February 28, 2006
Special Legislative Edition
February 23, 2006
January 30, 2006
December 12, 2005
Elections and Voting
October 26, 2005
Comprehensive School Reform
September 28, 2005
Impacts of a Minimum Wage Increase
August 30, 2005
July 18, 2005
The Aging Face of Utah
June 2, 2005
NCLB v. UPASS
April 29, 2005
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...
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...
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
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. . .
are the relative effects of marginal tax rates vs. the quality of our public
education system on economic growth?
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...
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. . .
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?
Since SB 242 is considered not “flat” but
“flatter” we believe it has some progressive elements. We would like to know...
subsistence income protected for low-income taxpayers by a floor and indexing?
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?
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...
did lawmakers decide to incorporate tax cuts instead of keeping reforms revenue
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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