by Howard Stephenson
Since 2001, Utah’s state and local governments have significantly increased their reliance on property taxes while decreasing their reliance on income taxes, according to the Utah Taxpayers Association. Reliance on sales taxes has remained stable. Utahxs experience closely resembles results in other states. This shift is largely due to economic forces and not due to any conscious decisions or changes by policy makers.
However, the Taxpayers Association reports that in Utah there has been some conscious effort to raise taxes imposed by school districts. Local school boards have been especially aggressive in raising property taxes.
Many tax policy experts consider property taxes to be the best form of taxation, mainly due to its stability. Since property values typically do not change drastically from year to year, property taxes are inherently more stable than other forms of taxation. Utahxs Truth-in-Taxation (TNT) law increases this inherent stability through the certified tax rate mechanism. As valuations of existing property increase, tax rates decrease. Conversely, if property valuations decrease, under TNT tax rates are allowed to increase.
Other forms of taxation, such as income taxes and particularly corporate income taxes, are much more volatile. During economic expansions, income taxes due to capital gains and dividends increase rapidly. During recessions, these sources of revenue decline rapidly. Since capital gain and dividends are tied to corporate profitability, corporate income taxes exhibit similar behavior.
Sales taxes are also volatile. As the economic outlook becomes more pessimistic, households and businesses reduce purchases which depress sales tax revenues.
Property taxes are frequently considered the most unpopular of all taxes for at least two reasons. Unlike income taxes, increased property taxes are not tied to an increased ability to pay.
Seniors on fixed incomes are particularly susceptible to property tax increases. Second, unlike sales taxes, taxpayers receive a bill once a year for property taxes. Most Utah taxpayers would be surprised to learn that they pay more in sales taxes than in property taxes, but the lack of a single, annual sales tax bill due at the end of November causes many taxpayers to ignore sales taxes.
THE EFFECTS OF UTAH’S TRUTH-IN-TAXATION LAW
Despite claims by local governments and the Spending Lobby, Truth-in-Taxation (TNT) has not unfairly impacted the ability of local governments to raise revenues through property taxes. TNT requires local taxing entities to notify the public through quarter page newspaper ads and mailed notices and hold public hearings before property taxes can be increased. TNT opponents point towards data that show that property taxes constitute a smaller percentage of state and local taxes now than in previous years. However, the relative decline of property taxes compared to sales and income taxes is due to two factors: First, sales taxes and income taxes as a percent of personal income have increased in the past ten years. In 1992, general state and local sales taxes amounted to 3.43% of personal income. By 2002, this had increased to 3.49% of personal income. During the same time period, individual income taxes increased from 2.74% to 2.84% of personal income.
Second, tax cuts by the legislature have reduced Utah’s reliance on property taxes relative to sales and income taxes. Four events during the 1990s, all of which were completely unrelated to TNT, caused a reduction in property taxes, including legislative decisions to reduce the statewide basic levy for education in 1995, 1996, and 1998. Additionally, Utah’s reliance on property taxes were reduced by the introduction of county-option sales taxes which required a dollar-for-dollar reduction in property taxes for each dollar raised by the county-option sales tax.
To accurately gauge the impact of TNT on property tax collections, adjustments need to be made to account for the reductions in property taxes unrelated to TNT as explained in a and b above. When these adjustments are made and total property tax revenues are plotted as a percent of personal income, the evidence is clear that TNT has not unduly restricted local governmentsx ability to fund their operations through property taxes. In fact, when non-TNT factors are accounted for, property tax burdens have actually increased.
TNT opponents have described the TNT process as “more inflamematory than informational” which subjects local government officials to “political pummeling”. Over the years, the Utah Taxpayers Association staff has made public comments in hundreds of TNT hearings. In nearly every case, the hearings are civil and present an opportunity for local government officials to explain why taxes are being increased and for taxpayers to express their support or opposition to the proposed tax increase. Occasionally, taxpayers show up with pitchforks and hanging ropes (figuratively speaking) when local governments propose outrageous increases, such as Davis Countyxs 138% increase and Moroni Cityxs 167% increase, both in 2002.
TNT opponents argue that the TNT process forces elected officials to be “resolute in avoiding, at almost any cost, the discomfort ofxa Truth-in-Taxation hearing”, as if this were a bad thing. Apparently, based on the numerous school district property tax increases in the past three years, this message has not been relayed to Utahxs local school boards.
Total statewide property tax collections increased from $900 million in 1992 to $1.7 billion in 2003, an 89% increase.
The data presented above clearly demonstrate that property tax revenues, once adjusted for non-TNT factors, have actually increased as a percent of total personal income, hardly evidence of inflammatory political pummeling.