The Utah Legislature’s Tax Reform Task Force is underway. One of the main purposes of the task force is to address the “structural imbalance” in Utah ’s tax system which was exposed by former Governor Olene Walker’s tax reform group. The solution, according to the Walker team is to broaden the base of Utah ’s tax system and lower the rates. They pointed to the fact that more and more of people’s income is spent on services which are not subject to sales taxes and that exemptions, deductions and tax planning are gradually eroding the revenue capacity of the state income tax.
The Walker team also pointed out that the peaks and valleys in the current revenue stream will be reduced by fixing the tax system’s structural imbalance. They noted that the tax structural imbalance is exacerbated by the tendency of budget makers during the peak years to grow government and then, during the lean years to raise taxes to maintain spending levels. This is what I call the spending structural imbalance,
In all our efforts to address the tax system’s structural imbalance, Utah should also solve its spending structural imbalance. This was attempted several years ago when the state spending limitation law was enacted following Governor Norm Bangerter’s re-election. Taxpayers were upset when he pushed what was then the largest tax increase in state history ($176 million) through the legislature to remedy a revenue shortfall brought on by an economic recession. He promised that, if re-elected, he would work for a statutory spending limitation law.
Winning the three-way election by a plurality, Bangerter kept his promise and the measure was passed. It was designed to limit spending growth to no more than the rate of growth in population plus personal income. Unfortunately, each time the spending cap would have restricted spending growth, the legislature amended the formula to relax the cap. As a result, during the 1990s Utah state spending growth was among the fastest growing in the nation.
In 2003, Representative Greg Hughes sponsored an amendment to strengthen Utah ’s spending limit. He was surprised to find so much opposition in a state which is touted as being fiscally conservative. After much work and compromise he was able to cap general fund growth to the combined percentage growth in population and inflation. Since the general fund is only one component of the total state budget, much remains to be done.
Hughes would really like the Beehive State to enact something like Colorado ’s Taxpayer Bill of Rights (TABOR). This is a constitutional amendment made possible through a ballot initiative which limits Colorado revenues from growing faster than the rate of increase in population plus inflation, requiring revenues in excess of the cap to be returned to taxpayers. As with every state except Vermont , Colorado ’s constitution also requires a balanced budget. This means that in the event revenue growth dips below TABOR’s allowed rate, spending must be cut to the level of revenues unless voters give approval for tax increases.
The combined effect of these two provisions has been to end spiraling increases in state spending while providing more than $1 billion in rebates to taxpayers. Because population and inflation don’t typically show wide swings from year to year, the peaks and valleys common to all states have virtually disappeared from Colorado ’s state budget.
Detractors of TABOR have conducted a nationwide smear campaign against the limit. They use concocted figures and horror stories about such things as the quality of prenatal care in Colorado and “inadequate” education spending to “prove” that TABOR has decimated the state. The Tax Foundation of Washington, D.C. has published “An Analysis of Misleading Attacks of Colorado’s Taxpayer’s Bill of Rights” which debunks the critics’ claims about TABOR. The analysis can be found online at www.taxfoundation.org.
The Tax Foundation analysis showed clearly that, contrary to the spending lobby’s claims, the effect of TABOR during the recent economic decline was to save Colorado from a more severe revenue shortfall while smoothing Colorado ’s spending over the economic cycle.
Hopefully with all the talk about tax reform the Utah Legislature will also look at the other side of the coin: spending reforms.