by Howard Stephenson
Last week we reviewed in this column the details of Governor Olene Walker’s 16 point plan for revamping Utah’s tax structure. It may take some time for people to really understand it, but the more people look at it, the more they like it.
Here is my initial assessment of the proposal, for what it’s worth.
First Impressions
The sixteen recommendations are a mixed bag which includes some things taxpayers and businesses should like and other elements taxpayers have traditionally opposed. The proposal is without a doubt the most comprehensive tax restructuring proposal to ever be presented since statehood.
The proposal intends to be revenue-neutral while broadening the base and lowering rates. The Tax Reform Committee believes it is important to broaden the base because it gives greater stability and flexibility to meet future needs. They support lower rates to encourage economic development and because lower rates are less likely to distort business decision-making.
The Governor’s team has stated that Utah’s tax base is eroding and is volitile. They report that the core base of most of our taxes, adjusted for economic growth, is declining. The sales tax base is declining at a rate of 1.3% per year, the individual income tax base is declining 1.4% per year, and the corporate income tax base is declining 8% per year. Only the property tax has a base which is increasing – at 3.8% per year.
The Good
The proposal, if adopted would eliminate the numerous obstacles to economic development which the Taxpayers Association and the business community have attempted to eliminate for years but have failed, due to the archaic static fiscal note process which requires the legislature to find replacement funding before enacting any tax cuts.
1. One of the obstacles to economic development is our current 7% nominal rate for Utah income taxes. The proposal would replace it with a 5% tax on federal taxable income with a property tax increase in the uniform school levy to make up the revenue, or (the preferrable alternative in my opinion) a 4% rate on federal adjusted gross income.
2. Eliminate the corporate income tax and replace the revenue with an increase in the statewide school levy. There is a concern about the current constitutional provision which prohibits taxing intangible assets if there is an income tax. This would need to be addressed.
3. Eliminate sales taxes on business inputs. This has been the mantra of the Taxpayers Association and the Manufacturer’s Association for many years. This could be accomplished by expanding the sales tax to most services while lowering the rate. It is estimated that Utah’s current 4.75% state rate could be dropped a full point to 3.75%
4. Eliminate the crazy-quilt of sales tax rates through a single statewide sales tax rate. This would eliminate the “botique” taxes which have become the spending lobby’s tax of choice.
5. Reduce property tax subsidies for water users. This would ensure that water bills include all costs, thus giving water users an incentive to conserve.
6. Provide limits on Redevelopment Agency give-aways of property taxes to developers by allowing school districts and special districts to opt out of RDAs. This could bring an end to the more than $70 million annually taken by city councils from school district and other local budgets.
The Questionable
Although the proposal it revenue-neutral, it contains some items which are traditionally opposed by taxpayers.
1. Shift a portion of the current 24.5 cent per gallon motor fuel tax to a sales tax. This would allow gas tax revenues to grow somewhat as prices increase while still providing the stability of the per-gallon component.
2. Change the two-tiered oil & gas severance tax to one rate. While this may increase taxes slightly, oil & gas will also benefit from the elimination of sales taxes on their equipment and machinery and would also benefit from the elimination of the corporate income tax.
3. Retain the state inheritance tax if congress decides to hang on to it.
4. Allow an annual inflationary adjustment in the certified property tax rate under the Truth-in-Taxation law (TNT). While this would allow annual increases for inflation, it would eliminate the current justification of adjusting for inflation every five or six years. Currently when going through the TNT process local officials often reason for much higher increases since they have to go through the pain of exceeding the certified rate. Under this new system, taxpayers would be justified in opposing nearly all tax hikes because annual inflation is already built in.
5. Require a summit between centrally assessed taxpayers and the counties who believe centrally assessed taxpayers don’t pay their fair share of taxes . This may actually be a good thing because the facts are on the side of centrally assessed taxpayers, which show that if anything, centrally assessed taxpayers are over-assessed. If they actually get the county officials who have it in for centrally assessed taxpayers to actually face the facts, this issue may be put to bed once and for all.
Overall Assessment
I believe that on the whole, this plan is the best tax policy proposal to come along in the 27 years I’ve been at the Taxpayers Association. It has a few elements that taxpayers won’t like, but the fact that it accomplishes the economic development goals for which the business community has been working so hard makes the plan worth the legislature’s and Governor-elect Jon Huntsman’s serious consideration.
The plan has been touted as a remedy to the state’s tax volitility and eroding tax base. However, taxpayers should be most excited about the fact that the plan should restrict government growth. By eliminating the peaks and valleys in state and local revenue streams, there will be less tendency by budget makers to increase spending during boom years beyond sustainable levels. Other traditional problems of the boom-bust cycle should also be mitigated.
I am impressed by the work of the Governor’s committee and realize in hindisght that it was a good thing they created this proposal outside of the political process where it would have been dismantled as each piece was added. The proposal was developed over a period of more than one year by a team of distinguished tax experts including: Pam Hendrickson, Utah State Tax Commission Chair; Bruce Johnson, Utah State Tax Commission; Lynn Ward, Governor’s Deputy Chief of Staff; Gary Cornia, BYU professor and former State Tax Commissioner; Keith Prescott, CPA, tax practitioner; Val Oveson, Utah Chief Information Officer; Leo Memmott, Governor’s Deputy of Policy; Ray Nelson, BYU professor.
A few legislators are not taking the plan seriously because they were not included in the process. It would be a mistake for them to disregard it.
The business community will likely never have the opportunity to achieve so many of its goals in one legislative session.
Some may not like the plan because it is so comprehensive: it seeks to change so many things at once. However, it may be easier to swallow the whole elephant in one bite rather than piece-meal. If this plan is adopted in its entirety, Utah could have one of the most competitive tax climates in the nation, despite our extreme funding demands for education due to our high birth rate. Utah’s average annual wage is currently only 83% of the national figure. This proposal could stimulate economic activity to improve family incomes by encouraging higher paying jobs.
The text of the tax plan can be found at www.utah.gov/governor/newsrels/.