State Budgets

State of the State: Utah

Governor Herbert exhibits a steadfast zeal to maintain the trifecta of fiscal responsibility, a sensible regulatory environment and low income tax rates.

During his State of the State address, Utah Governor Gary Herbert reflected on the economic success story of the Beehive State. “Utah had one of the fastest growing technology sectors in the nation, and Utah businesses added more than 43,000 jobs to our economy,” declared the governor. Despite the state’s 4th place economic performance and 1st place economic outlook ranking in the 10th annual ALEC report Rich States, Poor States, the governor showed no signs of complacency. In fact, he placed renewed emphasis on education reform and tax reform.

The governor cautioned against “altering our tax policies in any way that could damage our robust economic engine.” He also advised the “best way to ensure ongoing growth of education funding is to continue to grow our economy. Failure to take into account how tax rates affect business investment won’t help us make good policy decisions.” Indeed, the relatively low top marginal personal and corporate income tax rates (18th and 11th lowest, respectively) are partly responsible for Utah holding the top economic outlook for 10 consecutive years.

At the same, the governor recognized a flaw in the current system—the narrowing tax revenue base. Much of this narrowing is due to tax carve-outs, deductions and loopholes created to favor particular businesses or special interests. “I also urge a thorough legislative review of each and every tax exemption and tax credit to examine whether it has outlived its usefulness. That means making our taxes fairer by eliminating loopholes and broadening the base,” said Governor Herbert.

As an example of tax favoritism, consider the rising number of sales tax exemptions in Utah (rising from 48 in 1997 to 89 currently) or the tripling in income tax credits from 12 to 38. Such an emphasis on expanding the tax base while maintaining low rates (or enacting further reductions) will spread the stability of the state’s “diversified revenue policy” and the booming job market.

Unfortunately, the governor outlined his desire to require out-of-state online retailers with no physical presence in Utah to collect and remit sales taxes on purchases made by Utah consumers. “We all know that Congress needs to resolve the issue of how to effectively collect our owed but unpaid use tax. But if Congress won’t do its job, then you, the legislature, must act to provide our own state solution,” threatened Governor Herbert. Demanding retailers with no “substantial [physical] nexus” collect sales tax on behalf of the state runs contrary to the Commerce Clause of the United States Constitution as interpreted by the Supreme Court in Quill Corp. v. North Dakota. And even if this precedent were overturned, other states could likewise burden Utah businesses with similar tax collection demands. Under that scenario, Utah businesses with remote transactions across the 49 states could face a daunting patchwork of nearly 10,000 taxing jurisdictions.

The bottom line: broadening the base and eliminating loopholes are positives for growth. But expanding tax collection powers across state lines is not.

One area of tax preferences still enjoying bipartisan support is the Rural Partnership Board. The governor committed to working through this entity to help create “25,000 new jobs in the 25 counties off the Wasatch Front over the next four years.” The Rural Partnership Board (RPB) is part of the Utah Governor’s Office of Economic Development (GOED) which redirects taxpayer dollars to favored businesses through items such as a film tax credits, tax-exempt bonding authority for politically favored construction projects such as residential housing and qualified redevelopment projects. Other incentives classified as corporate recruitment were showered on 13 companies last year.  Thanks to the Technology and Life Science Economic Act, the GOED can now dispense tax favors (through a program administered by the RPB) to certain life science investors approved by the office. These credits may reach $350,000 in just one year for an individual investment approved by the state. The favoritism of the RPB and GOED stands in marked contrast to the otherwise free-market oriented policies in Utah.

As a whole, Governor Herbert’s address indicated a steadfast zeal to maintain the trifecta of fiscal responsibility, a sensible regulatory environment and low-income tax rates. And he expressed a willingness to lead the way “to reinvigorate principled federalism that will allow us to apply Utah solutions to Utah challenges.” With this warm embrace of limited government and economic freedom, Utah’s outlook is almost certain to remain the envy of the nation.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

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