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Wednesday, March 29, 2006 Taxes / Revenue Forecast   Volume 2 Issue 4  
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Income Tax Reform and 2nd Substitute SB 242
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Income Tax Reform and 2nd Substitute SB 242
Things we would like to know...
by Sandy Peck, Executive Director, League of Women Voters

The League of Women Voters has followed tax policy for many years. We also have supported adequate funding for quality education. Since all income tax revenue goes to education, we have been especially interested in Governor Olene Walker’s study group recommendation in 2004 to broaden the income tax base and lower rates to provide stability and flexibility for future needs, needs that are growing rapidly due to a burgeoning school age population.
 
Tax rates, tax bases, economic development and education
The Walker group expressed a particular concern that the income tax base is decreasing by 1.4% a year. This was puzzling, so we’d like to know...
 
If the population and the economy are growing, why is the income tax base going down 1.4% a year?
 
The Walker group, Governor Huntsman, and some legislators on the Tax Reform Task Force have said the income tax base is decreasing because our top income tax rate of 7% is too high. It discourages new businesses who would broaden the tax base from coming to Utah. So we would like to know...
 
Do we have data to tell us how many new businesses would choose to locate in Utah and how much the tax base would be increased by lowering the top rate from 7% to 5% or 4.95%? Would the growth make up for the education revenue lost using the lower rate?

We have several reasons for asking. Our current 7% rate seems fairly competitive with those in other states (Arizona, 5.04, California 9.3, Idaho 7.8, Montana 6.9, and Oregon 9.0). Nevada and Wyoming have no income tax. Colorado’s rate of 4.63 is apparently not financially sound.
 
We also wonder how important the 4.95% rate would be to CEO decision-making. Last July, the Utah Education Association invited Richard G. Sims, President of the Sierra Institute on Applied Economics, to speak to the Revenue and Taxation Interim Committee. He pointed out that 48% of total business costs go to labor and only 0.27% to business taxes. This indicates that a well educated and well trained labor force is likely to weigh more heavily in business location decisions.
 
When the League studied education and economic development 18 years ago, we found important factors in economic development were an educated labor force, employee training and retraining capabilities, university research and development, technology transfer, and good elementary and secondary schools for employees’ children. We expect these factors are still important and know that state policy makers are aware of them. The question is. . .
 
What are the relative effects of marginal tax rates vs. the quality of our public education system on economic growth?
 
Revenue stability
The Walker group endorsed the lower marginal tax rate not only to attract business but to create a more stable revenue flow that would not vary more than the ups and downs of the economy. This stability would make budget management easier. However, as Rep. James Ferrin asked during the March 1 House debate of SB 242, do we want stability in a growing economy? He pointed out that the Uniform School Fund would grow more slowly, collecting less money for education. Our questions are...
 
Couldn’t we use tools for stability we already have such as Rainy Day funds and judicious use of general obligation bonds instead of lowering the tax rate? Isn’t increasing revenue for education as quickly as possible a major goal of income tax reform?
 
Expanding the base by eliminating exemptions
During the March 1 House floor debate (which I highly recommend listening to at le.utah.org) it was very clear that a major obstacle to passing SB 242 is the proposed elimination of virtually all current tax exemptions except credits for charitable deductions and home ownership. Legislators said they wanted to keep exemptions for retirement income (claimed on 81,000 returns) higher education savings accounts, medical expenses, adoption expenses, special needs adoptions, motor fuel used by agriculture, half of federal tax paid (claimed on 605,000 returns), and check-offs for contributions to political parties, the homeless and others. Altogether there are at least 20 tax breaks in current law, but their loss was not discussed much in task force meetings, perhaps in hopes of avoiding controversy. Our question is. . .
 
Should some exemptions be preserved for their social policy value and what would the tradeoffs be in terms of a higher top rate and administrative efficiency?
 
Tax fairness
Since SB 242 is considered not “flat” but “flatter” we believe it has some progressive elements. We would like to know...
 
Is subsistence income protected for low-income taxpayers by a floor and indexing?
What would the tax burden be for households at various income levels, expressed as the percent of income spent on all state taxes? Is it at least proportional, even if not progressive?
 
Revenue neutrality
The original intent of tax reformers was revenue neutrality. But SB 242 would provide a $65 million tax cut in the first full fiscal year after it took effect. It would seem more productive to spend that amount on education initiatives such as smaller class size and full-day voluntary kindergarten. We would like to know...
 
Why did lawmakers decide to incorporate tax cuts instead of keeping reforms revenue neutral?
 
Maybe this question should be multiple choice: a) revenue surpluses (b) its an election year c) make-up for loss of treasured exemptions or (d) all of the above.
 
We look forward to a better understanding of tax reform before the special session convenes.
 

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