Utah’s preliminary budget numbers show tax collections for the state finished slightly behind projections for the just-ended fiscal year, primarily because of lower-than-expected income tax revenue.
When lawmakers set the state’s budget, they rely on revenue projections for the coming year. In recent years, revenue for the state has been higher than anticipated, giving legislators more money to spend.
That’s not the case this year.
Legislative budgeters anticipated that revenue from income taxes for the just-completed 2023 fiscal year would drop by 3.1%. Preliminary figures from the Utah Tax Commission show income tax revenue dropped more than projected, falling 4.8% or about $133 million.
Lower-than-expected revenue is never good news, but don’t expect lawmakers to start slashing budgets.
“We anticipated this might happen,” House Majority Leader Mike Schultz, R-Hooper, said.
Schultz says when legislative leaders set this year’s budget, they purposely gave themselves some “wiggle room” in case of a shortfall, using ongoing revenue — money available to spend every year — for one-time expenditures like buildings or roads.
“We can pull that money out of those things if we need it,” Schultz said.
For example, lawmakers could tap about $300 million in ongoing funding that is currently paying for transportation projects. Legislators left about $500 million in surplus revenue unspent, designating those funds as “high risk,” meaning they weren’t sure they would materialize.
Additionally, if Utah’s fiscal picture were to worsen, lawmakers have squirreled away more than $1 billion in the state’s rainy-day accounts.
“The state is financially well-prepared,” Schultz says.
Utah saw robust revenue growth over the last few years, which led to overflowing coffers. Utah lawmakers had an extra $2 billion surplus to work with during January’s legislative session. That extra cash resulted from federal COVID-19 relief funds flowing through the economy and strong stock market performance.
Those economic good times appear to be coming to an end. State government revenue collections declined nearly 7% over the first quarter of 2023, says Lucy Dadayan, principal research associate for the non-partisan Tax Policy Center.
“This decline is very much expected. States are seeing a significant decline in income tax revenues because of the weakness in the stock market,” Dayadan said.
“The enormous pandemic relief that was injected into the economy helped to boost tax collections because people had money to invest and do other things.”
Don’t expect Utah’s declining revenue situation to improve anytime soon.
Dayadan says many states celebrated the economic boom of 2021 and 2022 by enacting permanent tax cuts. Utah’s Republican-controlled legislature joined the tax-cutting spree, passing a $200 million tax reduction package in 2022 and a $480 million tax cut earlier this year.
Right now, income taxes can only be used to pay for public and higher education in Utah and a few social services. That restriction will ease somewhat if voters approve a constitutional change next year allowing lawmakers to shift income tax revenue to other parts of the budget. However, because of the tax cuts enacted over the last two years, the amount of income tax money lawmakers can spend will be lower in future budgets.
While tax cuts are a short-term political winner for lawmakers, there could be some dark economic clouds on the horizon. Dayadan says lawmakers may be forced to do some belt-tightening in future budgets, as inflation and rising costs are happening at the very same time that states have less cash to spend.
“States need to keep up with current funding levels, but because of rising costs, I don’t see how they can collect those revenues when they have passed massive tax cuts. Unfortunately, that’s going to be the consequences of those cuts,” Dayadan said.
Schultz looks at the situation differently, arguing inflationary pressures are a good justification for reducing taxes. While he admits a third straight year of tax cuts in 2024 is unlikely, he’s not willing to close the door completely.
“I will never take tax cuts off the table. That’s something we always have to think about,” Schultz says.