In July, the Utah Taxpayers Association published a list of the 78 entities proposing to raise taxes in 2023. In reviewing the reasons behind some of these proposals, common themes included hiring new law enforcement and public safety personnel, making city employee pay more competitive, and “inflation”. Over the last several years, almost everything has been blamed on inflation. Housing prices, flight prices, food prices, postage stamp prices and yes, tax increases. But to what extent is inflation a valid argument for cities to raise taxes?
While it is true that cities’ costs have increased because of inflation, so too have their revenues. Sales tax is a percentage of the cost of purchased goods and services. A higher cost of these goods and services means a higher amount of sales tax is being paid. For example, a $10 burger in Salt Lake City is subject to a 7.75% sales tax of $0.775. If inflation causes that burger to increase in price to $12, the sales tax collected increases to $0.93. Applied to almost every item purchased, this increase in sales tax translates to hundreds of thousands of dollars of increased revenues for cities.
Between our 2022 and 2023 Cost of City Government reports, average city collections increased by more than $2MM, from $26,358,207 to $28,382,837, and median collections increased by more than $4MM, from $40,797,438 to $45,152,808. There were several reasons for these increases, including growth and impact fees, but many cities saw substantial increases in sales tax revenues. If cities want to argue that inflation has caused their expenses to increase, they must also concede that inflation has caused their revenues to increase.
There is also evidence to suggest city costs have not increased by much more than the inflation they have captured. The Municipal Cost Index, developed and quantified by American City and County since 1978, shows the effects of inflation on the cost of providing municipal services. The Consumer Price Index – a measure of inflation more broadly – often deviates more than the MCI and demonstrates that the cost of providing government services often does not increase as much as headline inflation would indicate. As seen in the chart below, this has been the case in 2023 once again with the year over year change in MCI significantly below the change in the CPI.
The Utah Taxpayers Association encourages cities to go through the Truth in Taxation process every 5-7 years to respond to inflation, or to capture the modest difference between the MCI and the CPI. However, the idea that taxes should be raised every year to respond to inflation is born out of poor budgeting practices and lazy excuses. The Truth in Taxation process is based on the simple truth that taxes rise only when entities want to spend more money. While there are legitimate reasons for an entity to increase their budget, the claim that it is a necessary response to inflation is – at best – disingenuous.