Remember as a kid when 25¢ would “burn a hole” in your jeans’ pocket?  Growing up about a mile from the local Drug Store was hard for me as a youngster.  Every time I earned a quarter, a dime, or a nickel for that matter, I had to rush off to the Drug Store to buy some penny candy.  Having $355.5 million “extra” bucks in our state’s pocket is not unlike my experience as a kid growing up near the Drug Store.  When the money’s in the pocket, that ol’ sweet tooth starts a hollerin’.

It’s always a good exercise in fiscal responsibility for the State Legislature to ask the question “what do we do with a huge, under-estimated budget surplus?”

Legislative leaders have spent the last couple of weeks since the new budget surplus numbers have been posted wondering which fiscal direction to take the state.  Statutory spending limits imposed by a former Legislature force all but about $12 million of the “extra” $355.5 million into transportation, education or tax reform/cuts. Rep. Greg Hughes (R-Draper), sponsor of the State Spending Limitations bill (HB66, 3^rd Substitute, 2004 General Session), believes that how Legislators deal with the large budget surplus “might reveal the true nature of those in both political parties on fiscal responsibility.”  A tough position to be in during an election year.

Understandably, Kim Burningham of the State Board of Education, knows about the state’s spending limitations and wants that surplus money to go toward Public Education—that’s what Kim does, it’s his job, he fights for Public Ed.  By the end of the 2006 General Session, the State Legislature funded Public Education at $3,013,184,025.00.  (FY07 State Funds were $2,148,309,745.00 representing a state funded increase of 12.8%.  Also, Public Ed weighed in at 43.47% of the total State Funds of $4,942,541,645.00.)   It doesn’t sound like nearly enough.

Spending is tempting, especially when you’re a kid; however, one of the issues constantly debated on the floor of both houses is the sustainability of on-going revenues.  It’s easy to get in a pattern where you spend (or earmark) every dollar that comes through the door.  But spending every dime on government growth isn’t good fiscal policy and is bound to create a problem when the economy slows.  Economic cycles are inevitable.  Current revenue forecasts look good today–just like they did in early 2000 right before the bottom dropped out.  Severe budget cuts for the following three years caused a lot of bureaucratic heartache.

An Electable Personal Income Tax System

Governor Jon Huntsman, Jr. spoke to State School Board officials, encouraging board members to consider the economic benefit to Public Education with the dual-tax reform plan, which includes two components.  First, the current system remains intact and becomes one of two optional methods of tax payment for state residents.  Second, is the “flatter” tax sub-system.  By requiring the taxpayer to calculate a simple percentage of their federal adjusted gross income (eliminating state exemptions), individuals need do nothing more than sign the form and place a 39¢ stamp on the envelope and send the form to the Tax Commission.  Voila!  The taxpayer would have the option of using one system or the other from year to year.  The taxpayer would assumedly choose the system requiring the lowest amount of tax to be paid (this, of course, would be your choice).  The immediate result would be the injection of money into the economy requiring additional labor, creating additional jobs, thereby, creating more personal income.  The result would be higher paid wage earners paying more Personal Income Tax which is the major source of Public Education Funding.  The evidence of this is shown in the current TC-23 where our current Personal Income Tax surplus is $162 million.  We have seen the success of this concept with the Bush Tax Cut a couple years back.  It didn’t take me long to reinfuse my refund money back into the private sector.   State School Board members seem to be warming up to the idea.   

The climate is just right for such tax policy reform.  The Legislature should encourage the Governor to call a Special Session in the early Fall to consider the benefits of implementing the Dual Tax or Electable Personal Income Tax System, as it has come to be called.  When the plan was introduced to the Revenue and Tax Interim Committee there was wide spread consensus, save a few.  The Tax Commission, The Governor’s Office, everyone seemed to be on board with the simplistic, realistic approach the dual system offered.  Following a comprehensive presentation by Legislative Staff, Rep. John Dougall, and a Public Comment period, it became apparent this was a tax reform package with broad bi-partisan legislative and citizen support.

A Little History

The House Conservative Caucus (about 25 House Representatives), of which I am the Vice-Chair (and co-founder), took a position back in January to support an approximately $378 million tax cut for this year (the number is approximate because we only had speculative figures from the Tax Commission at the time and the Caucus formulae was based on 5.5% growth for population and inflation–ththis represents the normal year-to-year, budget growth rate of the state).

Before we got too far down the 2006 Session road, however, it became apparent that the Tax Reform Task Force was pushing for between $270 and $290 million in reform/cuts across the board.  Believing greater consensus could be achieved among the Legislature as a whole by joining the Task Force position, the House Conservative Caucus voted again and took a position of total tax reform/cuts between $270 – $290 million.  In February, House leadership during a House Republican Caucus meeting conceded to Senate pressure and encouraged the caucus to settle on $160 million in tax reform/cuts (i.e. $70 million in Sales Tax, $70 million in Personal Income Tax, and $20 million in Corporate/Franchise Tax).  Even though the House Republican Caucus voted to support the $160 million package, the House Conservative Caucus never reversed its consensus opinion from $270 – $290 million.  To this day the $70 million earmarked for the H3 “Flatter Tax” Plan (or for the Top-Marginal Rate Plan, which ever plan you prefer) still sits on the table waiting to be returned to its guaranteed location—the taxpayers’ pockets.  (This, of course, is all hypothetical because these revenues are projections—funny money.)

Here are the current numbers as I understand them:  The $70 million dollars from the 2006 General Session (a portion of the $1.17 billion surplus) is still sitting on the table.  The $70 million is a separate figure from the new $355.5 million and should be considered independently as the $70 million is already earmarked by the House, the Senate, and the Governor’s office for Personal Income Tax Reform/Cut.  However, while considering the following proposal, for the purposes of illustration, we will combine the $70 million and the new surplus $355.5 million to divvy up between the various Reform “Pots” for a grand total of $425.5 million.

THE F4 PLAN   (Four is always better than three—right?!)

1^st Element of Reform– The TC-23 report (Twelve Months FY2005-06) clearly shows the greatest growth in revenues comes from Individual Income Tax ($162.63 million or 17.8% above 2/13/06 Consensus projections) and Corporate Franchise Tax ($113.52 million or a whopping 85.6% above 2/13/06 Consensus projections).  A total of $276.15 million representing 77.68% of the total new surplus.

While individuals and families are strapped with a greater financial burden by government, many are unable to maintain their current obligations.  The state continues to exhibit its insatiable appetite for personal tax dollars .  Traditionally, total tax obligations (Personal Income Tax, Sales Tax, Personal Property Tax, Fuel Taxes, Educational Taxes and Fees, and on and on…) increase at a faster rate than personal income rates.  And, Utah’s personal tax burden is one of the highest in the US.

Also, exorbitant amounts of tax revenue are being extracted from the business arena and manufacturing industries.  Unfortunately, one of the “unintended” consequences of removing this kind of surplus revenue from business and manufacturing is the government potentially removes the potential for better paying jobs and better benefits packages in the private sector.  Reinvestment in capital is also stifled.

Relief Now

In part, The Legislature and the Governor need to follow through with their original commitment to return the money to the taxpayers.  Whoooosh!  $70 million off the table–that was easy!

I would prefer to see the Legislature accomplish this by lowering the top marginal rate (calculated at approximately $33 million per one-tenth of one percent.)  from 7%  to 6.8%.  But that’s livin’ in a dream world.  The problem with that approach is the Governor already told the Legislature he’d veto the Top Marginal Rate Plan with a big stick (my analogy, not his).

In lieu of my delusion, I suggest implementing the $113 million (or $115 million, depending who you are or what day it is—and includes the $70 million) Electable Personal Income Tax Plan as explained in the Revenue and Taxation Interim Committee on July 19^th.  Simple and almost too good to be true.  As Representative Dougall explained in his presentation, with the two pronged approach, “ nobody loses using [the dual-Personal Income Tax] system.”   Options, choice, election—these are all concepts I can support, at least for now!

$425.5 million minus $113 million equals a $312.5 million balance.

2^nd Element of Reform—The Utah business community got hit hard last year when it came to corporate taxation.  And, this is not just big business–small business, too.  The entrepreneur.  The small vendor.  Your mom, your dad, your brother, your uncle, your neighbors—people—you.  The legislature gave back $20 million “surplus” dollars to industry during the 2006 General Session.  In my opinion, that means we took more than we needed.  I guess that means if we didn’t need the $20 million, we don’t need the $113.52 million extra we took from them.  If the state needed it we would have taken it and spent it—right?!  (This argument could be applied to each of the four elements.)   I’m wondering how many jobs are lost when the Legislature takes all those monetary resources out of the private sector, and maybe not so much the loss of jobs (as we have an incredibly low rate of unemployment right now—about 3.4%), but, maybe, the increases in living-wage jobs or reinvestment in technology and/or capital.  Just think of the possibilities if we reinvest it!

$312.5 million minus $113.52 million equals $198.98 million.

3^rd Element of Reform—Since there seems to be a surplus in State Sales Tax let’s remove another approximately 1.5% of the state’s portion of the Sales Tax on Food.  (Tinkering with just the State’s portion should keep ULCT happy.) The TC-23 Report shows an extra $56.94 million more than we had anticipated collecting in Sales Tax.  $70 million gave us 2% (the amount we removed during the 2006 General Session), another 1.5% should give us another $52.5 million (darn close to $56.94 million—gives us a little margin to play with just in case we underestimate the numbers).  The state would end up with ¾ of a percent to fiddle with.

$198 million minus $56.94 million.

That leaves us with about $142.04 million “left over” (as I calculate it).

This one should make Duane Cardall happy…

4^th Element of “Reform”–Dump all but $12 million of the remaining $142.04 million into transportation.  That’s about $130 million in ongoing transportation dollars into TIF (Transportation Investment Fund) and CHEF (Centennial Highway Fund) related projects.  That’s it!  We need roads and it’s going to cost each of us a whole heck of a lot of money.

The remaining  $12 million is the money Rep. Hughes explains is the amount the Legislature can spend on social programs without breaking the spending limit law.  The Legislature, their constituents, and Special Interest can fight over whether it goes to Emergency Dental Benefits or any number of hundreds of  Entitlement Programs.

Sum

You’ll notice my approach to considering the dissemination of the surplus has an element of Tax Relief.  We need Tax Relief, now!  I guess this plea may be partially a function of the recent receipt of my Property Tax Bill (which, of course, is a different topic for another blog).  However, in the F4 Plan you’ll notice a focus on transportation investment.  The need for reinvestment into our state transportation system has reached critical mass.  Transportation influences everything we do, everywhere we go, and the cost of everything we purchase.  With the need to consider the state’s statutory spending limits, transportation is a good place to park a portion of our surplus.

THERE IT IS “F4”.  REFORM IN A NUTSHELL.  PROBLEM SOLVED.  38-15-1.  Go after it guys!