by Howard Stephenson

State budget makers have not worried much about Utah’s spending limitation–until now.

According to recent figures from the Governor’s Office of Planning and Budget and the Legislative Fiscal Analyst, non-exempt state appropriations for FY2006 were just $50.4 million below the statutory limit. Non-exempt appropriations for the current fiscal year, FY2007, are only $20 million below the limit, which could prove to be a serious challenge when the Legislature meets in January 2007 to approve supplemental appropriations for FY2007. Your Taxpayers Association has been monitoring policy maker’s chatter which indicates there will be a serious effort to weaken the spending limit next January.

Utah ’s state appropriations limitation law (63-38c-101 to 205) was strengthened by passage of HB66 (Hughes) in the 2004 General Session. HB66 passed overwhelmingly, 48-17-10 in the House and 18-5-6 in the Senate. At the time, HB66 was seen as being more symbolic than substantive since large amounts of state spending were exempt from the cap and because non-exempt state expenditures for FY2004 were $150 million below the limit.

How is spending capacity calculated?

Spending capacity is determined by calculating the spending limit and then subtracting non-exempt general fund and education fund expenditures, and expenditures from federal sources, gas taxes, and other sources outside of education and general funds are exempt from the calculation.

The spending limit is calculated by multiplying base year non-exempt expenditures inflation and population growth.

Non-exempt expenditures are calculated by starting with total general fund expenditures and subtracting general fund expenditures for Transportation Investment Fund, Centennial Highway Fund, Debt service, Revenue bond debt service, One-time capital, and Emergency expenditures, Adding school fund expenditures for Higher education operations, One-time capital improvements.

The following expenditures from education funds are excluded:  Public education operations and capital, one-time capital for higher education, debt service, commerce and revenue (Tax Commission)

Is this what Rep. Hughes had in mind?

Contrary to the interpretation of state number crunchers, Representative Hughes said he intended for all transportation expenditures to be exempt but did not intend for one time capital projects like university buildings to be exempt.

How does Utah’s spending limit compare to Colorado’s TABOR?

Utah ’s spending limit is much weaker than Colorado’s original TABOR law, which itself was recently weakened. Utah’s spending limit exempts all state public education expenditures, most transportation capital expenditures, and “one-time” capital projects. Moreover, Utah’s spending limit does not have a “ratchet down” effect like Colorado’s original TABOR. In contrast to Colorado’s TABOR, Utah’s spending limit is based on inflation and population growth relative to a fixed year (1985). The TABOR limit, on the other hand, was recalculated every year based on the previous year’s revenue. If revenue decreased during a recession, the spending limits for future years are impacted.

Why is the state so close to the limit?

Government revenues have grown rapidly in the past ten years.  While annualized population and inflation increased 5.2% corporate income taxes increased 8.3%, individual income taxes 7.2%, gas taxes 5.2%, and state sales taxes 5.1%.  The total annualized growth in the four major state taxes increased 6.2%, a full percentage point higher than the combined population and inflation growth.  Over the years this kind of disparity has lead to bumping up to the cap.

Are inflation and population growth good standards for measuring government growth?

The spending lobby argues that government growth should not be restricted to inflation and population growth, maintaining that government is “different” than the private sector.

The consumer price index is a broad economic measure that is driven by hundreds of thousands of domestic and foreign producers that have challenges of their own. General inflation impacts all producers and all producers impact inflation. Opponents of inflation measures in education are basically arguing that the private sector should be expected to be more productive on a cost basis but government in general and education in particular should not be expected to achieve consistent productivity gains.

Moreover, the spending lobby has been telling taxpayers for years that spending tax dollars on various government programs “pays for itself several times over” by reducing future government costs or promoting economic development. If these claims are true, and undoubtedly some are, then government expenditures should be increasing at a lower rate than inflation and population growth.

Taxpayers should prepare for a wild session

The 2007 session of the Utah Legislature is sure to see some fireworks about the spending cap.  There are already those loyal to the spending lobby who are conniving to prepare ways of getting around the limit by defining many expenditures in the exempt categories such as education and transportation.  But lawmakers must be careful and not violate the spending law as was done in the state of Washington recently.

The Utah Legislature will be coming into special session on September 20 and cut income taxes by a modest $70 million.  If the spending cap is left intact in the General Session more taxes will need to be trimmed.  If Oklahoma, whose population is about one million or 50% larger than Utah can cut taxes by $600 million, surely we can do better than $70 million.