by Howard Stephenson

Utahns will most likely be getting tax cuts next year as state government revenues continue to grow dramatically. With surpluses projected at $1 billion following four years of revenue stagnation, it’s time for serious tax cuts.

The Governor and many legislators agree that tax cuts are in order, but the various players disagree on the magnitude of the tax cuts. Governor Huntsman proposes a $60 million tax cut while the House Republicans propose $230 million in tax cuts. Senate Republicans as well as Democrats in both houses have decided to wait until the legislative session starts before committing to cutting taxes.

The economic recovery presents state government an opportunity to offset recent tax increases as well as relieve some of the tax burden in a state whose state/local tax and fee burden as a percent of personal income is third highest in the nation.

Tax Revenues Experience Significant Increase

State revenues grew significantly during the 1990s but then leveled off and actually declined slightly from 2001 to 2003. Annualized state revenue growth from 1995 to 2005 was 5.5% which exceeded combined population growth and inflation of 4.9%. Governor Huntsman’s budgeted revenue growth from FY 2006 to proposed FY 2007 is a whopping 13.4%. FY2005 to FY 200-6 one year growth in various taxes are projected to be 9.9% Individual income tax, 13.4% state sales tax, and 82.9% corporate income tax.

Rainy Day Fund at an All-time High

The state now has two rainy day funds, one for the uniform school fund and one for the general fund. The balance of the combined rainy day funds is now at an all-time high. Prior to the recent recession, the rainy day fund balance reached $120.3 million in FY2001 but declined to $19.5 million by FY2002. At the end of FY2005, the combined balance had reached $146.2 million, and the FY2006 budget contains an appropriation for an additional $24 million.

1980s Tax Changes

In recent decades, Utah has reduced and raised taxes depending on the state of the economy. In the 1980s as Utah suffered through a flood and a recession, Utah increased nearly all major taxes that would be the equivalent in today’s economy of more than $500 million annually.

These tax increases included:
increasing city sales tax rate from 0.75% to 1.0%
– increasing state sales tax rate from 4.0% to 5.0%
– increasing corporate income tax rate from 4% to 5%
gas tax increase from 11 cents per gallon to 19 cents per gallon
During the 1980s, top marginal individual income tax rates were reduced from 7.75% to 7.2%.

1990s Tax Changes

In the 1990s, Utah reduced taxes as the economy expanded. These tax cuts included:
– reducing the top marginal individual income tax rate from 7.2% to 7.0%.
– reducing the statewide basic levy twice.
– reducing sales taxes by allowing manufacturers sales tax exemption However, these tax cuts were partially offset by the state’s refusal to index tax brackets for inflation. In 2001, the state
increased tax brackets by 15%, which offset only a small portion of the bracket creep that had occurred since the early 1970s.

Also, the state increased gas taxes from 19 cents per gallon to 24.5 cents per gallon. During the recent recession, Utah increased taxes, although on a much smaller scale than in the 1980s.

Recent Tax Changes

Some of the tax hikes in recent years include:
no indexing of tax brackets since tax year 2002 (about $12 million annually)
cable and satellite TV excise tax (about $22 million annually)
property tax for K-3 reading program (about $12 million annually)
numerous fee increases

Last year, the legislature reduced corporate income taxes by $7 million by enacting an electable double-weighted sales factor for corporate income apportionment.

But what about Spending Needs?

Due to the growing economy, taxes can be reduced while increasing education and transportation
spending. Policymakers need to take a long term approach to Utah’s education and transportation needs. Adequately funding critical needs is contingent upon a growing economy which generates additional tax revenue, and high tax burdens reduce long term economic growth.

Is Revenue Growth Sustainable?

Some observers say we shouldn’t cut taxes because another recession could be just around the corner. A lot of discussion has occurred regarding the inverted yield curve and whether or not the current inversion indicates that a recession is approaching. While the inverted yield curve has presaged recessions, it has also signaled at least two false alarms. As the Wall Street Journal pointed out, “Not everyone believes a flat or inverted yield curve carries the same weight it once did. Foreign appetite for U.S. debt, particularly long-term bonds, has kept rates low and actually helped to stimulate economic growth in the U.S., optimists argue.”

Additionally, skeptics have argued that previous inverted yield curves have occurred at higher interest rates. According to the Wall Street Journal, “when the curve inverted in 2000, rates were about 6%, which is more restrictive on economic growth. ‘It seems astounding that anyone thinks that a 4.5% interest rate is enough to cripple this economy that has survived all kinds of battles,’ [Timothy Rogers of] said.”