State Budgets

Utah State of the State: Acting Today with the Future in Mind

For the 11th consecutive year, Utah ranks number 1 in Rich States, Poor States economic outlook.

“Our state is healthy, growing, and successful,” proclaimed Utah Governor Gary Herbert in his State of the State Address. Indeed, for the 11th consecutive year, Utah ranks number 1 in Rich States, Poor States economic outlook. Unlike dozens of other states, government shutdowns are unheard of in Utah. The governor noted that in 2017, the legislature managed to pass 500 bills along with a balanced budget in a 45 day session. “By every meaningful metric, the state of Utah is truly exceptional,” glowed the governor. Few details of legislative priorities were given based on the belief that “we already know what we need to be doing…” However, his opening remarks hinted at his goals regarding education spending, infrastructure, and tax reform.

Specifically in his address, the governor mentioned the need to “prioritize [education] funding and standards.” Education funding for the following school year will increase $292 million thanks to the budget passed weeks later. The governor also asked legislators to “think proactively about infrastructure so that we maintain what we build, so that users pay their fair share, and so that we are investing in the future…”

The governor expressed hope that the tax reform bill sponsored by Senate President Wayne Niederhauser “will have meaningful impacts on the state not only today—but will lay a foundation for the success and well-being of our children and grandchildren.” Legislation signed into law just weeks later seemed to mirror his intent.

One important aspect of this reform was transferring much of the state revenue windfall resulting from the federal tax reform back to taxpayers. Utah expected up to $80 million in additional revenue in 2018 alone due to federal tax code changes. Federal tax reform shrank or eliminated many deductions and the federal personal exemption, in exchange for lower tax rates. Because state taxable income calculations are based largely on adjusted gross income or federal taxable income, these federal changes often translate into a larger state income tax collections even without a state rate increase. The tax reform legislation signed into law weeks later addressed this problem by reducing the individual and corporate income tax rates by 0.05 percent. This cut represents nearly $84 million in tax revenue, more than covering the windfall amount from federal reforms.

Unfortunately, the tax legislation also included provisions meant to ensure longer term revenue increases. A provision signed into law by the governor instituted a statewide property tax rate levy floor of 0.0016 is for five years. Thanks to “Truth-in-Taxation” in Utah, if a taxing entity desires more revenue from its property base, public notice and hearings are required along with a vote by the corresponding legislative body.  Absent this process, property tax rates decline as property valuations increase, ensuring property tax revenue remains constant. This ensures that the property tax burden does not expand simply as a result of inflationary increases in property values. Blocking property rates from falling below this arbitrary rate is a subtle tax increase of more than $125.6 million in revenue by 2023.

With the governor’s support, the legislature placed a 10 cent gas tax increase indexed for inflation on the November 2018 ballot. This is expected to generate $170 million in new revenue to the Transportation Fund in the first year. Of this $170 million, “Thirty percent would be dedicated to local roads and the remaining 70 percent would be used to offset an equivalent cut in funding for transportation that would then go toward education.” Of important note, the legislature placed this measure on the ballot in order to keep a much larger tax increase proposal from appearing on the ballot.

Lastly in relation to tax reform, the governor stressed the importance of keeping “tax rates low and revenue reliable by broadening the base.” The governor held true to this economic principle by opposing efforts to eliminate the sales tax on food while raising the overall sales tax. Although potentially politically advantageous, shrinking the sales tax base sets a poor precedent for the future. Each segment of the economy securing favored tax treatment results in higher taxes elsewhere.

Economic opportunities within the state are allowing parents, children, and grandchildren to remain geographically close to one another. As an example, the governor’s six adult children—and their 15 children—have all placed roots within half an hour’s drive of one another. “What is most important for our prosperity and our well-being, today and 100 years from now, is a strong culture of work, self-reliance, shared responsibility, and mutual respect. This unique culture is not just about rugged individualism,” explained the governor.

Even with the modest changes to property taxes and a possible increase in the gas tax, Utah’s overall pro-business status remains unrivaled. Economic growth and jobs growth over 10 years are 5th highest and 3rd highest, respectively. Perhaps Utah has indeed “become that shining city on a hill for our 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…

+ State Budgets In Depth