Writing on tax reform back in December, I quoted Thomas Jefferson: “Politics … holds up the torches of martyrdom to the reformers of error.” Well, apparently state political leaders saw the glow of firelight coming over the hillside, because the tax reform in question was quickly thereafter thrown out. This leaves the issues that motivated reform unresolved.
To give Utahns a better idea of what that means, Utah Foundation recently released “Now What? A Citizen’s Troubleshooting Guide to Tax Reform.” The report addresses three basic issues that appeared to be at the center of reform efforts: the adequacy of general fund revenue; the competitiveness of income tax rates; and a large constitutional earmark. It explores the various choices — or, depending on your point of view, potential consequences — on the table following the reform effort’s demise.
Rising costs and the long-term diminishing role of key revenue sources have state policymakers worried about their ability to maintain funding levels for basic state spending categories in the coming years. Specifically, the roles of motor vehicle fuel taxes — which are dedicated to transportation — and sales taxes in overall state revenues have declined with greater fuel efficiency and a shift in overall consumer spending from taxable goods to untaxed services. At the same time, rapid population growth is putting continued pressure on transportation spending, and rising Medicaid costs are consuming an increasing portion of the state budget.
There are several avenues for addressing these issues. One is to broaden the sales tax base by including a wider set of services in the taxable base and eliminating exemptions. Another way of creating budgetary flexibility is to eliminate earmarks. That could mean removing the large constitutional earmark dedicating income taxes to education or paring down the collection of earmarks that ties up more than a quarter of the state’s sales tax revenues. Alternatively, the state could raise existing taxes, like gasoline and sales taxes. In the past, Utah has imposed significant state-level property taxes and theoretically could do so again. Failing all such approaches, the state may be forced to curb spending on state services and infrastructure.
Another issue is income tax rates. By reducing the income tax rate in 2018 and attempting to do so again at the end of 2019, Utah’s legislative leadership signaled a commitment to reducing income taxes to keep Utah economically competitive.
The state has a couple of options for addressing income tax rates. There would be greater flexibility for cuts in the income tax if a larger portion of education spending could be shifted to the general fund — perhaps by broadening the sales tax base. Another option would be to hold income tax revenues somewhat steady as time passes, allowing for a series of minor cuts to the income tax rate that could have a significant impact over time. However, those seeking increased funding for education would likely prefer to harvest new income tax revenues by keeping the rate steady — which leads to the third issue.
Under the Utah Constitution, all income tax revenues are dedicated to education. As Utah’s largest and quickest growing major revenue source, this significantly limits budgetary flexibility. Some have also argued that, by relying heavily on a guaranteed revenue stream, particularly from a relatively more volatile source like income taxes, there is less predictability than there would be if the focus was on steady funding.
One approach would be to replace the current constitutional income tax earmark with language that would guarantee that the amount appropriated for public education is no less than the prior fiscal year, with adjustments for inflation and enrollment growth. Another approach may be to boost education reserves, creating a stronger failsafe for education funding. Still another approach would be to shift more of the burden of education costs to local districts, with accompanying property tax increases, with changes making it easier for local districts to tax their constituents.
Obviously, none of these choices would proceed without opposition, and few would be very popular. Some may defend the status quo. Torches could be lit. But at some point, policymakers may have to face the heat.
Originally published in the Deseret News on February 23, 2020: https://www.deseret.com/opinion/2020/2/23/21144466/guest-opinion-tax-reform-may-be-on-pause-but-the-issues-roll-on