Tuesday, April 15th, 2003

RE: Indexing State Income Tax Brackets and a Federal Bailout of the States
CONTACT: Mike Jerman, Vice President, 972-8814 or 808-8814 (cell)

State Lawmakers Need to Adjust State Income Tax Brackets for Inflation; Federal Lawmakers Should Not Bail Out State Governments

Today, April 15th marks the deadline for payment of state and local income taxes. On this occasion, the Taxpayers Association would like to call attention to two pressing issues:

1. State lawmakers need to adjust state income tax brackets to account for inflation

2. Federal lawmakers should not bail out state governments

Indexing State Income Tax Brackets

According to a study issued recently by the Taxpayers Association, Utah’s state and local tax burden as a percent of personal income increased 1.4% and is now 9th highest in the nation, up from 10th highest in the previous year and up from 17th highest in 1993. “Several factors impact Utah’s tax burden, including age demographics, but the state’s refusal to index income tax brackets for inflation also plays a major role”, said Mike Jerman, vice president of the Utah Taxpayers Association. “Every year, Utah taxpayers are hit with a $4 million tax increase because state income tax brackets are not indexed for inflation”.

“State income taxes are 24% higher in Utah than the national average because of outdated tax brackets, not excessively high rates. Utah’s highest marginal tax rate, 7%, is comparable to the highest rate in other states, but our highest rate kicks in at lower income levels. In Utah, a married couple pays the highest rate on taxable income above $8,626 while residents in other states do not pay the highest rate unless their taxable income exceeds $65,000”, Jerman added.

Failure to index tax brackets for inflation impacts lower and middle income taxpayers the hardest. “A Utahn with a taxable income of $14,000 will experience a 4% increase in state income taxes for a 3% increase in wages”, Jerman commented.

During tough fiscal times, indexing tax brackets is a tough sell. However, once the economy begins to recover, indexing tax brackets should be the first tax reform that the Utah legislature implements.

Bailing Out State Governments

State governments are facing fiscal problems nationwide, and pressure is being exerted on the U.S. Congress to have the federal government bail out the states. The Utah Taxpayers Association opposes such plans. The case against a federal bailout of the states is compelling:

1. The federal government cannot afford to bailout the states. The federal government is already running a huge deficit at nearly 3% of GDP and a huge debt at more than 60% of GDP. In FY2001, 10% of federal revenues were used to pay debt interest and another 6% was used to pay debt principal.

2. Most of the states’ fiscal pain is self-inflicted, not due to declining revenues. Nationwide, state spending growth increased by 86% from 1990 to 2001, well in excess of inflation and population growth. Federal spending by contrast increased at 49%. Even after adjusting for inflation and population growth, state spending nationwide increased by 20%.

3. Excessive state spending occurred at a time when overall poverty rates as well as child poverty rates decreased, which should have reduced the demand for government services.

4. Bailing out the states will encourage long-term fiscal irresponsibility and would punish frugal states while benefiting states that would not control their expenditures.

5. A federal bailout increases the federal government’s role as middleman between state taxpayers and state government. In addition to increasing inefficiencies by having the feds impose taxes on state residents and then transferring these revenues back to the states, states should take a larger role in determining how they handle their own problems.

6. If the federal government bails out the states, Utah will be on the losing end compared to other states. Utah receives less federal dollars for social programs per capita than other states due to Utah’s low poverty rate.

7. By every measure, Utah state government spending has exceeded inflation and population growth. Adjusted for inflation and population growth, Utah’s total spending (general fund, uniform school fund, and transportation fund) increased by 25% from 1990 to 2001.

8. States are already excessively dependent upon federal dollars. Nearly 25% of Utah state government’s total revenues are from the federal government.

“Federal and state governments must focus on the long term concerns of economic growth, fiscally sound government, and the importance of personal responsibility”, Jerman said. “The budget debate focuses on the short-term needs of children and the indigent, but the debate must also consider the ability of these children to pay for the government that they will inherit”, Jerman concluded.