Utah educators say tax reform efforts could target school funding

(Illustration by Christopher Cherrington | The Salt Lake Tribune) Historically, all income tax revenue in Utah has been spent on education. Recent tax reform efforts are challenging that idea.

Nearly three hours into a recent legislative hearing on tax reform, state Rep. Tim Quinn suggested to his colleagues that they stop playing “shell games” and come clean to constituents about their desire to eliminate the Education Fund.

“Let’s just be honest with the people and say, ‘This is what we want to do and this is why we want to do it,’ because [schools] truly have no guarantees,” Quinn said. “Let’s just be honest — that Education Fund is no guarantee to the education community, because we don’t need to change the constitution to take the income tax rate from 4.95 to zero if we wanted to. So there is no monetary guarantee in that constitutional guarantee.”

The Heber Republican’s comments followed a lengthy discussion that first criticized school districts for wastefully building “Taj Mahals” and failing to shoulder their fair share of school costs, before pivoting to options for squeezing every last penny of unrestricted funding out of the education budget for use on other government programs.

Since voters approved in 1946, Utah’s Constitution has required that all income tax revenue be spent on education. A 1996 amendment allowed spending on higher education, too. Better known as the education earmark, this “constitutional guarantee” has generated considerable budgetary hand-wringing in recent years, particularly during the 2019 legislative session when a roughly $1 billion income tax surplus stood apart from the state’s slower-growing sales tax.

The dynamic was labeled a “crisis” by legislative leaders, prompting calls for generational reforms that would modernize the state’s tax code by taxing the emerging service economy — from limousine rides to hair cuts and landscaping. When that failed in the face of an uproar from the public and business community, they launched a task force to study the issue ahead of legislation at a later date.

(Bethany Rodgers | Tribune file photo) Gov. Herbert (at podium) is joined by Senate President Stuart Adams (right of governor) and House Speaker Brad Wilson (left) to announce there will be no tax reform plan in the 2019 legislative session, March 7, 2019. Instead, Republican leaders said they would work with business, education and community interests to come up with an overhaul that tries to address the many concerns raised. The news conference was held in the state Capitol Gold Room.

But in town halls across the state and hearings on Capitol Hill, talk of modernization and generational change has increasingly taken a back seat to discussion of budget autonomy and stop-gap measures.

The task force’s most recent meeting was focused solely on education and the prospect of removing the income tax earmark in service of a single, combined pool of revenue to be spent as legislators deem necessary.

“Seems like we have two basic options,” said Rep. Mike Schultz, R-Hooper, “do away with the constitutional earmark, or find legal ways around the constitutional earmark.”

Blaming schools

In their critique of school district administrators, members of the tax force focused on two points: that roughly $1 billion could be raised for education if districts raised their property taxes to the maximum allowed by state law; and that districts spend too large a share of their budgets on buildings compared to other states.

“Are you kidding me?” Rep. Robert Spendlove, R-Sandy, said in response to a presentation on district spending. “We spend that much more on buildings and on capital? How do we justify overspending to that degree?”

Quinn described the presentation as “astonishing,” and suggested parents would prefer to see districts focus on operational and instructional costs rather than erecting “monuments” in their communities.

“That would really make a difference in education,” he said.

The task force meeting did not include public comment, but members of the education community contacted by The Tribune — some of whom declined to speak on the record out of fear of retribution or because they were not authorized to participate in media interviews — were quick to push back on the legislators’ talking points. School districts are compelled to build long-lasting structures with new and expensive security features, they said, and construction costs appear falsely inflated when compared against the tight budgets of school districts in Utah, which consistently ranks last in the nation for per-student education funding.

“We really have got to give our school boards credit for what they do in terms of balancing their budgets, given the limited amount of funding they have from the state,” said Heidi Matthews, president of the Utah Education Association. “It’s disingenuous to be looking at percentage instead of the actual expense.”

Utah’s low education spending ranking can be explained in part by the inordinately large number of children who live in the state, lawmakers are quick to point out. But that factor also drives up construction costs, educators say, as Utah is perpetually in need of new school buildings compared to other states with more consistent, or even declining, youth populations.

“Have you ever been to Herriman?” former educator and Sen. Karen Mayne, D-West Valley City, asked her Republican colleagues on the task force. “We’ve got a lot of kids out there. We can teach them in the playgrounds, I guess, but I think we need to house them.”

Terry Shoemaker, executive director of the Utah School Superintendents Association, said that in almost all cases, school districts hold bond elections to raise money for new school construction. That means residents are able to either sign off on, or reject, a district’s plans for the facilities in their community, he said.

Asked about districts taxing below the maximum levels set by the state, Shoemaker and other educators noted that state law restricts how that money could be spent. And local property taxes exacerbate funding disparities among communities compared to the equitable per-student dollars appropriated by the Legislature.

Additionally, it is politically difficult for school board members to raise taxes on their constituents.

“A tax increase is still a tax increase,” Shoemaker said. “School board members are just as reticent to do that as legislators are.”

Recognizing the unpopularity of property taxes, Utah lawmakers have for the last 20 years repeatedly reduced the state portion of property tax to the point of elimination, placing more and more emphasis on state income taxes for education funding.

Task force member Rep. Joel Briscoe, D-Salt Lake City, said state law has made local tax increases difficult by forcing districts to go through Truth-in-Taxation hearings. If lawmakers want to place more of the responsibility of education funding on districts, he said, then they should make it easier for school boards to make taxing decisions.

“We make school boards pass through the valley of the shadow of death in order to raise taxes,” he said.

The task force hearing did include discussion of removing the spending restrictions on district funding, providing local school boards with the same kind of budget flexibility that some lawmakers are seeking by removing or diluting the income tax earmark. Shoemaker said there are differences of opinion on that topic within the education community, but that it is not a priority of his organization, which represents the state’s district school boards and superintendents.

“We have not asked for it,” Shoemaker said. “We have discussed it, because legislators have asked about it.”

(Francisco Kjolseth | Tribune file photo) Sen. Lyle Hillyard, R-Logan, left, and House Majority Leader Francis Gibson, R-Mapleton, co-chairmen of the tax structuring and equalization task force, hold the first of several meetings at the Utah state Capitol, Aug. 19, 2019. The task force, after a statewide listening tour, now is faced with coming up with recommended tax reform to the full Legislature.

House Majority Leader Francis Gibson, who is co-chairman of the task force, said lawmakers always hear that Utah is the worst in the nation for per-student funding. But the presentation on district spending, he said, adds context to the conversation by showing that districts are not blameless on the topic of school investment.

“I think it illustrates that the locals aren’t doing as much as they could, either,” he said.

But Ben Horsley, spokesmen for Granite School District, said district school boards are stuck with the rules that legislators created for them, from restrictions on property tax spending to calls for secure, earthquake-safe buildings in an increasingly competitive construction market.

“It appears that a handful of legislators clasped onto classic misinformation and, in reality, have no idea what’s going on in the actual classroom,” Horsley said. “It’s an unfortunate reality that the complexities of education funding are so extensive that, perhaps, some of our legislators don’t know how it works.”

Erasing the earmark

In March, during the legislative debate over tax reform options, the Utah Senate voted 21-8 for a proposed amendment to the state constitution that would permit income tax spending on “services for the poor, the disabled, or the elderly.”

The amendment, opposed by all six Democratic senators and two Republicans (including task force co-chairman Sen. Lyle Hillyard), never came up for a vote in the House. Still, it was the first indication that lawmakers were seriously looking at punching a hole in the Education Fund.

“At this time, this is just a tool in the toolbox,” sponsor Sen. Dan McCay, R-Riverton, said in March. "We are all reluctant to make this change.”

But in recent interviews, lawmakers say reluctance around a constitutional amendment is less about the amendment itself, and more about the risk of placing their tax reform effort in the hands of voters. Amendments require a two-thirds majority in both legislative chambers, followed by a majority vote of the state electorate.

“To the degree that there is a problem, you could solve that problem permanently with a constitutional change,” said Sen. Lincoln Fillmore, R-South Jordan, a member of the task force who sponsored the services tax bill that faltered during the legislative session. “But that’s outside the Legislature’s control.”

Supporters of the income tax earmark argue that a constitutional amendment, in isolation, would only shrink the amount of state funds available for schools. They argue that if money is tight — and the state’s per-student spending ranking suggests it is — moving dollars from one account to another does nothing to give the state a leg up on its bills.

(Scott Sommerdorf | Tribune file photo) Heidi Matthews, Utah Education Association president, outside Salt Lake City Hall, July 29, 2017. Matthews said Utah's school system is frugal in the way it spends tax dollars and the UEA and other education groups will fight attempts to do away with the constitutional earmark on income tax revenue.

“We don’t just need flexibility,” said Matthews, the UEA president. “We need to grow the investment. We need to grow education funding.”

Fillmore, whose private career deals with charter school administration, said he disagrees with how earmark supporters characterize the argument, but “in general their point is right.” The constitutional guarantee cements eduction’s status as a top budget priority, he said, and amending that guarantee would allow lawmakers to consider other areas for prioritization.

Amending the constitution would do nothing to solve the long-term viability of the state’s sales tax, he said, but would solve the immediate issue of getting dollars to the areas where lawmakers determine it is most needed.

“In my personal opinion today, I think that flexibility is the issue,” Fillmore said. “But over the long term, a declining sales tax base actually does create something of a problem of [revenue] sufficiency for the future.”

Briscoe, a former educator, speculated that it would be difficult for a constitutional amendment to make it through both the House and Senate. But if it did, he said, proponents might face a tough sell with voters without other guarantees for education.

“What perception are they trying to give the public?” Briscoe said. “It doesn’t sound like they want to attach something to protect public education to go along with removing the constitutional protection.”

Putting education first

Task force co-Chairman Hillyard, R-Logan, said that the message he heard most from recent town halls is that residents would like their taxes to be reduced. He argued, as he has in several meetings, that income taxes are exclusively paid by Utah residents while sales taxes — and particularly the sales tax on food — apply to tourists, part-time residents and other visitors to the state.

“If we do a tax cut, I’m solidly in favor of an income tax cut,” Hillyard said, “because that makes more sense for Utah residents.”

But Gibson emphasized that lawmakers have traditionally put education first, cutting funding to other programs to mitigate the impact of the Great Recession on schools, and now underfunding social services to address the needs of education.

“Other forms of state government take a haircut to make sure that public education receives more funds,” he said.

Shoemaker said that while his organization is supportive of the constitution’s funding guarantees, he is also open to discussion on different options for the state’s tax structure.

“We feel pretty strongly about the earmark, the dedication of income tax, but we don’t want to be left out of conversations that could affect us,” Shoemaker said.

And Horsley said the earmark provides security for schools through a stable source of revenue.

“We would be concerned any time you’re going to dismantle a long-held funding mechanism and put us in a situation where there is that lack of stability,” Horsley said.

Matthews, the UEA leader, also said educators would resist proposals to raid the Education Fund for other needs.

“Any attempt to be creative with that or divert any funds away to a different area is wrong,” she said. “Simply adjusting the constitutional guarantee is not going to solve the issue that needs to be addressed.”