inclusion in the voucher debate.

In the context of the voucher debate, how much of these costs are variable?
Considering that Utah’s enrollment is expected to grow 3% annually, virtually all K-12 costs are variable. There are no fixed costs associated with teachers that have not yet been hired, buildings that have not yet been built, or equipment that has not yet been purchased. Even districts that have experienced declining enrollment have demonstrated that costs are largely variable by redrawing school boundaries. They can also convert underused traditional district schools to charter schools.

Property taxes, part 4: is Truth-in-Taxation harmful to local governments?

2007-08-16T23:34:00.000-06:00

Opponents of Truth-in-Taxation (TNT) argue that TNT harms local governments because the calculation of the certified tax rate does not include inflationary adjustments. To offset inflationary losses, local government must go through Truth-in-Taxation periodically.

As we explained in part 3, property tax revenue growth since TNT's enactment has been nearly identical with inflation and population growth. When property tax reductions unrelated to TNT are accounted for -- two legislative reductions in the statewide basic levy for education and a reduction in county property taxes in exchange for county authority to impose a 0.25% sales tax -- property tax revenues have increased slightly faster than inflation and population growth.

Property tax revenues would be even higher (or property tax rates for everyone would be lower while local governments would be getting the same amount of revenue they are currently receiving) if cities would stop using RDAs to subsidize locally-driven retail, recreation, and entertainment. Subsidizing economic activity that would occur on its own somewhere in Utah without a subsidy is poor fiscal policy. Hopefully, recent RDA reform will change this.

Property Taxes, Part 3: Truth-in-Taxation Results

2007-08-13T00:52:00.000-06:00

We’ve discussed the theory and mechanics behind Truth-in-Taxation in parts 1 and 2. Now we’ll talk about the results.

Property tax revenue growth before and after Truth-in-Taxation
In the six years (1980 to 1986) prior to Truth-in-Taxation’s enactment, property tax revenue grew at a 10.8% annualized rate even though combined inflation and population growth was about 7%

In the twenty years since Truth-in-Taxation, property tax revenues have grown at a 5.4% rate, equal to the combined inflation and population growth rate of 5.4%.

During that time period, there were three property tax cuts unrelated to Truth-in-Taxation – two reductions to the statewide basic levy for education and a reduction in county property taxes in exchange for a sales tax increase. All of these reductions occurred prior to 2000 so comparing property tax growth since 2000 would provide a more accurate impact of Truth-in-Taxation. Since 2000, property tax revenues have grown at about 5.9% annually, and combined inflation and population growth has been slightly lower at 5.5%. Relative to inflation and population growth, property taxes have grown at a much slower rate since Truth-in-Taxation’s enactment than before.

Utah’s property tax burdens compared to other states
Utah’s major sources of tax revenues are individual income, sales, property, motor fuel taxes, and fees. Of these, Utah is below the national average on property taxes only.

- Individual income taxes: Utah ranks 16th highest at 2.94% of total personal income (TPI) compared 2.41% for the U.S.

- General sales taxes: Utah ranks 13th highest at 3.33% of TPI compared to 2.63% for the U.S.

- Motor fuel taxes: Utah ranks 10th highest at 0.54% of TPI compared to 0.36% for the U.S.

- Property taxes: Utah ranks 36th highest at 2.73% of TPI compared to 3.36% for the U.S.

For a complete report on Utah’s state/local tax and fee burden in FY2005, click [here] to see the Utah Taxpayers Association’s How Utah Compares report. The association updates this report annually.

$7,500 per Utah K-12 student in FY2008?

2007-08-08T21:45:00.000-06:00

The Utah Taxpayers Association estimates that taxpayers will be spending more than $7,500 per student in FY2008. This figure includes operations, facility construction, and interest. It does not include non-K-12 programs.

Isn't this higher than the Census Bureau figure?
The most current Census Bureau spending per student figure for Utah is $5,257 for FY2005, not FY2008. The $7,500 figure is for FY2008, and it includes expenditures that the Census Bureau does not include.

This Census Bureau figure excludes facility construction and interest. The Utah Taxpayers Association's figure (actual, not estimated) for FY2005 excluding facility construction and interest is $5,300, which is within 1% of the equivalent Census Bureau figure.

Including facility construction and debt service, the association calculates that Utah spent $6,309 per student in FY2005 (again, actual not estimated).

How did we get to an estimated $7,500 per student for FY08?
The association recently released its Utah School District Spending Report for FY2006. You can view this report here. The spending figures in this report are actual expenditures, not estimates. In FY2006, Utah school districts spent $6,529 per student. Again, this includes facility construction and interest.

The actual figures for FY2008 won't be available for another 18 months, but we can safely estimate that FY2008 per student spending in Utah will be at least $7,500 because the increase in Minimum School Program (MSP) spending per student from FY2006 to FY2008 is about $1,000. Adding the MSP increase to the FY2006 actual expenditure yields more than $7,500 per student for FY2008. This is a conservative estimate because it assumes that facility construction, interest, and non-MSP operating costs per student will not increase from FY2006 to FY2008.

By the way, facility construction and interest are not fixed costs in a state where enrollment is projected to grow by about 3% annually for at least the next decade. There are no fixed costs associated with buildings that have not yet been built. As long as Utah is expected to experience enrollment growth of about 3% annually, Utahns can expect to continue spend more than a $500 million per year on facility construction and interest.

However, Utahns can spend less if vouchers divert a portion of enrollment growth to private schools at a lower cost per student.

Throwing kids together?

2007-08-07T22:22:00.000-06:00

Kim Burningham is turning to the age-old canard of “diversity,” a common theme among voucher opponents. As he notes in yesterday’s Salt Lake Tribune, “We are best served by schools that throw children together. . . . One of our greatest faults as a society is that we have become fragmented. Separation is not to be encouraged.” While that theme is laudable, it’s hard to see how the school system he has overseen for 8 years fulfills that mandate.

According to the Civil Rights Project, a joint project of Harvard University and UCLA, Utah’s public schools are among the most racially segregated in the country. As the table below, extracted from page 22 of their 2006 report, “Racial Transformation and the Changing Nature of Segregation,” indicates, Utah public schools are more racially isolated than all of our neighboring states except Idaho. (And no one points to any state in the intermountain west as a bastion of racial integration.)

Percent of Students in Multiracial Schools by Race, 2003-04
	%White in	%Black in	%Latino in	%Asian in	%American Indian in
State	Multiracial School	Multiracial School	Multiracial School	Multiracial School	Multiracial School
Utah	2	14	14	21	5
Nevada	43	74	58	69	33
Colorado	11	54	16	26	29
Arizona	11	27	14	17	21
Idaho	1	0	2	1	10

By this measure, Utah public schools are hardly “throwing students together,” to use Mr. Burningham’s phrase. Given the way public schools are designed to stratify along economic lines, that’s hardly a surprise. The wealthy and affluent people buy houses near each other, because they can, while the rest of the community lives in the nicest neighborhood they can afford. Then public schools mimic this economic segregation by using geographic boundaries to dictate who attends which schools.

Before the complaints are lodged, we’ll clarify. We support the wonderful work Utah public schools do. They do and always will educate the vast majority of Utah students, because most Utah families are very pleased with the hard work they perform. However, it is disingenuous at best for Mr. Burningham, or any representative of Utah public schools, to criticize vouchers on the grounds of segregation, diversity or some other racial codeword. Hard geographic boundaries like those used in public schools are hardly the model for achieving it.

What is Hogle Zoo Hiding?

2007-08-06T15:53:00.000-06:00

Hogle Zoo is asking the Salt Lake County Council to place a $65 million bond before the voters this November. Although the Zoo’s bond is nearly TWICE the size of the $35 million Real S.L. stadium subsidy, their proposal has faced little scrutiny. A scant 5 years ago, the Legislative Auditor General found serious lapses in the Zoo Board’s judgment. Voters should wonder whether the use of the $65 million bond will be appropriate.

To better understand whether the Zoo Board’s judgment has improved, on July 13 the Utah Taxpayers Association submitted a GRAMA request with the following questions deriving from the Audit.

What is the relationship between the Audit's recommendation regarding the elephant moat, and the elephant water tank the Zoo recently built?
What is the current size of the Zoo (in acres)?
What is the annual capacity of the parking at the Zoo?
How many on-site parking stalls does the Zoo have?
How many off-site parking stalls does the Zoo have?
Please provide the names and contact information for every member of the Zoo’s Board from 2002 to the present.
What outside contracts has the Zoo let since the 2002 audit?
Who won the outside contracts let by the Zoo since the 2002 audit?
What is the relationship between the Zoo's Board members and the winners of these contracts?
What kind of competitive bid process has the Zoo Board used in evaluating various contract proposals?
What is the Zoo Director’s total compensation package, including salary, home and auto?
How does the Director's total compensation package (salary, home and auto) compare with that of directors at zoos of similar size and who have similar tenure?
What procedures has the Zoo put in place to independently track how ZAP funds and state appropriations are tracked?

Despite annually receiving approximately $1.4 million dollars from the state, and more than $500,000 from the Salt Lake County ZAP Tax, the Zoo Board refused our GRAMA request. The Zoo Board did provide the material they supplied Salt Lake County’s Debt Review Committee and the Salt Lake County Council. This material answers several of our questions; however, they failed to answer others. Our first question is perhaps the most surprising. The 2002 Audit questions whether the elephant moat creates a potential hazard for the elephants. Since then, the Zoo built an elephant water tank, where the elephants could safely play in the water.

This question stems from conversations with current and former Zoo board members, who say that elephants only play in water if trained from infancy to do so. Although these current and former Zoo board members have told us no Hogle Zoo elephant has even gotten in this elephant water tank, the Zoo board did not respond to this question.

Several questions focused on issues the Auditors raised about the suitability of the Zoo’s current site. For several years the Zoo examined the possibility of either expanding into undeveloped portions of This Is The Place Heritage Park, or relocating to another part of the Salt Lake Valley. Although the Auditors found that Hogle Zoo’s current site would be at capacity in just 8 years, the Board rejected both of those options, and is now pressing for a 20 year bond to improve the current site.

Finally, the Zoo’s response suggested at least one more question. On May 22, 2007, the Zoo told the Salt Lake County Council, “The Zoo operates without debt.” In reality, they operate on the debt carried for them by other taxing entities, such as the $10 million bond Salt Lake City approved for the Zoo in 2003, and now the $65 million bond they want from Salt Lake County.

We hope the County Council requires the Zoo to answer these pressing questions before they vote. To gloss them over when so much is at stake is entirely inappropriate.

Property Taxes, Part 2: why did my taxes go up?

2007-08-01T21:46:00.000-06:00

Generally, when property valuations increase, property tax rates decrease to maintain revenue neutrality (excluding new growth). This revenue-neutral rate is called the certified tax rate. This rate is then applied to all properties, including new residential and commercial developments. Increased valuations due to new developments do not reduce the property tax rate

Despite Truth-in-Taxation’s ratcheting down of property tax rates as valuations of existing properties increase, sometimes property owners see a higher property tax bill. Sometimes, property owners see a decrease. There are several reasons why.

Property valuations increase faster in one area than in other areas
Property valuations can increase faster in some areas than in other areas for two reasons. First, properties are periodically reassessed. As a result, properties that were recently reassessed by the county will typically experience larger valuation increases than properties that were not reassessed recently. Second, real estate market demand may push up the value of some properties faster than others.

Using yesterday’s example, if existing property valuations increase 20% county-wide, the tax rate is reduced by 16.7% to maintain revenue neutrality (excluding new growth). However, properties that increased faster than the county (and/or school district/city/special service district) average will experience an increase in property taxes while others will experience a decrease. In the end, it all works out because other parts of the county and school district will be reassessed in following years and their taxes will increase while everyone else’s decreases.

Local governments issue or retire voter approved general obligation bonds
A local government’s property tax rate is a sum of several tax levies. In most cases, one of the property tax levies is used to pay off voter-approved general obligation (GO) bonds. These debt service levies are NOT subject to Truth-in-Taxation. Therefore, if a local government issues a voter approved bond, property taxes may increase even though the local government’s other levies were reduced by the Truth-in-Taxation process.

When a local government retires a GO bond, the debt service levy is reduced (unless the local government issues new debt).

Local government raises taxes
Truth-in-Taxation does not prevent local governments from raising taxes. Once the certified tax rate has been calculated by the Utah State Tax Commission, local governments have the option of exceeding the certified tax rate. When local governments decide to exceed the certified tax rate, they must go through the Truth-in-Taxation notification and hearing process. Annually, about half of school districts increase their rates above the certified tax rate, and about 20% of counties and 5% to 10% of cities increase their rates above the certified tax rate.

Certified tax rates do not include adjustments for inflation. Therefore, local governments occasionally increase property tax rates to recoup inflationary losses. Sometimes, the proposed increases do more than offset inflation, sometimes less.

Local government imposes judgment levy
Occasionally, large taxpayers successfully appeal their property valuations, just as home owners successfully appeal their property valuations. In some cases, these large taxpayer appeals take several years to resolve. When that happens, the local governments must refund the property tax overpayment from previous years. In such situations, local governments have the option of imposing a one-time judgment levy to cover the costs of the tax refund. In these cases, property taxes may increase even though Truth-in-Taxation has reduced other levies.

Residential appeals, on the other hand, are generally resolved quickly, which means that refunds of multi-year overpayments are not an issue for residences.

Other factors: BOE adjustments, delinquent taxpayers, centrally assessed properties
Just as local governments are allowed to impose one-time judgment levies to cover costs of refunding previous years’ overpayments to large taxpayers, tax rates are increased when any property owner successfully appeal current-year property taxes. This adjustment is called the board-of-equalization (BOE) adjustment. This increases the certified tax rate.

Every year, some property owners do not pay their property taxes, usually due to financial hardships. (Note: property owners are required to pay their taxes even when they appeal.) When this happens, tax rates increase to hold local governments harmless. Local governments actually benefit from delinquent property owners since the tax rate increases when taxes are delinquent but tax rates do not decrease when delinquent taxes are eventually paid (which is always the case since such properties are sold by the county and back taxes are collected at that point.)

BOE (3-year moving average) and collection (5-year moving average) adjustments do not change much from year to year, especially in large taxing entities like school districts and counties. However, in small cities/towns and special service districts, a couple of delinquent taxpayers or successful property tax appeals can increase the certified tax rate for all taxpayers.

We’ll talk about centrally assessed property in a later post.

Property Taxes, Part 1: How Truth-in-Taxation Works

2007-07-31T20:57:00.000-06:00

Truth-in-Taxation is Utah’s most taxpayer-friendly law. It’s even better than California’s Prop 13 (more about that in a later post).

How does Truth-in-Taxation (TNT) work?
TNT is a revenue-driven system, not a rate-driven system. Generally, as valuations of existing property increase, property tax rates decrease. This automatic reduction in property tax rates prevents local governments from getting a windfall simply because valuations have increased.

For example, if valuations of existing property increase by 20%, the property tax rate decreases by 16.7% to maintain revenue neutrality as demonstrated by the following equation:

(100% + 20%) * (100% - 16.7%) = 100% of original tax = no change

The reduced property tax rate is known as the certified tax rate (CTR). This rate is then applied to all property, including “new growth”. While local governments receive increased revenues due to new growth, TNT includes no automatic adjustment for inflation.

If local governments want to adjust for inflation (or more, or less), they go through TNT notification and hearing process. This is a good opportunity to for local government officials to explain the proposed budget to their constituents.

For the record, the Utah Taxpayers Association does not oppose every proposed increase over the certified tax rate. In many cases, local governments are recouping inflationary losses. Certainly, that is not always the case. In Part 7, we’ll talk more about that.

Other notes
- Automobile Fee-in-Lieu and semiconductor personal property revenues are excluded from CTR calculation

- RDA increments are excluded from CTR calculations (as increment becomes taxable, it is treated as new growth)

Tomorrow, we’ll discuss some of the other factors that impact the certified tax rate and why your property taxes may have increased in spite of Truth-in-Taxation.

Explaining your property taxes

2007-07-30T22:31:00.000-06:00

If you own property in Utah, you have most likely received a "notice of property valuation and tax change" from your county. Nearly everyone's property has increased dramatically. (Don't get too giddy about that because the value of your next house has increased by about the same percentage.)

In the next two weeks, we will be discussing property taxes with emphasis on Truth-in-Taxation. The Utah Taxpayers Association lobbied very aggressively for Truth-in-Taxation in the 1980s and continues to defend it every year.

This six-part series will cover the following:

1. How does Truth-in-Taxation work?
2. Why did my property taxes go up (or down)?
3. What have been the results of Truth-in-Taxation?
4. Does Truth-in-Taxation hurt local governements?
5. What impact do centrally assessed properties have on tax rates?
6. Does Utah need a Prop 13?

Congestion Pricing and Maximizing Freeway Throughput

2007-07-25T15:15:00.000-06:00

Transportation experts have demonstrated that congestion pricing can maximize highway throughput. Throughput is defined as the number of cars that cross a certain point on a freeway over a given amount of time. Cost-effectively maximizing throughput is obviously an important objective, and congestion pricing can achieve this objective by controlling average vehicle speed during rush hour.

Intuitively, two factors impact a freeway’s throughput: the average speed of the vehicles on the freeway and the number of vehicles on the freeway. Inevitably, these two factors work against each other. As more vehicles enter the freeway, the average speed of vehicles decreases.

Studies have shown that freeway throughput is maximized when the number vehicles on the freeway allows vehicles to travel at about 50 mph. In other words, if vehicles are traveling at 70 mph, then throughput is not maximized because the increased average speed is offset by the low volume of vehicles. On the other hand, if vehicles are traveling at 20 mph, then the high volume of vehicles is offset by the low average velocity.

By charging commuters to use roads during periods of congestion, the number of vehicles on the freeway is optimized to maximize throughput. As average speeds decline, the price to enter the freeway increases to ensure that vehicle speeds hover around 50 mph.

Chao Chen and Pravin Varaiya have demonstrated the relationship between average vehicle speed and freeway throughput. Click here to see the chart.

In 2005, the US Department of Transportation issued Report on the Value Pricing Pilot Program Through March 2004. According to the report, a lane with congestion pricing on State Route 91 in Orange County, California carries twice as many vehicles per lane during rush hour than the adjacent toll-free lanes.

Benefits to taxpayers
Congestion pricing offers several benefits to taxpayers. First, congestion pricing slows the growth in vehicle miles traveled (VMT) by incentivizing commuters to carpool, telecommute, use roads during off-peak hours, and live closer to work. Slowing the growth in VMT means state and local governments can slow the growth in transportation expenditures.

Congestion pricing also improves the utilization of freeways and does this in two different ways. First, congestion pricing encourages drivers, especially discretionary non-commuting drivers, to use roads during off-peak hours when roads are under utilized. Second, as explained above, congestion pricing maximizes freeway throughput by optimizing average vehicle speeds.

Mike's Top Twenty Political Songs

2007-07-23T13:39:00.000-06:00

Later this week, we'll have the results of a report we've done on the disparity between charter school and district school funding.

In the mean time, inspired by Rep. Urquhart's top ten movies list, we present Mike's Top 20 Political Songs of All Time (in no particular order).

Redemption Song - Bob Marley
Sunday Bloody Sunday – U2
If I Had a Rocket Launcher – Bruce Cockburn
Right Here, Right Now – Jesus Jones
Invisible Sun – The Police
Wind of Change - Scorpions
Cult of Personality – Living Colour
Sonderzug nach Pankow – Udo Lindenberg
99 Luftballons - Nena
Sympathy for the Devil – Rolling Stones
Revolution – The Beatles
The Trees – Rush
Okie from Muskogee – Merle Haggard
Courtesy of the Red, White, and Blue - Toby Keith
Fortunate Son – Creedence Clearwater Revival
Rain on the Scarecrow – John Mellencamp
Star Spangled Banner – Jimi Hendrix/Francis Scott Key
Borrowed Time – Styx
Rockin’ in the Free World – Neil Young
We Didn’t Start the Fire – Billy Joel

Utah School District Spending Report for FY2006

2007-07-19T12:36:00.000-06:00

How does your school district spend your tax dollars compared to other Utah school districts?

The Utah Taxpayers Association has just released its annual school district spending report. Click here to view the report FY2006.

The report contains district-by-district per student spending data, including the following:

- instructional expenditures
- instructional expenditures as a percent of total operations
- transportation
- library
- maintenance/operations
- student services
- interest
- facility construction
- food services

The report also looks at district revenues (operations, capital, nutrition, non K-12, and total) on a state-wide basis.

Congestion pricing and the environment

2007-07-16T21:29:00.000-06:00

Congestion pricing is an issue that taxpayer advocates and environmentalists can rally behind. Environmentalists in other states and countries have been advocating for congestion pricing, and it's only a matter of time before environmental groups in Utah catch up with their counterparts in other places.

Congestion pricing slows the growth in vehicle miles traveled by incentivizing car pooling, telecommuting, living closer to work, and leaving earlier/later. This is good for the environment due to reduced pollution and good for taxpayers because growth in transportation spending is reduced while congestion is reduced.

Congestion pricing will also shift discretionary non-commuting traffic to off-peak hours. According to the US Department of Transportation, up to 50% of rush-hour traffic is discretionary (that is, non-commuting) Even if discretionary traffic is merely shifted instead of reduced, this still reduces pollution because fewer drivers will be stuck for longer periods of congestion burning more fuel than if they were just able to drive at normal freeway speeds.

According to the Texas Transportation Institute's 2005 Urban Mobility Report, Americans waste more than 2.3 billion gallons of fuel per year due to congestion, and that's bad for our wallets and for the air we breath.

Are massive local sales tax increases for transportation “real” taxes?

2007-07-12T08:14:00.000-06:00

Are massive local sales tax increases for transportation “real” taxes or just “pretend” taxes?

To most people, this sounds like a strange question. “Of course, local sales taxes for transportation are real taxes”, nearly every one would reply.

We’ve been talking to a lot of people who are concerned about transportation funding, and surprisingly many of them seem to think that local sales taxes for transportation are not "real" taxes. Frequently, they act like sales tax dollars from a taxpayer's perspective are just Monopoly money.

In most cases, they don’t articulate their position that way, but their arguments against congestion pricing indicate that they really don’t think these sales taxes are real, or certainly not worth worrying about.

The Transportation Lobby has really zoomed in on local sales tax increases because – due to near invisibility -- they are incredibly easy to pass. If a well-funded and organized group is pushing for a sales tax increase, voters most likely will not reject it unless it is an especially bad idea. The Lobby understands the boiling-the-frog principle as well as anyone.

The Main Event: Congestion Pricing (and other measures) vs. Increasing Local Sales Taxes Every 5 to 10 years (and increased earmarking of state sales taxes for transportation).

Elected officials and interest groups have already launched their effort to periodically increase local sales taxes for transportation. It began more than a year ago, and it scored early victories last year with sales tax increases in Utah and Salt Lake counties. The goal is to increase sales taxes by several hundred million dollars per year. State Sen. Ed Mayne wants to increase state sales taxes by more than $500 million per year.

This is why the Utah Taxpayers Association has proposed a four-point transportation reform plan. Of the four proposals, congestion pricing is encountering the most opposition, and this is where the issue of “pretend” and “real” taxes comes in. Here are some examples.

Comment: “Congestion pricing is bad because it will cost people and businesses money. We should do sales tax increases instead.
Response: Sales tax increases cost people and businesses money too. At least with congestion pricing, people will change driving habits which means that state and local governments will actually reduce more congestion while spending less than they otherwise would if they relied on sales taxes.

Comment: Congestion pricing is bad because roads should be free. Increase sales taxes instead.
Response: Roads have never been free. Taxpayers have always paid for them, traditionally with user fees like gas taxes but more recently with a combination of general taxes and user fees. When did sales taxes become "free"?

Comment: Congestion pricing is bad because once the road is paid for, pricing will still be there. Increase sales taxes instead.
Response: The same situation exists with state and federal gas taxes. We drive every day on roads that have been paid for, and we pay gas taxes to drive on these roads. The same applies to sales taxes. We won’t be paying less sales taxes when we drive on roads that have been paid for.

Comment: Congestion pricing is bad because we already pay gas taxes. Therefore, it’s a double tax. Increase sales taxes instead.
Response: That means that sales taxes must be double taxation as well since we’ll continue to pay state and federal gas taxes (and motor vehicle registration fees, impact fees, and existing state, county, and city sales taxes of which a large portion goes to roads).

Comment: Truckers will pass on congestion prices to consumers. Increase sales taxes instead.
Response: Business will pass on sales taxes on to consumers, either by applying sales taxes at the register on final purchases or hidden in the prices of the things we buy since sales taxes are applied to many business inputs.

Current system for electing state board of education members is too easily manipulated

2007-07-09T22:29:00.000-06:00

Rep. Carl Wimmer is proposing partisan elections for the state board of education. Opponents criticize this as “politicizing” education.

Reform opponents, however, don’t want voters to know how their state school board is currently “elected”. Not only is the current system “politicized”, it is hardly democratic, and the process is easily manipulated by the education establishment. This manipulation, not vouchers, is the impetus for changing the current process.

When considering the current system for nominating and electing school board members, ask yourself if you think Utah should elect legislators and governors in the same way.

Here’s how the system works.

Step One: Low-profile committee recruits and selects nominees for the state school board

A group of insiders gets to determine who appears on the ballot in November. Currently, a low-profile 12-member committee consisting primarily of UEA supporters is supposed to select three candidates in each board race for the governor’s consideration. In order to get on the ballot, a candidate must be nominated by this committee. Members of the committee are supposed to represent a broad range of interests, but they typically represent the education establishment. Unlike the two-party process, this committee is virtually unknown to the public, and the local media provides very little if any coverage of this committee’s membership or decisions.

Step Two: The Governor makes his choices
Using the committee’s list of recommended candidates, the governor then picks up two candidates for each race (or one if the committee only picks one candidate for a given race) and then puts these names on the ballot.

When the committee picks one candidate for a given race (which is a violation of the law), then that one candidate automatically appears on the ballot unchallenged and is elected to the state board of education.

Step Three: The people “choose”
This is hardly an election in the true sense of democracy since the candidates on the ballot were not selected by an open, accessible, contested process. They were selected by a low-profile committee and the governor. At least in a partisan process, most races would be contested, either within the party at convention or primary or in the general election.

To get on the ballot in the current process, there are no public debates or meet-the-candidates nights. It’s all done quietly and without any scrutiny except for a very small committee.

Sometimes, a reform candidate manages to get on the ballot, but this is rare. In the end, the “election” is almost always a perfunctory ratification of the establishment’s candidates, not a true election.

Some people claim that Utah’s “one-party” partisan process is too restrictive and is dominated by Utahns with narrow interests. However, the current process for selecting state school board members is much more restrictive and closed than the process for electing the governor and legislators.

Brazen manipulation of the system in 2006, not vouchers, is the impetus for change
The current restrictive process is bad enough, but the education establishment’s brazen manipulation of this process last year was the final straw for many legislators. Here’s a summary of what happened:

1. Although state law requires the committee to be formed by November 1 in the year prior to the election, the 12-member committee was not formed until March, just days prior to the candidate filing deadline.

2. The committee was stacked with mostly UEA loyalists.

3. None of the eight races had more than two nominees for the governor to choose from.

4. In three races, the committee did not recommend anyone other than the incumbent.

Opponents of partisan elections for state board of education are going to have a hard time justifying the current system.

Utah Taxpayers Association

Incrementalism, part 3: Bryan Gray of the Davis County Clipper

2007-07-02T22:20:00.000-06:00

Bryan Gray of the Davis County Clipper gives us an opportunity to revisit the issue of incrementalism. We've previously written two posts on incrementalism. You can view those here and here. Incrementalism is a strategy employed by the spending lobby to gradually increase our tax burdens over time. It has two parts:

1. Justify all or nearly all tax increases as costing only a few pennies per day or a few pennies per purchase

2. Oppose all tax cuts as not worth implementing because these tax cuts will save us only a few pennies per day or purchase.

Of course, over the long term, small tax increases accumulate into large tax burdens, and that's exactly the goal of those who regularly rely on incrementalism to justify tax increases and oppose tax cuts.

In his weekly column last week, Gray wrote

"The proposed tax is only a quarter of 1 percent. If you buy a Subway sandwich, you'll pay an additional penny. Buying property now rather than at a higher price later is a no-brainer."

We naturally agree with the second part that buying transportation corridors is a good idea. In fact, it's one of the items in our four-part transportation reform proposal. However, is another sales tax increase really needed? Government revenues are growing at historically high rates (local sales tax revenues increased 15% in FY2006), and government could spend transportation dollars more efficiently by slowing the growth in vehicle miles traveled by increasing transportation user fees such as congestion pricing and gas taxes (while reducing general taxes to maintain revenue neutrality).

The additional-penny-per-Subway-sandwich argument is not the first time Gray has resorted to incrementalism to support tax hikes. In previous columns, Gray wrote

"If the Open Space proposal passes, a dinner for two at a nice restaurant will skyrocket an entire two cents! If the Open Space proposal passes, the owner of a spanking new Mercedes will pay an extra $40."

"Have yourself a tiny tax increase...Through the year, you'll barely even notice [the tax increase], a dollar here or there"

Note: we could not find links to these comments on the Clipper website. We are relying here on hard copies in our files.

Painting the freeways apricot?
In 2004, Gray wrote "If someone proposed that we pay five cents per year to paint the freeways an apricot color, I'd vote against it". First of all, no one is proposing that, and we can be quite sure that no one will propose that in the future either. While Gray is obviously trying to be funny here, it's clear that he really could not think of a serious tax increase or expenditure to oppose.

Several months ago, Gray also came up with the worst argument to-date against congestion pricing. Read about that here.
Utah Taxpayers Association

The tax increase voucher opponents won’t tell you about, and how to avoid it

2007-06-28T14:49:00.000-06:00

The state Supreme Court has cleared up the ambiguities about Citizen’s State Referendum 1 this fall, and the campaign is under way. The first volley came when both sides submitted reasons for the referendum to repeal Utah’s voucher law to the Lt. Governor’s Office. While voucher supporters offered cogent reasons to vote YES on Citizen’s State Referendum 1, the opponents trotted out tired assertions that our elected officials have heard and rejected. More importantly, the opponents ignore the taxpayer reasons every Utahn should say YES to vouchers.

Recognizing the need to better fund Utah’s public schools, the Utah Legislature has more than doubled per pupil spending over the past 15 years. This dramatic increase-today Utah spends just over $7500 per pupil-has been possible because the state’s economy has been red hot, while enrollment growth has been flat. Between 1990 and 2006 Utah’s classrooms grew by only 18%, while the number of Utah jobs grew by a whopping 67%.

Unfortunately, these trends no longer prevail. Between 1990 and 2004, Utah schools never grew by more than 10,000 students in a given year; in 2005, 14,330 new students enrolled, and another 16,075 entered in 2006. The State Office of Education’s most current projections show another 156,345 new students entering Utah classrooms between 2007 and 2016, nearly quadruple the number of new students who entered Utah classrooms in the 1990’s.

More troubling is the reality that Utah’s economy will not always grow so rapidly. Since 1980, Utah has had 2 significant economic slowdowns, in 1986 and again in 2001 to 2003. With student enrollment growing faster than it did in the 1990’s, but not so fast as it is now, the 1986 slowdown forced lawmakers to impose the largest tax increase - $176 million - in Utah history.

The 2001 to 2003 slowdown happened while Utah school enrollment was flat, so no tax increase was necessary. However, it was all the Legislature could do not to cut public education spending. And if the slowdown had lasted just 6 months longer, Legislators would likely have had to raise taxes again.

It is at best folly-at worst irresponsible-to hope that Utah’s hot economy can protect taxpayers from further the tax increases brought on the dramatic increase in public school enrollment. With the largest families in the nation, and per capita income well below the national average, lawmakers must identify policy options that simultaneously reduce the strain on our public school system and increase the amount of money available to educate Utah children.

That is why the Legislature and the Governor adopted HB 148. Vouchers help solve both aspects of Utah’s education-taxpayer dilemma. Each time a student switches from public school to private school because of vouchers (worth between $500 and $3000), Utah’s public schools have one fewer child to educate, and they have between $4500 and $7000 more to spend on the rest of Utah’s children. In other words, vouchers decrease the number of students in Utah classrooms and increase the amount of money available for other students. Utah policy makers rightly see vouchers as one of several tools we need to avoid another tax increase. The lessons of 1986 and 2001 to 2003 are too clear and compelling to avoid any other conclusion.

Utah Taxpayers Association

Principled and Objective?

2007-06-28T14:39:00.000-06:00

The Salt Lake Tribune’s recent editorial on splitting the Jordan School District betrayed their willingness to set aside principle, and pursue their ideological agenda no matter what. Since March 1, the Tribune has issued no fewer than 15 editorials in support of the referendum to repeal Utah’s voucher law, an issue far more “complicated” than splitting a school district. Nevertheless, they argue, the complicated nature of dividing a school district can’t be trusted to a district wide vote. Instead, they believe, that process “should be overseen an independent, dispassionate group [not the voters who would be affected by their decision!] that could call for data, analyze it and make and objective decision.”

While members of the Legislature declare an allegiance to a political party, our 2007 Legislative Scorecard shows how “independent” the Utah Legislature is. Democrat Ed Mayne scored in our top 10 in the 29-member Senate, and Republicans Sheryl Allen, Kay McIff, Mel Brown and Gordon Snow scored in the bottom 15 in the 75-member House. And over the past decade, the Legislature has “called for” and “analyzed” more data about the voucher issue than any other issue. They came to an objective decision, albeit one the Tribune disagreed with.

The Taxpayers Association supports smaller districts, but we find ourselves joining the Salt Lake Tribune in opposing the proposed vote to split Jordan School District. (In our view, there are serious questions about the constitutionality of depriving west side voters of their right to vote.) We hope, however, the Tribune will apply the logic behind their opposition to this vote to other, arguably more important education issues, like vouchers.

The impact of children on Utah government

2007-06-28T11:54:00.000-06:00

Jay Williams’ op-ed (“There is no way around paying for quality education,” Salt Lake Tribune) notes Utah’s demographics present tremendous challenges for funding Utah’s public schools. However, his argument about the “ratio of students to taxpaying adults” not causing similar funding problems for roads, the power grid, sewage treatment system, etc. is not accurate.

With 38 school age children per 100 Utah working age adults, all segments of Utah government struggle to obtain funding for their services. And given the political pressure to move Utah out of last place in per pupil spending, public education is spared the ax more than any other segment of Utah government. For example, to avoid cutting public education spending during the 2002 and 2003 budget-cutting special sessions, the Legislature cut non-public education spending by $234.8 million, and another $90.4 million in transportation spending. By contrast, the Legislature maintained Utah public education spending at its 2001 levels.

As this recent history shows, public education is better insulated than any other portion of government from the challenges our uniquely high dependency ratio creates.

Proposed sales tax increases demonstrate need for transportation reform

2007-06-26T08:25:00.000-06:00

The need for transportation reform becomes more obvious every day, and it's time for Gov. Huntsman and the Utah Legislature to step up to the plate and make it happen.

This November, commissioners in Weber, Davis, and Box Elder counties will be asking voters to increase sales taxes by 0.25%. The increased revenue would be earmarked for transportation and transit projects, including corridor preservation.

This proposal would increase taxes by about $10 to $12 million per year in Davis County and by about $8 to $10 million in Weber County. In Box Elder County, tax increase would yield about $1 to $2 million per year.

Meanwhile, back at the Utah State Senate, Sen. Ed Mayne is calling for a full one-percentage point increase in state sales taxes and would dedicate this for transportation. This proposal would increase taxes by more than $500 million per year and would be the single largest tax increase in Utah history. It would also make Utah's state and local tax structure more regressive, even if food purchases are exempt from this tax.

Periodic increases in state and local sales taxes are exactly what the transportation lobby wants. Most people don't pay attention to sales tax increases, and most taxpayers are unware how much they are paying in sales taxes. A median income Utah family pays more in sales taxes than in property taxes as demonstrated by our annual report on tax burdens for a median income Utah family.

Raising sales taxes for transportation is a bad idea. Increased sales taxes do not encourage commuters to change driving habits by telecommuting, carpooling or living closer to work.

Real reform is needed. Implementing congestion pricing and increasing gas taxes while cutting general taxes such income taxes will slow the growth in vehicle miles traveled, which decreases the need for higher taxes. It's also a good idea for the environment. Gov. Huntsman could score some points with his counterpart in California if he promoted these reforms.

Prioritizing roads and transit projects based on cost-effectiveness of reducing congestion would ensure that our tax dollars are being spent efficiently. The current prioritization process is completely inadequate, as demonstrated by the hundreds of millions of dollars that will be spent building a TRAX line to the airport which will relieve no congestion. (Click here to read our post on the airport TRAX line).

The governor and the Utah Legislature need to show some leadership on this issue. Simply passing the buck to county commissioners won't solve the problem. If the transportation lobby gets its way, the recent tax cuts will be offset by tax increases in the future. In fact, it started happening last year with sales tax increases in Salt Lake County and Utah County.

Government living large in Utah

2007-06-22T09:16:00.000-06:00

The June newsletter of the Utah Taxpayers Association has a report on state and local revenues and tax burdens. Typically, Utah ranks high by these measures, and this year is no exception.

Click here to see the report.

Click here to see previous comments we made about so-called voluntary and non-mandatory fees.

More WPU confusion

2007-06-18T07:32:00.000-06:00

Last week, we commented on the confusion that is created when newspapers, education advocates, and elected officials equate the WPU with per student spending. Today's example comes from the Deseret Morning News:

"The Legislature gave a 4 percent increase in the weighted pupil unit, the state's basic per-student funding formula that traditionally sets the pace for teacher raises."

Most readers would think that the Legislature increased per student spending by 4%, but this is not the case. The increase was much higher.

As noted last week, the WPU excludes a lot of education spending. Moreover, the amount of K-12 education spending that is excluded from the WPU is growing faster than the amount that is included in the WPU. While total WPU expenditures increased by 7.3% (includes student growth), total Minimum School Program expenditures increased by 17.7%, or about 15% on a per student basis assuming 2.8% enrollment growth.

Once all local expenditures are included -- the MSP includes a lot of local sources such as the basic and reading levy and the voted and board leeways -- the per student increase will be at least 10%. After adjusting for inflation, the per student increase will be about 7%.

WPU Confusion

2007-06-09T07:32:00.000-06:00

Within public education finance, nothing is more misunderstood than the Weighted Pupil Unit, or WPU. An article in last Sunday’s Tribune provides an excellent example of how the WPU is routinely misunderstood by elected officials, reporters, education advocates, and the public.

'The [Minimum School Program’s] 'weighted-pupil unit' - $2,417 for fiscal year 2007 - represents one average child with no special needs. '

This is not correct. Others have stated that the WPU is the amount that state government spends in income tax per student, which is also incorrect since the WPU includes property taxes generated by the basic levy and excludes hundreds of millions of state income tax dollars in so-called below-the-line expenditures.

WPU accounts for less than 50% of per student expenditures
Despite the attention paid to the WPU, less than half of all public school expenditures including capital and debt service are accounted for in the WPU.

The following items – based on FY2008 appropriations -- are not included in the WPU.

Social Security, Medicare, and retirement: $333.3 million
Pupil transportation: $70.9 million
Teacher compensation increase (beyond steps and lanes): $68.7 million
Various block grants: $113.7 million

In total, about $1.2 billion Minimum School Program expenditures are excluded from the WPU. On top of that, there are local expenditures for capital and debt service.

In FY2008, WPU expenditures will be about $1.75 billion out of a total of $4.1 billion K-12 expenditures, or about 43% of the total.

Moreover, WPU is not a per student amount although there is a correlation between student enrollment and number of WPUs. Statewide, there are about 1.29 WPUs per student (based on anticipated enrollment of 540,190 as stated in the LFA's Appropriations Report). About 50% of the difference between the number of WPUs and the number of students is attributable to special education.

How much does Utah spend per student?
According to recently released Census Bureau figures for FY2005, Utah spent $5,257 per student which includes nutrition programs but excludes capital and debt service.

Utah Taxpayers Association calculated per student spending for FY2005 at $6,309 which includes capital and debt service. Excluding capital and debt service and including food service, the association calculates $5,300 per student, which is within 1% of the Census Bureau figure

For FY2008, the Utah Taxpayers Association estimates that Utah will spend about $7,500 per student, which includes capital, debt service, and nutrition programs. This includes state income tax, local property tax, and federal sources.

Excluding federal and local sources, the state will spend about $4,500 per student in income tax dollars for public education in FY2008.

Quote of the Day: Real Salt Lake

2007-06-04T06:07:00.000-06:00

Today's quote comes from Real Salt Lake (0-3-6) spokesman Eric Gelfand

"When people are properly educated that the hotel taxes are paid nearly 100 percent by out-of-towners, they are in favor of [tax dollars for Real stadium]".
Source: Deseret Morning News, June 3, 2007

In other words, people don't mind wasting tax dollars as long as the tax dollars are coming from out-of-towners.

Real's statement is seriously flawed because hotel tax dollars are our tax dollars no matter who ends up paying them, and government has the responsibility to spend these dollars as wisely as the tax dollars that Utahns pay directly.

Besides, a lot of tax dollars in Utah are paid by out-of-staters, including the following:

- Sales taxes paid by tourists, which currently go to state and local government general and transportation funds (according to Tax Commission estimates, tourists pay about 7% of all state/local sales taxes, or about $185 million in FY2006)

- About 75% of state corporate income tax, which goes to K-12 and higher education (total corporate income tax revenues were $380 million in FY2006 so 75% would equal $285 million)

- Severance taxes on metals which go to the state general fund (about $17 million in FY2006)

One could also argue that hotel property taxes are ultimately paid by out-of-state tourists even if the incidence is the hotel owner.

Bottom line: Utah state and local governments are missing out on an opportunity to waste a lot of tax dollars according to RSL tax policy.

Transportation Reform

2007-05-30T07:11:00.000-06:00

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

Vouchers: Let the people decide?

2007-05-24T06:13:00.000-06:00

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.

Provo Daily Herald: an example of economic illiteracy

2007-05-21T06:54:00.000-06:00

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.

The Fiscal Impact of School Choice Programs

2007-05-17T21:15:00.000-06:00

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.

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

2007-05-15T21:32:00.000-06:00

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%.

Taxing Services?

2007-05-09T17:44:00.000-06:00

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.

USDOT supports congestion pricing

2007-05-07T05:57:00.000-06:00

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.

Raise state gas taxes, cut income taxes

2007-05-01T12:15:00.000-06:00

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:

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.
Shift $350 million in general fund dollars from transportation to higher education
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).
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:

Lowering the 5.0% individual income tax rate
Increasing the credit amounts
Slowing the phase out of credits based on income
Make credits refundable (helps low income)

2007 Legislative Scorecard

2007-04-27T09:48:00.000-06:00

The Utah Taxpayers Association has just released its 2007 legislative scorecard. Click here to see how legislators voted on key tax issues.

Click here to see position papers on most of the bills on the 2007 scorecard.

This year, we supported most of the tax bills and officially opposed only one (Real Salt Lake soccer stadium subsidy).

To view scorecards from previous years, click on the following links

iProvo: the rest of the story

2007-04-24T08:35:00.000-06:00

Last Sunday, Provo Mayor Lewis Billings wrote an op-ed in the Deseret Morning News extolling the virtues of iProvo. We would like to cover some points that Mayor Billings overlooked.

iProvo is losing money
Last year, iProvo lost nearly $1 million and is expected to lose about $2 million this year. Provo originally projected that they would need 10,000 subscribers to break even, but now that number is being ratcheted upward.

Of course, iProvo was supposed to make money.

iProvo competes with unfair tax advantage
Since iProvo is government owned, it is not subject to taxes. Unlike Qwest, Comcast, satellite providers, and wireless companies, iProvo does not pay federal and state corporate income taxes, local property taxes, and state/local sales taxes.

Defenders of government-owned telecommunications systems argue that companies that provide services over iProvo's network are subject to taxes. However, iProvo's infrastructure is tax exempt, and private sector competitors like Qwest, Comcast, and wireless companies have to pay taxes on their infrastructure. Payment of some taxes by iProvo providers does not negate iProvo's exemption from other taxes.

Recently, the Legislature partially addressed this issue by exempting certain telecommunications purchases from state and local sales taxes.

However, the bottom line is that iProvo competes directly against private sector companies but does not pay property taxes or corporate income taxes. Some may argue that non-payment of federal and state corporate income taxes is a moot point since iProvo is losing money. Nevertheless, iProvo's competitors are subject to federal and state corporate income taxes.

Does the airport analogy justify iProvo?
UTOPIA and iProvo supporters have used the airport analogy to justify government-owned telecommunications systems. Supporters argue that it would be unrealistic for each airline to build its own airport. Therefore, government builds an airport and charges airlines to use it.

That's not a bad analogy from a PR sound bite perspective, but the analogy is seriously flawed from a logical fiscal policy point of view. Prior to iProvo's and UTOPIA's creation, private sector companies had invested hundred of millions of dollars in Utah's telecommunications infrastructure, and cumulative total private sector investment now exceeds $1 billion. It's simply not fiscally responsible to walk away from this investment, which is subject to taxes and does not expose taxpayers to risk, in order to start something from scratch and expose taxpayers to financial risk.

The airport analogy could make sense if the private sector had not been willing to build telecommuncations infrastructure in the first place, but that has not been the case.

But haven't Qwest and Comcast have lowered their prices because of iProvo?
Qwest offers the same prices and service throughout its entire multi-state service area. Comcast offers certain short-term promotional pricing which proponents of government-owned telecommunications systems cite as proof that iProvo and UTOPIA are benefitting taxpayers. However, Comcast's long-term pricing is independent of whether the customer lives in a city with government-owned telecommunications system.

Vouchers: Responding to Rep. Kay McIff, part 2

2007-04-19T15:18:00.000-06:00

Last week, Republican Rep. Kay McIff submitted ten reasons why he is opposed to vouchers in a guest editorial in the Standard Examiner. Click here to see part 1 of our response to Rep. McIff.

Today, we respond to some other points Rep. McIff raised in his guest editorial.

"Point 5, Escape and abandon: First and foremost vouchers are vehicles to escape from schools deemed unacceptable . . ."

"Point 7, Stratification: The free market produces winners and losers . . . The result is enormous disparity."

Parents already "escape and abandon" public schools deemed "unacceptable" by moving into neighborhoods where public schools are deemed acceptable. Every morning as we leave our homes in suburban Salt Lake County, we pass by groups of middle class white children waiting for the school bus to take them to nearly all-white middle class public schools. When we arrive at our offices on Salt Lake City's west side, we see immigrant Latino and African children waiting for a school bus to take them to non-white low income schools.

Voucher opponents like to talk about the egalitarian nature of public schools, but very few institutions in America -- and Utah -- are more segregated than public elementary schools, and the disparity in school performance is enormous.

Voucher opponents cannot criticize Utah's voucher program on the grounds that it will cause stratification because this process has been occurring for decades within the public school system and nothing -- including busing and additional funding for schools in low-income areas -- has reversed this trend.

Moreover, since the voucher is means-tested, the bulk of voucher dollars will be going to low-income students, not high-income students. By giving financially viable education choices to low-income students, education stratification is reduced, not increased.

Coming soon, part three: Is competition a bad thing for education?

Taxes on Typical Utah Family

2007-04-16T14:30:00.000-06:00

Last week, the Utah Taxpayers Association released a report detailing the federal, state, and local taxes paid by a median income Utah family consisting of two parents and three children. Click here to read the report and click here to read the Deseret Morning News article on the report.

Taxes consume 25.3% of a typical Utah family's income. This includes all direct taxes paid by the typical family as well as the employer-paid payroll taxes (which are counted in the income denominator as well as in the taxes numerator) but does not include taxes paid by businesses that are passed on to consumers in the form of higher prices, to employees in the form of reduced compensation, and to shareholders in the form of reduced share prices and dividends.

Some of the results may be surprising, particularly how much the typical 5-person, 3-child family pays in state and local sales taxes and how little (comparatively) the same family pays in federal income taxes.

Vouchers: Responding to Rep. Kay McIff, part 1

2007-04-12T16:00:00.000-06:00

Rep. Kay McIff (R) outlined ten reasons why he opposes vouchers in a guest editorial that appeared in yesterday's Standard Examiner. We'll be addressing these points (in no particular order) over the week, starting today.

In point number two, McIff argues that vouchers are a subsidy for private industry and compares vouchers to subsidizing golfers on private courses. This claim has several flaws.

- The existing public education system itself is a subsidy. Most families do not earn enough income to pay enough taxes to cover the cost of educating their children in public schools (and still have enough left over to cover the costs of other government services). The top 1% of taxpayers pay about 20% of all individual income taxes (this percentage fluctuates based on the state of the economy) and the top 10% pay about 50% of all income taxes. Public education was instituted so that high income families could subsidize the education of middle and lower income families.

- Private school vouchers are actually a smaller subsidy than the existing public school subsidy. On average, Utah will be spending $7,500 per student in 2008 (includes capital and debt service costs that government reports and newspapers exclude). The average voucher amount is expected to be about $1,900. That's why vouchers are a good deal for everyone, including those who do not have children and those whose children will continue to attend public schools. (Please click here to read our response to concerns about existing private school students getting vouchers.)

- Comparing private school vouchers to golf courses is truly apples and oranges. First, education is an entitlement enshrined in the state constitution and vouchers are a lower cost way to deliver this entitlement. Golf is not an entitlement (yes, we know some people would disagree with that). Besides, government shouldn't be in the golf course business anyway. This is something the taxpaying private sector can provide.

- While vouchers are a subsidy for low- and middle-income students who receive them, vouchers are not a subsidy for the private schools themselves. Government routinely contracts with the private sector to provide services. Food stamps, for example, are a subsidy for the low income families that receive them but are not a subsidy for the grocery stores that accept them. School districts contract with private companies to build facilities. These are not subsidies for privately owned construction companies because these companies are providing a service. The same is true for vouchers since private schools will be providing education services.

Finally, while McIff didn't mention this, a commonly used "subsidy" argument claims that vouchers are bad policy because government doesn't give vouchers to people who buy their own security systems. Again, this is an apples-and-oranges comparison because government is not currently imposing general taxes in order to have government employees install and monitor security systems for all residents. If government were currently taxing its citizens in order to provide security systems as a constitutional entitlement, then vouchers would make sense if the voucher amount were less than the amount the state was paying to provide this service on its own.

Please click here to read our response to concerns about existing private school students getting vouchers.

There has to be a better way to fund transportation

2007-04-09T08:41:00.000-06:00

Many years ago, sales taxes were increased by 0.25% (actually 0.25 percentage points) along the Wasatch Front to pay for mass transit. This was called the first quarter. Then came the second quarter. A quarter of the second quarter in Salt Lake County is used for roads. As of this April, Salt Lake County taxpayers will start paying the third quarter. Like the second quarter, a portion of the third will be used for roads.

Now transportation planners are calling for fourth and fifth quarter sales tax increases for transit in the next twenty years.

Sales tax rates don't have to be increased to generate additional revenues. Sales tax revenues increase with population/wage growth and inflation.

According to the Utah State Tax Commission's FY2006 Annual Report, Utahns paid $23.8 million in public transit sales taxes in 1987. In 2006, Utahns paid $136.4 million in transit sales taxes, a portion of which (less than 10%) was used for roads. This is an annualized increase of 9.6%. In the past ten years, the annualized increase has been 10.1%, compared to annual combined inflation and population growth of about 5.5%. With the recently approved third quarter in Salt Lake County and second quarter in Utah County, the annualized increases will be even higher in future years.

Each quarter percentage point sales tax increase yields about $50 million in Salt Lake County, assuming that the additional transit tax increases are not imposed on unprepared food purchases.

When tax increases were originally proposed for mass transit, proponents claimed that increased transit spending would allow the state to slow the growth in highway expenditures. Has that happened? No, in fact just the opposite has happened. In FY2008, the state will be spending nearly $790 million in one-time and ongoing general fund dollars for roads, up from nearly zero in 1990, when gas taxes and other user fees covered the costs of transportation infrastructure. Despite the huge infusion of general fund dollars for transportation, the transportation lobby says even more is needed.

Some argue that general fund revenues are needed because the state has not increased gas taxes. Since the gas tax is a fixed amount per gallon, gas taxes need to be periodically increased to offset inflationary losses, unlike sales and income taxes which automatically increase with inflation and population/wage growth.

However, only a portion of the increased reliance on general funds for transportation can be explained by the state's reluctance to increase gas taxes. The nearly $790 million in general fund revenues for transportation would equate to a 56 cent per gallon gas tax increase which means the gas tax rate would be triple what it is now. If the state gas tax rate were adjusted for inflation since the last gas tax increase, the gas tax rate would be about 10 cents per gallon higher, not 56 cents per gallon higher.

What are the solutions? We've proposed three ideas: increased funding for transportation corridor preservation, combined prioritization of roads and rails projects, and congestion pricing. Click [here] to read about congestion pricing.

We have an additional proposal, which we'll discuss within the next couple of weeks.

Taxes Now Conference, May 4th

2007-04-05T08:38:00.000-06:00

The Utah Taxpayers Association will be hosting its annual Utah Taxes Now conference on May 4th at the Little America Hotel in downtown SLC.

The conference will be moderated by KUTV's Rod Decker. We've got an impressive line up of speakers including

Gov. Jon Huntsman, Jr.
Senate President John Valentine
House Speaker Greg Curtis
David Horner, US Department of Transportation
Sen. Mike Dmitrich
Sen. Wayne Niederhauser
Sen. Sheldon Killpack
Sen. Howard Stephenson
Rep. Ronda Menlove
Rep. Merlynn Newbold
Rep. Wayne Harper
Rep. John Dougall
Rep. Mike Noel
Rep. Greg Hughes
Tax Commissioner Bruce Johnson
Tax Commissioner D'Arcy Dixon Pignanelli
Tax Commissioner Marc Johnson
Superintendent Patti Harrington
Several tax practitioners, tax lawyers, and industry representatives

Topics include the following

2007 tax legislation
Tax reform
Transportation reform
Education reform

For more details including registration information, click here

Tax Freedom Day

2007-04-02T11:41:00.000-06:00

Tax Freedom Day will arrive on April 30th this year, according to the Tax Foundation, two days later than last year. On a state-by-state basis, Tax Freedom Day arrives on different days. In Utah, for example, Tax Freedom Day arrives on April 22nd, a couple days earlier than the nation as a whole.

Tax Freedom Day is a broad economic measure that accounts for the amount of federal, state, and local taxes paid as a percent of national income. In 2007, Americans will earn $12.199 trillion in income and pay $3.988 trillion in taxes, or 32.7% of national income. Multiplying 32.7% by the number of days in a year equals 120 days. April 30th is the 120th day of the year.

The Tax Freedom Day calculation includes business taxes that are hidden but are passed on to consumers in the form of higher prices, employees in the form of lower salaries and benefits, and shareholders in the form of lower dividends and stock prices.

Why does Tax Freedom Day arrive earlier in Utah?
Utah’s federal income tax burden is lower than the national average, due largely to larger families and lower average annual wages. Larger families mean more federal personal exemptions and child tax credits. In fact, many middle-income Utah families pay little or no federal income tax.

Utah’s average annual wage is about 18% below the national average (this is an average wage, not a per capita wage which would include children). Since the federal income tax is steeply progressive, Utah’s lower wages means that Utahns pay lower federal income taxes compared to the national average.

Several legislators argue that Utah’s lower federal tax burden justifies a higher state and local tax burden. However, every level of government should be held separately accountable for the taxes it imposes. For example, a city should not argue that it is justified in imposing higher taxes than other cities simply because the county tax rate is lower than other counties.

Responding to criticism from the Left
Some groups have criticized the Tax Foundation’s Tax Freedom Day calculation. They argue that Tax Freedom Day does not measure the tax burden of the average or median income American. The Tax Foundation responds that Tax Freedom Day is a broad measure that accounts for tax burden across the entire economy and was never intended to measure the tax burden of the “average” American.

Some groups maintain that Tax Freedom Day overstates America’s tax burden because taxes on capital gains are included in the numerator (taxes) but capital gains income is excluded in the denominator. The Tax Foundation responds that including capital gains income would impact Tax Freedom Day calculations by roughly one percent.

To read the Tax Foundation’s complete response to its critics click here.

Corporate income tax change: single sales factor apportionment

2007-03-29T15:22:00.000-06:00

In recent years, states have been slowly reducing corporate income taxes. States have been doing this not by reducing corporate income tax rates but rather by increasing the sales factor weighting in corporate income tax apportionment formulas.

What is apportionment of corporate income?
Apportionment of corporate income is an important issue for multi-state companies. Many decades ago, states agreed to use an evenly weighted three-factor apportionment formula based on a corporation's sales, property, and wages. Each factor was given a 33.3% weighting. This was intended to prevent overtaxation of a corporation's profits. For example, without apportionment, a company doing business in twenty states would have to pay 100% state corporate income tax if each state imposed a 5% corporate income tax rate.

Using the evenly weighted three factor formula, the corporation's income would be apportioned to each state where it did business. The following hypothetical example illustrates how this works

Percent of sales in
Other states: 99%
In-state: 1%

Percent of wages in
Other states: 1%
In-state 99%

Percent of property in
Other states: 1%
In-state: 99%

Apportionment
Other states = (99% + 1% + 1%) / 3 = 33.7%
In-state = (1% + 99% + 99%) / 3 = 66.3%

Why increase sales factor weighting?
States have been increasing the sales factor weighting from 33.3% in order to incentivize and encourage investment by high wage, export-oriented companies that have the option of locating in any state (or country for that matter). A semiconductor manufacturer, for example, pays high wages, brings money into the state by exporting products to other states, and can locate anywhere.

By increasing the sales factor to 100%, a company that employs Utahns and invests in Utah but exports all or most of its product to other states, would pay zero or little Utah corporate income tax (assuming the throwback rule were eliminated, which will talk about at a later time). Companies that produce and employ in other states but sell their products in Utah would not benefit from this change.

Using the above hypothetical example, the Utah-based exporter's apportionment to Utah would be 1% if single sales factor were used instead of 66.3% if evenly weighted three factor were used.

Currently, Utah uses a double-weighted (50%) sales apportionment formula. Only eight states use an evenly weighted formula for all corporations. Thirteen states allow or soon will be allowing some or all corporations to use single sales factor (100% weighting). In addition, three states (Nevada, South Dakota, and Wyoming) do not impose corporate income taxes at all.

What about repealing the state corporate income tax entirely?
Complete repeal of the Utah corporate income tax presents two problems. First, the fiscal impact would be huge. In FY2006, Utah's corporate income tax generated $380 million. (The amount generated each year varies dramatically depending on the state of the economy). Increasing the sales factor weighting would impact revenues by about $30 to $50 million per year.

Second, complete repeal of the state corporate income tax would allow local governments to begin taxing intangible property such as patents, trademarks, and goodwill. The Utah state constitution prevents the taxation of intangible property as long as corporate income tax is imposed ("If any intangible property is taxed under the property tax, the income from that property may not also be taxed." -- Utah Constitution, Article XIII, section 2, part (6))

For example, let's assume a company has a market value based on its stock price of $1 billion and tangible real and personal property of $100 million. Currently, local governments can impose property taxes on $100 million. If the state corporate income tax were repealed without changing the state constitution, then local governments would impose property taxes on $1 billion.

Impact of Utah state income tax changes on federal income taxes

2007-03-26T08:33:00.000-06:00

Several people have asked us if the recent Utah income tax changes will impact federal income taxes. For those who itemize deductions on federal income taxes, the answer is yes. Federal taxes will be increasing as a result of state income tax cuts. That's because Utahns who itemize will have have higher federal taxable income because they are deducting less state income tax. Bad news, but that's the way it works.

The state income tax cut will be larger than the federal income tax increase. Most Utahns with full-time jobs are in the 15% federal income tax bracket. The 15% bracket for tax year 2007 begins at $15,650 and ends at $63,700. Remember that this is TAXABLE income, which is adjusted gross income less exemptions and deductions. Therefore, for each dollar reduction in state income taxes, federal income taxes will increase by 15 cents.

Higher income Utahns will see an even higher increase in federal taxes because they are in higher federal income tax brackets. The highest marginal tax rate is 35% and begins at taxable income of $349,700 (tax year 2007). However, since itemized deductions are phased out for higher income taxpayers, these taxpayers will experience a federal tax increase of a little less than 35 cents for every dollar of state income tax reduction. In future years, the itemized deduction phase out will be eliminated at the federal level which means the federal tax increase will be 35 cents for every dollar of state income tax reduction.

In a given year, about 40% of Utahns itemize deductions on their federal and state income taxes. If this sounds low, it's because the other 60% includes

- retirees who have paid off their mortgages and whose combined charitable contributions and state income taxes paid are less than the standard deduction

- young taxpayers who do not own homes and do not currently earn a lot of income.

The percent of Utahns that itemize or will itemize deductions during their lifetime is much higher than 40%.

BYU professor opposes vouchers?

2007-03-23T15:43:00.000-06:00

Last week, the Provo Daily Herald published an anti-voucher letter by BYU professor Richard Davis and two others.

Not surprisingly, they falsely claimed that vouchers would financially hurt public education. Click here to see our response to this claim.

However, we can't help but be shocked that a BYU professor would be opposed to vouchers, especially since tens of thousands of BYU students have received vouchers (Pell Grants, GI Bill) over the years. Surely, Professor Davis himself has taught hundreds of students that have received taxpayer funds to attend LDS Church-owned BYU.

Davis dismisses vouchers as a "government subsidy, a handout if you will". Unless of course those receiving the voucher subsidies are BYU students. Then it's OK.

When calling vouchers a subsidy, Davis doesn't mention that K-12 public education itself is a subsidy. The voucher subsidy -- expected to be about $1,900 per student -- is actually smaller than the Utah K-12 subsidy, about $7,500 per student in 2008 (figure includes capital and debt service). When students transfer from public schools to private schools, everyone benefits financially, including those families that keep their children in public schools and those families without children.

Davis also plays the elitism card by saying "Americans rejected a caste system where rich people go to private schools". Is Davis not aware that rich people live in rich neighborhoods and send their kids to neighborhood public schools that are much different/better than the public schools in poor areas? Isn't it common knowledge that schools in Alpine and Highland perform better than the schools in Rose Park and Glendale?

Voucher opponents argue that the Pell Grant-voucher analogy is apples and oranges because K-12 education is an entitlement and is compulsory and higher education is not. Actually, the entitlement argument justifies vouchers for K-12 more than it does for higher education. Since K-12 education is a constitutional entitlement, K-12 students are entitled to government funded education, whether that's through the traditional school system or through vouchers.
Mike Jerman
Andrew Stephenson

Impact of tax changes on Utah family of four

2007-03-20T11:11:00.000-06:00

The Utah Taxpayers Association has just released its analysis of the impact of recent tax changes on a Utah family of four of various incomes. Click here to read the analysis.

This analysis illustrates the impact of tax changes of the 2006 and 2007 legislative sessions, including the following:

- individual income tax reduction

- 3% reduction in state sales tax on food from 4.75% in 2006 to 2.75% in 2007 to 1.75% in 2008.

- 0.1% reduction in general state sales tax from 4.75% to 4.65%

- 0.6% reduction in "boutique" sales tax on food (ZAP, mass transit).

- 0.25% rails/roads sales tax increase in Salt Lake County (most Wasatch Front counties will eventually adopt the "third quarter" sales tax increase). Food is exempt from this tax.

- 0.05% increase in mass transit sales tax rate

(Note: the above listed "percent changes" are technically percentage point changes, but policy makers generally call them percent changes).

The basis for comparison is the new tax system that will be implemented in 2008 and the old system with 7% top marginal rate kicking in at $8,626 taxable income.

The analysis does not include the impact of business tax changes. While businesses pass on taxes and tax cuts to customers, employees, and shareholders, determining how these tax changes are passed on to families and households of various incomes is problematic.

Click here to read the report.

Mike Jerman
Andrew Stephenson

Would HB148 repeal hurt taxpayers?

2007-03-15T20:28:00.000-06:00

Question: would repeal of HB148 (education vouchers) harm taxpayers? Maybe, maybe not.

We've always supported means-tested education vouchers because they are a good deal for taxpayers, parents, and students.

- Choice allows parents to find education options that are best suited for their children.

- Competition improves the quality of public schools.

- Diverting a portion of public school enrollment to the private sector at a lower cost than taxpayers would have to spend to educate these children in district schools is a benefit for school districts and taxpayers, including those taxpayers whose children stay in public schools and those who don't have any children.

By promoting a referendum to repeal HB148 (education vouchers), the National Education Association's local affiliate is trying to undo the good work that Gov. Huntsman and the Utah Legislature have done for the taxpayers of the state.

However, even though vouchers are good policy, would a repeal of HB148 be a bad thing for taxpayers? That depends. Repealing HB148 would not repeal vouchers because HB174 supersedes HB148. However, some elements of HB148 would be repealed, particularly so-called mitigation funds for school districts. This would actually make the voucher law better.

Are "mitigation" funds justified?
Vouchers will not financially harm public schools which means so-called "mitigation" funds won't be needed. In FY2008, school districts will be spending about $7,500 per student, including capital and debt service. Nearly all of this cost is variable. That is, as enrollment growth is slowed in growing districts or enrollment decreases in declining districts due to vouchers, district costs would be less than they otherwise would be. Growing districts won't have to hire as many teachers or build as many schools as they otherwise would. Clearly, so-called "fixed costs" are not an issue with growing districts. Instead of spending $7,500 per student, taxpayers would be spending on average about $2,000 per voucher student that is diverted to the private sector.

Declining districts can also reduce so-called fixed costs by shifting school boundaries and/or consolidating schools (which they are already doing). Also, if enrollment declines, districts won't need as many teachers. Don't worry about teachers losing their jobs. The growing districts will make sure that there will be plenty of jobs for teachers, even if enrollment growth in growing districts is slowed due to vouchers.

Bottom line: by diverting students to the private sector at an average cost of $2,000 per student, districts will have more money to spend per student for those students remaining in the public system.

But didn't the legislative fiscal analyst say this would cost $450 million over thirteen years?
The Legislature's projected fiscal impact included only the costs of providing vouchers, but the projection did not include the other half of the equation: the school districts' reduced costs due to diverting enrollment to the private sector. The legislative fiscal analyst admits that there are significant variable costs but did not include these costs in the model.

But what about students already in private schools? Where are the savings for districts when these students get vouchers?
The ultra worst case scenario would be that only existing private school students would use the voucher, and maybe a small amount of switchers on top of that. Under HB148 and HB174, voucher eligibility for existing private school students is phased in over thirteen years. However, even if all current private school students were immediately eligible for the voucher, the fiscal impact would be small.

According to the Utah State Office of Education, there are currently (FY2007) 16,386 students in private schools. Opponents of vouchers have always argued that private school students come from rich families, which means that they would only be eligible for a $500 voucher. Therefore, 16,386 students multiplied by $500 equals $8.2 million. We'll round this up to $9 million to account for the worst case possibility that a handful of public school students switch but not enough students to allow school districts to reduce costs.

In FY2008, Utah school districts will spend at least $4 billion (again, including capital and debt service). A $9 million reduction in revenues would be 0.22% of total costs, and this is the ultra-worst case scenario.

Realistically, thousands of students will switch to the private sector, and the private sector currently has the capacity to increase their enrollment by several thousand students without having to build more facilities. If 3,000 students switch, taxpayers will save about $5,000 per student, or about $15 million in total, which more than offsets the $8.2 million cost of providing all current existing private school students with a $500 voucher.

As demand for private schools increases, the private school supply will also increase. Expanding private school capacity is not difficult, and much of the expansion will come from existing private school providers.

Conclusion
Fiscal conservatives are in a bind. How do we support the repeal of HB148 -- which improves the voucher law by getting rid of the so-called and unnecessary mitigation funds -- without sounding like we oppose vouchers?

Six ways (and counting) to understate government spending growth

2007-03-14T20:18:00.000-06:00

Elected officials and spending groups frequently understate government spending and government spending growth. We've identified at least six ways that these groups do this:

1. Increase government funding by increasing "non-mandatory" fees instead of taxes and then exclude fees when calculating tax burdens (sometimes fees are better than taxes, but they should still be counted)

2. Exclude capital and debt service costs when calculating per student spending (that's right, when your local school district asks you to vote for a property tax increase to build new schools, those tax dollars are not included in official statistics on per student spending.)

3. Exclude growth in "below-the-line" items in the Minimum School Program (line items outside the WPU).

4. Earmark state general sales tax dollars for roads and exclude these earmarks from general sales tax revenue and general fund expenditure figures.

5. Compare the pre-supplemental budget for the next fiscal year with the post-supplemental budget for this year.

6. Exclude one-time appropriations

Recently, we've seen an example of items #3 and #6. A local blogger wrote "Instead of a 4 percent increase [for education], lawmakers should have given at least a 10 percent increase".

The actual per student increase in the Minimum School Program -- which accounts for more than 90% of state/local funds for school district operations -- was 15.4% (or about 12.1% adjusted for one year's inflation). This obviously is much higher than 4%.

So where does the 4% figure come from? It comes from WPU growth, which excludes growth in below-the-line items. Frequently, local newspapers have equated WPU growth with spending growth, but this year they avoided that mistake.

Much of the inflation-adjusted 12.1% increase in per student spending is one-time (less than half), which has caused some critics to say education didn't really increase that much. Let's not forget that one-time appropriations are still appropriations and that education budgets have almost always had at least some one-time appropriations. One-time appropriations have contributed to increases in inflation-adjusted per student spending over the years as we've outlined in a previous post. Usually, one-time appropriations either become ongoing appropriations in future years or are replaced with other one-time appropriations.

New state government growth figures

2007-03-12T05:33:00.000-06:00

Every year right after the general legislative session, the Legislative Fiscal Analyst releases a State Budget Overview. Here are some sobering numbers from the current year and previous years' State Budget Overview.

- In the past two years, state spending from general sources (excludes federal sources, dedicated credits) has grown 38.8%. Including all sources of revenue, spending has increased 24.3% in two years.

- In the past four years, state spending from general sources has grown 67%, or 13.7% annualized. Total state spending has increased 45.4%, or 9.8% annualized.

All of these numbers will most likely be adjusted upward once supplemental appropriations for FY2008 are determined next year.

Defenders of government growth argue that much of the increase in state spending is due to "one-time" expenditures such as roads and buildings, and taxpayers should not be worried about this. However, taxpayers should be concerned about so-called one-time expenditures

- One-time expenditures are still tax dollars.

- Increased expenditures for roads and buildings lead to higher ongoing expenditures since these new roads and buildings require annual appropriations for maintenance and operation.

- This year's "one-time" expenditures will be replaced by new "one-time" expenditures next year. This is especially true for roads. State leaders anticipate spending hundreds of millions of dollars annually on roads, eventually billions of dollars per year. When did "one-time" expenditure evolve into annual expenditure?

While using cash for capital projects such as roads serves as good "working" rainy day (if projected government revenues don't materialize, then government can issue bonds for the project and use the freed-up cash to cover operations in other parts of the budget), let's not pretend that these expenditures aren't growing government.

Individual income tax changes

2007-03-07T16:20:00.000-07:00

Now that the dust has settled, here's a summary of the individual income tax changes that Gov. Huntsman and the Utah Legislature approved last week. An example of how the new tax system will work is also explained.

1. Utah’s previous top marginal rate of 7% (reduced to 6.98% for one year) will be replaced by a single rate of 5%. This will be the first time in recent memory, if ever, that Utah's individual income tax rate has been lower than the national average (currently 5.3%, non-weighted). However, a broader tax base will ensure that Utah's individual income tax burden as a percent of personal income will remain above the national average.

2. The new system will not have tax brackets.

3. Moderate progressivity will be maintained by offering non-refundable credits that are phased out as income increases.

4. Credits are phased out at a rate of 1.3 cents per dollar of adjusted gross income in excess of $24,000 for married households and $12,000 for singles. Since the credits are completely phased out at high income levels, Utah’s new system will be a 5% flat tax for high income households.

5. Taxpayers will be able to choose a non-refundable credit based on either 6% of the federal standard deduction (approximately $10,900 in TY2008) or 6% of federal itemized deductions (excluding Utah income taxes paid).

6. Taxpayers will be able to claim non-refundable credits for each household member equal to 4.5% of the federal personal exemption (or 6% of 75% of the federal personal exemption). The federal personal exemption will be about $3,500 in TY2008.

7. Existing credits such as historic preservation, renewable energy, and several others that appear on the TC-40S form and are reported on lines 20 and 30 of the TC-40 will not be impacted by these changes.

Here's an example of how the new system will work based on TY2008 assumptions.

adjusted gross income: $60,000
family size: 4
standard credit: $10,900 x 6% = $654
personal credits: $3,500 x 4.5% x 4 = $630

1. Total credit prior to phase out would be $654 + $630 = $1,284

2. The phase-out would be ($60,000 - $24,000) x 0.013 = $468

3. Total credit would be $1,284 - $468 = $816

4. Total tax would be 5% x $60,000 less $816 = $2,184.

Under the old system (prior to changes in last year's special session), this household would have paid $2,374 in taxes for tax year 2008. The new system reduces individual income taxes by $190 per year for this household.

Significant increases in education spending?

2007-03-05T22:49:00.000-07:00

For the past couple of weeks, Utah Republican leaders have bragged about recent increases in education spending. Others have asked "Have recent increases kept up with inflation and enrollment growth?"

In addition, many have not forgotten the lean recession years in the earlier part of this decade when education spending did not keep up with inflation and population growth. Have recent increases compensated for the lean years?

The answer to both questions is yes.

Everyone seems to have their own way of measuring education spending per student. Some -- particularly the UEA and local newspapers -- focus on the WPU which accounts for less than 50% of total education spending in Utah (and the WPU is not a per student measure anyway although there is a correlation). Others -- like the National Center for Education Statistics -- focus on operations costs, which exclude capital, debt service, and food service. Still others, like the Utah Taxpayers Association, focus on total spending, including capital expenditures and debt service (while excluding bond principal repayment to avoid double counting).

The best way to measure recent increases in per student spending is to look at the Minimum School Program (MSP). Total spending for FY2008 -- which includes capital, debt service, and federal expenditures -- won't be known for another two years. However, the Legislature has released data for the FY2008 MSP, and the MSP accounts for more than 90% of school district operation expenditures from state and local sources.

The Utah Taxpayers Association has calculated annualized inflation-adjusted per student MSP spending growth for three different time periods. The results are as follows.

1993 - 2008 . . .2.6% annualized
1998 - 2008 . . .2.2% annualized
2003 - 2008 . . 3.1% annualized

Keep in mind that these are annualized inflation-adjusted per student spending increases, and these increases are significant, even if some of the increase is so-called one-time revenues (one-time revenues are tax dollars too). We'll talk about one-time revenues in a later post.

Day 45 - Nearly done

2007-02-28T11:34:00.000-07:00

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

Day 43 - Responding to former state senator Karl Swan

2007-02-26T06:35:00.000-07:00

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

Day 38 - Differential pay for teachers

2007-02-21T09:11:00.000-07:00

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.

Day 35 - Reducing telephone taxes

2007-02-18T13:45:00.000-07:00

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.

Day 32 - R&D Tax Credit

2007-02-15T21:55:00.000-07:00

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.

Day 31 - Tax Expenditure Report?

2007-02-14T14:14:00.000-07:00

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.

Day 30: Truth in Bonding

2007-02-13T11:48:00.000-07:00

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

NOTICE OF PROPERTY TAX INCREASE DUE TO BOND ISSUANCE
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.

Day 29 - Gas tax increase?

2007-02-12T13:04:00.000-07:00

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 (www.api.org) 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.

Day 26 - HB203: focusing on real economic development

2007-02-09T07:10:00.000-07:00

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.

Day 25 - Bad news on soccer stadium

2007-02-08T12:37:00.000-07:00

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?

Day 24 - Senate individual income tax proposal

2007-02-07T10:36:00.000-07:00

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.

Day 23 - Half way there

2007-02-06T14:44:00.000-07:00

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.

Day 22 - Finally!

2007-02-05T22:08:00.000-07:00

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.

Day 18 - Expanding the sales tax exemption for business inputs

2007-02-01T20:56:00.000-07:00

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.

Day 17 - Shifting general funds from higher education to transportation

2007-01-31T21:15:00.000-07:00

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.

Day 16 - Voucher fiscal impact

2007-01-30T22:30:00.000-07:00

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.

Day 15 - Corroon makes right call

2007-01-29T14:00:00.000-07:00

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].

Day 12 - Renewable Energy Tax Credit

2007-01-26T09:12:00.000-07:00

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.

Day 11- Utah Senate votes to weaken spending limit

2007-01-25T13:47:00.000-07:00

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.

Day 10 - "One-time" expenditures and government growth

2007-01-24T14:55:00.000-07:00

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.

Day 9 - Vouchers and Childless Taxpayers

2007-01-23T21:17:00.000-07:00

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.

Day 8 - Proposed income and sales tax cuts

2007-01-22T14:23:00.000-07:00

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.

Day 5 - State Spending Growth Accelerates

2007-01-19T18:28:00.000-07:00

Yesterday, the Utah Taxpayers Association released a report documenting large increases in state spending growth. You can access this report in [pdf format] and [html format].

Annualized state spending growth has been much higher during the Huntsman years than during the Walker and Leavitt years. (Note: EF/GF = education funds and general funds)

Annualized EF/GF growth

Leavitt .............. 5.6%
Walker..............11.2%
Huntsman...... ..14.6%
FY93 to FY08.. ..7.7%

includes GF earmarks

Total spending growth, annualized
Leavitt................6.4%
Walker................6.1%
Huntsman........ ..9.1%
FY93 to FY08.. ..6.9%

Annualized growth since FY04

EF/GF incl earmarks... ....13.8%
Total spending...................8.3%

Some argue that current growth rates are justified because of the slight decrease in state expenditures during the economic downturn of FY2001 to FY2004. Annualized state government growth including the FY2001 – FY2004 period has been higher than combined inflation and population growth as the follow data demonstrate

Annualized growth, FY93 to FY08
EF/GF incl earmarks..........7.7%
Total spending...................6.9%
Inflation/pop. growth.........5.2% (approx)

Annualized growth, FY01 to FY08
EF/GF incl earmarks.........7.1%
Total state spending..........5.8%
Inflation/pop. growth........5.5% (approx)

Day 4 - Welfare Expenditure Report

2007-01-18T15:59:00.000-07:00

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.

Day 3 - Severance Tax Trust Fund

2007-01-17T16:45:00.000-07:00

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.

Day 2 - Supplemental appropriations and government growth

2007-01-16T13:04:00.000-07:00

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.

Day 1 - Our legislative agenda

2007-01-15T07:35:00.000-07:00

The Utah Taxpayers Association will be promoting the following agenda at the 2007 General Session of the Utah Legislature:

Education Reform
Vouchers for low and moderate income students (Rep. Steve Urquhart)
Click [here] and [here] to see some of the comments we have posted on vouchers. We’ll have more information on the financial impacts of vouchers on public school districts.

Differential pay for K-12 teachers (Sen. Howard Stephenson)
Click [here] to read about teacher pay in Utah. Increasing teacher pay is important, but pay increases should be targeted towards those areas where Utah has difficulty finding teachers, such as math, science, and special education. Increasing teacher salaries to the national average would be a lot less expensive than reducing pupil-teacher ratios to the national average.

Transportation Reform
Transportation corridor preservation
A major cost in highway construction is land acquisition. By purchasing land years in advance, Utah can save a lot of money because land values escalate tremendously as development encroaches on land that will be used for future highways.

Congestion pricing
We've written extensively on this issue. Click [here], [here], [here] [here], [here], and [here] to read more.

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.

Defending Truth-in-Taxation

Every year, there is a bill to weaken or gut Truth-in-Taxation even though Truth-in-Taxation works. Click [here] to see the evidence.

Tax cuts and slowing the growth in state spending

We'll be releasing a report in the next couple of days on state spending growth. Prepare to be shocked.

2007 General Session

2007-01-12T10:57:00.000-07:00

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.

$500 million tax increase -- or more -- for highways?

2007-01-09T15:00:00.001-07:00

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.

Responding to Bryan Gray at the Davis County Clipper

2007-01-05T09:57:00.000-07:00

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.

Tax outputs, not inputs

2007-01-01T21:56:00.000-07:00

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]

Huntsman's tax reform proposal

2006-12-26T20:23:00.000-07:00

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

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

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

Credit details
Maximum credits would be as follows:

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

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

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

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

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

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

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

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

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

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

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

Back on Tuesday

2006-12-21T06:36:00.000-07:00

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

Huntsman's Proposed Tax Cut

2006-12-19T14:24:00.000-07:00

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

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

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

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

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

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

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

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

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

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

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

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

Huntsman's Proposed Education Budget

2006-12-14T21:49:00.000-07:00

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

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

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

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

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

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

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

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

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

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

Governor Huntsman's Proposed 2008 Budget

2006-12-12T20:11:00.000-07:00

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

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

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

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

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

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

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

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

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

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

Teacher Salaries in Utah

2006-12-11T21:36:00.000-07:00

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

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

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

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

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

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

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

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

We'll discuss this in a future post.