In December, Governor Spencer Cox unveiled his Fiscal Year 2023 proposed budget at an event near the Great Salt Lake.
The $25 billion, 176-page document is only a recommendation to the Legislature. The Legislature is given the full authority to set Utah’s budget during the upcoming 2022 General Session, which starts in January.
Governor Cox’s proposed budget does have some positive tax policy implications, but the Taxpayers Association believes the governor could have gone further in promoting stronger tax policy for Utah.
Here are a few of the highlights of his proposed budget.
Grocery Tax Credit
Since 2008, purchases of unprepared food or groceries have been taxed at a reduced state tax rate of 1.75% instead of the full state rate, which is currently at 4.85%. There is another 1.25% local sales tax on food for a total of 3%. The sales tax on food is the most stable source of tax revenue for government entities because those are necessary items that fund essential government services in economic downturns.
Your Taxpayers Association has long argued that reducing or eliminating the sales tax on food is economically unstable and poor tax policy. We are encouraged to see Governor Cox keep the sales tax on food (even at its current reduced rate) as part of his budget proposal. We are also pleased to see the Governor provide a tax cut for some Utahns in this recommendation.
The governor has recommended $160 million as a refundable income tax credit to offset the cost of sales tax on food to provide “tax relief [for] Utah families”, arguing that this will help low- and middle-income earners.
We do believe a similar approach to what the governor has proposed is an appropriate measure to help those most vulnerable, this recommended budget does not take into account a few items.
First, the grocery tax credit appears to apply for everyone that would be on SNAP, WIC, or similar programs. Recipients of these benefits do not pay any sales tax on grocery purchases in the first place.
Second, we believe the grocery tax credit in the governor’s budget is applied too broadly. For example, a family of five (the typical Utah family size) with a household income of $120,000, would be eligible for a $220 tax credit. The goal of the tax credit ought to be for the working poor whose income is too high to qualify for SNAP or WIC, but may still struggle with paying the grocery sales tax.
As an example, a family of five making $150,000 could receive $54, which seems far beyond helping those who are struggling at the income threshold right above being able to qualify for SNAP or WIC.
Third, the credit amounts do not seem to be applied in an even way. In their proposal, a single person making $60,000 would be entitled to a $33 tax credit. If that person got married, the tax credit more than doubles to $88. If those two had a dependent, the credit suddenly increases to an estimated $186.
Finally, the proposed $160 million income tax credit is a drop in the bucket of the budget compared to the amount of new revenue the state is expected to receive.
In its December meeting, the Executive Appropriations Committee received new revenue estimates, which are used to begin the budgeting process for the upcoming fiscal year.
The Committee learned the new ongoing revenue is $1.3 billion, and new one-time revenue will be $1.6 billion.
The governor’s budget itself even states “the largest source of state-collected revenues is the individual income tax. The Utah Constitution requires that the estimated $5.7 billion of individual income tax and $533 million of corporate income tax be available in FY 2023 to support public education (K-12), higher education, children, or individuals with a disability”.
With all of this revenue, all Utah taxpayers ought to see tax relief in the form of an income tax rate reduction. Following tax cuts for specific groups in the 2021 General Session (families, the elderly, and certain members of the military), action needs to be taken to provide relief to all Utahns.
Public Education and the WPU
As mentioned before, an estimated $6.2 billion is expected to be collected in income taxes.
With a part of this money, the governor is proposing a 5% increase in the Weighted Pupil Unit (WPU), the main source of public education funding from the state. The Governor is proposing a 2.6% increase in the WPU for inflation, and a 2.4% discretionary increase.
While the WPU can be an appropriate method to fund education under ideal circumstances, it is not a perfect education funding mechanism.
The WPU evenly distributes money to school districts regardless of their local ability to fund themselves using the property tax. For example, a school district with a lot of secondary residential properties within its boundaries, which are taxed at a higher rate, is able to generate more revenue with a lower tax rate. On the opposite end, a school district with low property values must have a higher tax rate to fund its district.
Under the WPU increase, both districts would receive the same increase percentage, putting the school district with higher property values at an automatic advantage.
Second, due to legislation passed in 2018, any increase in the WPU creates an automatic property tax increase on all Utahns. Each year until 2023, property taxpayers in Utah see an automatic, secret $20 – 40 million tax increase due to increases in the WPU.
Student Fees in Public Education
Your Taxpayers Association has long argued for users of a service paying for the service they consume. In the governor’s recommendation, he proposes eliminating student fees. Eliminating student fees for supplies or activities required to complete a course would cost the state about $55 million in appropriations.
Utah families do receive dependent exemptions and other tax credits to compensate and help offset some of these costs, but the Association still believes charges for use of services is an appropriate government revenue source when it comes to fees that are tied to extracurricular activities like sports or elective activities.
Road Usage Charge
On the topic of users paying for their usage, the Taxpayers Association has long been working on ensuring those that use the roads are also paying for the maintenance and operation of the transportation network.
Electric vehicles do not pay the gasoline tax, and therefore are not contributing their fair share of the usage of the roads. While they do pay a registration fee which does contribute to the transportation infrastructure, it is not nearly to the point of equity with traditional-fueled vehicles.
The governor has expressed his support of the road usage charge (RUC) program in his recommended budget. Road usage charge essentially charges people for how many miles they drive, as a way to replace the gas tax. This more directly impacts transportation funding by forcing those who use the roads more to pay more for it.
The RUC is up and running for hybrid and electric vehicles, and is statutorily required to be fully operational by 2031.
We thank Governor Cox for continuing to support the road usage charge program and hope that additional steps will be taken in 2022 to ensure those that aren’t paying a more even share of the contribution to the maintenance of the system are headed in a direction in which they will be.
Earmarks
Utah’s FY 23 budget, according to the governor’s office, will have $961 million in sales tax revenue earmarked for certain items, such as water or transportation. That’s 26% of total sales tax revenue the state is estimated to receive.
We have stated that earmarks are generally poor tax policy, as they automatically prioritize certain funding items over others that may be in more need.
Compensation for State Employees
Governor Cox is recommending $105 million to pay Utah’s government workforce more, including public safety. The budget proposes spending more than $15 million of that $105 million on corrections certified staff.
Rainy Day Funds
As of FY 2022, Utah’s rainy day funds have $1.15 billion in balances. The budget proposes an additional $57 million in deposits. Keep in mind, many of these funds can only grow a certain percentage each year. This is an appropriate policy to prevent taxpayers from paying excessive taxes for government’s savings accounts. Governments should look to trim their budgets, just like taxpayers do, in economic downturns.
December Executive Appropriations Committee Meeting (EAC)
A number of budget proposals were introduced at the December Executive Appropriations Committee (EAC) as the Legislature starts to map out a strategy to address the massive revenue surplus the state is seeing. As your Taxpayers Association has been predicting for several months, the state is seeing new available ongoing revenue of about $1.3 billion and new available one time revenue of approximately $1.6 billion.
The committee presented numerous changes to the base budget along with some “set asides”. With the passage of HB 357 during the 2020 General Session, public education will receive the lion’s share of the new revenue with more than $300 million allocated to it right off the bat. The Legislature is also mandated to set aside $120 million for higher education buildings. Along with Medicaid and a few other obligations that eat up the revenue in total, all of these items swallow up $514 million of the new available ongoing revenue before even considering any set asides.
Thanks to a bill run by Representative Jeff Moss (R-Saratoga Springs) in the 2021 session, the EAC established a set aside of $160 million for tax cuts. This marks the first time under this new process that the legislature has made this decision at the December meeting before the majority of spending decisions are made during the regular session.
There were also three additional set asides, including $125 million for an increase in state and higher education employee pay, an additional WPU boost for education of $72 million and $20 million for law enforcement compensation. Approximately $ 219 million remaining of new available ongoing revenue and your Utah Taxpayers will continue to fight to ensure that is allocated to a meaningful income tax rate cut for all Utah taxpayers.