The state of Utah spent $2.3 billion in FY2007 on programs targeted for low-income and disadvantaged households and individuals, according to the Legislative Fiscal Analyst’s first annual Government Assistance Expenditure Report. This accounts for almost 21% of state expenditures.
Last year, Rep. Mike Morley (R-Spanish Fork) sponsored HB89, which requires the Legislative Fiscal Analyst to issue an annual report on state-level expenditures targeted for low-income households. The idea originated with the Utah Taxpayers Association as an effort to achieve greater transparency in spending tax dollars.
Prior to passage of HB89, determining how much the state spends on various types of welfare was difficult since these expenditures are scattered through so many different departments and agencies. Rep. Morley sponsored the bill because taxpayers and policy makers deserve to know how much is being spent on programs for low-income households. The annual report will allow legislators and taxpayers to monitor the growth in these programs. The accompanying chart summarizes revenue sources and expenditures.
Federal funds accounted for the largest single share (70%) of total revenue sources, and the Utah Department of Health accounted for the largest single share (65%) of expenditures. Medicaid expenditures are by far the largest single group, followed by Food Stamps.
But isn’t most of this just federal money?
Too many state and local leaders look at federal money as “free” money, and argue that if Utah’s state and local governments don’t spend the money, other states will. There are at least two problems with this perspective. First, Utahns pay federal taxes just like other Americans and therefore are interested in making sure federal taxes are spent efficiently. Second, one of the biggest threats to Utahns’ prosperity is the massive federal deficit, which will probably only get worse as baby boomers retire.
What about a tax expenditure report?
Some legislators and organizations wanted to include a “tax expenditure report” as part of the Government Assistance Expenditure Report. A tax expenditure report would list all tax deductions, exclusions, credits, and exemptions. Spending groups argue that tax exemptions, credits, deductions, and exclusions are really forms of government expenditures. In other words, if government lets taxpayers keep more of their own money by exempting 45% of a primary residence valuation from property tax, this is really a government expenditure targeted to homeowners.
While a summary of tax base reductions is not a bad idea (the Tax Commission already lists most exemptions in its various reports), and while some tax base reductions are not easily justified, equating tax exemptions with government expenditures is problematic.
First, reductions in the tax base such as deductions, credits, exclusions, and exemptions are offset by increases in tax rates. While tax rates may not immediately increase as exemptions are granted, in the long run government usually raises rates to offset the reduction in revenue. That’s why the biggest tax reform mantra is “expanding the base and lowering the rates.”
Second, most exemptions and deductions allow individuals and businesses the discretion to spend their money how they want, whether it means buying a bigger house and getting a larger property tax break in absolute dollar amounts, or spending more on charitable contributions and getting a bigger income tax break. (Of course, they could do both.) Individual taxpayers would lose this discretion if these exemptions were eliminated and government spent the difference, which could explain some of the motivation behind the tax expenditure report in the first place.
While some of these exemptions negatively distort economic decision making or do not promote economic growth as well as an overall rate reduction would, the discretion of taxpayers to spend dollars due to tax exemptions clearly disqualifies these dollars as government expenditures.
The Utah Taxpayers Association generally supported broad tax bases (and lower tax rates), but they’ve never argued that reductions in tax bases are the same as if the state had actually spent these dollars directly on government programs. By lowering tax rates and broadening bases, taxpayers continue to have the freedom to spend their money as they see fit.