If someone told you that the key to the success of the Utah Tax Restructuring and Equalization Task Force may well be found in an examination of the in-state vs out-of-state effects of the current draft proposal, your eyes would probably glaze over and you might suddenly recall a dentist appointment that you had forgotten.
But wait! Please tell the dentist you’ll reschedule and take a few minutes to read on.
It is probably safe to say that the public in Utah would like to see two things coming out of the Tax Restructuring and Equalization Task Force process: Lower taxes, but also more of the things that our taxes pay for – such as education, infrastructure, public health, poverty prevention and a long list of other critical services.
As a general rule, it’s rare to get both. The principle that “there’s no free lunch” applies just as much with public goods and services as it does with anything else in life. But in this case, there’s something rare about the draft tax restructuring proposal that makes it possible: the in-state/out-of-state effects of shifting more of our taxes from income taxes to sales taxes.
The draft package proposes a roughly $600 million shift of revenues from income taxes to sales taxes. This shift also brings with it a less-noticed shift of $60 million to $100 million from in-state payers (aka Utahns) to out-of-state payers (non-Utahns). This is because a much higher share of the sales tax than of the income tax is paid by non-Utahns – 15% to 25% in general (though a much higher 40% for the gas tax and a much lower 5% for the grocery tax, as tourists mostly eat prepared foods, which are already fully taxable).
(The reason for the wide range is that neither the Tax Commission nor the Legislature has published research on this question, but recent analyses by Texas and Minnesota found that those states export 21% and 23% of their sales tax incidence, respectively.)
The first implication of this $60 million to $100 million shift is that the task force’s claim of an $80 million net revenue loss in their draft proposal actually understates the in-state tax cut (the tax cut for us Utahns) by $60 million to $100 million. This means that the draft package actually proposes a $140 million to $180 million tax cut for Utahns, offset by a $60 million to $100 million tax increase paid by non-Utahns.
But the second implication of this shift of taxes from Utahns to non-Utahns is that the package could very easily be adjusted (simply by changing the proposed income tax rate) to make it revenue neutral overall — and still have a $60 million to $100 million tax cut for Utahns.
From the perspective of Voices for Utah Children, where we are alarmed that Utah’s overall tax level has fallen to a 25-year low, leaving us unable to get Utah out of last place in per-pupil K-12 education funding, not to mention expand pre-K or help our young adults catch up to their peers nationally in attaining college degrees, the best implication of this in-state/out-of-state shift is that this package could achieve one of the holy grails of tax policy – getting non-Utahns to pay for the things we Utahns need – by using the new out-of-state revenue to get this package out of the red and permit a $60 million to $100 million revenue enhancement for the state budget without costing Utahns a dime.
But politics is politics, and politicians are politicians, and next year is an election year. Which brings us to the compromise that could potentially save this package: Take that $60 million to $100 million of new out-of-state money and split it 50-50: Make the package $30 million to $50 million revenue-positive so we can invest more instead of less in education and infrastructure and use the other $30 million to $50 million for an in-state tax cut. Which is probably not anyone’s ideal solution, but it just might be a compromise that could win broad public support and ensure a positive legacy for the Task Force.
Matthew Weinstein
Matthew Weinstein is fiscal policy director at Voices for Utah Children. A more in-depth version of this essay appears at www.UtahChildren.org.