by Howard Stephenson

Recently a proposal has surfaced to require the governor to include a “tax expenditure” report in his annual budget. At first blush it seems like a good idea, but under closer scrutiny it is clearly an attempt by the spending lobby to pit individual taxpayers against businesses and create sympathy for higher taxes.

State Senator Scott McCoy has proposed a piece of legislation entitled, “Disclosure of Tax Expenditures in Governor’s Budget.” The bill would require the governor to submit a tax expenditure report each year that details information about the amount and nature of money which is not taken from taxpayers, called tax expenditures.  “Tax Expenditures” are defined in the proposal as “. . . any state law that exempts, in whole or in part, certain persons, entities, income, industries, goods, services, or property from the impact of established taxes.” Tax expenditures include deductions, exclusions, tax subtractions, tax exemptions, tax deferrals, preferential tax rates, and tax credits.

Supported by Utah Issues, Senator McCoy says the proposal would provide greater transparency in budgeting while improving openness in government.

What the bill would really do, in my opinion, is to attempt to show that anything excluded from the tax base is somehow a giveaway or special preference – that government has given a special benefit by not drawing anything and everything into the tax base. Over time, this repeated attention would give the spenders more opportunities to find a tax exclusion ripe for the picking, coincidentally providing revenues for their pet spending program.

Tax expenditure budgeting is a popular proposal from the spending lobby in most states to supposedly provide “protection of the tax base.”  However, it begins with the false premise that government deserves a bigger tax base than it currently has.  In other words, government owns everything, and we ought to feel lucky that it allows us to keep what’s left after taxes.

There are some areas where government gives tax exemptions or appropriates money for some at the expense of their competitors such as RDAs, credit unions, “non-profit” hospitals, and government entities which compete with the private sector, tax free.   I would support an annual report on these, but a full-fledged tax expenditure report would actually be harmful to Utah’s economic expansion, giving the idea that all exemptions are at risk and business may be threatened at every turn.

Another problem is deciding where to draw the line and how to define exemptions, deductions, exclusions, and the like.  The total figure could actually be larger than all the taxes collected at all levels.  Instead of the governor presenting a $9 billion budget, under the McCoy plan he would be presenting a $20 billion or $40 billion budget, most of it made up of “tax expenditures” for exemptions from the tax base, including, conceivably, the tax exclusion on the air we breathe.

This concept has been rejected by the legislature in past years.   It should be rejected again.

Questions about tax expenditure accounting

Utah Taxpayers Association Vice President Mike Jerman proposed several questions about the McCoy proposal which point out how futile this effort could be, if enacted:

1. Would the report include the 45% primary residential exemption in the list of tax expenditures? The primary residential exemption is by far the largest single tax exemption in Utah. If the primary residential exemption were removed and local property tax rates were not reduced, the value of the exemption would be $663 million per year. If the exemption were removed and rates were lowered so that local governments did not receive a revenue windfall, the value of the exemption would be $218 million per year.

2. Would the report include exemptions and deductions on the state individual income tax, such as mortgage interest deductions, charitable contributions, and dependent/personal exemptions? Assuming a 5% effective rate, the impacts (FY2003) are as follows:

Mortgage interest: $149 million
Charitable contributions: $105 million
Personal/dependent exemptions: $237 million

These numbers would be 40% higher if the top marginal rate of 7% were used. Of course, these numbers change dramatically if a “flatter” income tax is adopted. If the proposed 2.5% credit (50% x 5% = 2.5%) for mortgage interest and charitable contributions becomes law, the amount of this credit would surpass $126 million per year.

3. If the sales tax on food were removed this would add to tax expenditure report $160 million at the state level and $66 million at the local level.

4. Would the list include exclusions, such as the exclusion of medical services from sales taxes and exclusion of charitable and religious property from property taxes? Legally, there are differences between exclusions and exemptions, but economically they are the same.

5. If the flat/flatter tax is approved, would deductions targeted towards low and middle class households be included in the report?

6. Would there be a separate line item for corporate income, sales tax, and property tax exemptions/exclusions for government-owned entities that compete against the private sector, like fitness centers, golf courses, UTOPIA, IProvo, and city power systems?

7. Household personal property is exempt from property taxes, largely due to the complications involved with enforcement and compliance. Nevertheless, business personal property is subject to tax even though compliance and enforcement is difficult. Computers, refrigerators, cell phones, etc. are subject to property tax if owned by businesses but are exempt if owned by households. Should non-vehicular household personal property be listed on the tax expenditure report, even though this would require some guess work? Every year, Utah businesses pay more than $100 million in personal property taxes.

8. Would the tax expenditure report include the property tax exemption on property owned by government, religious, and charitable organizations? How would these values be determined? Since the federal government owns approximately 70% of the land in Utah, this exemption could amount to billions in annual exemptions.