Keeping House

by Representative Kraig Powell

November 23, 2009

Over the next ninety days, citizens of Utah will face a choice that is unprecedented in most of our lifetimes. We will be asked to decide the level of services that we want our state government to provide in light of vastly-shrinking tax revenues.

It is a stark and unavoidable choice: Should state government raise taxes in order to continue to provide the services to which we have become accustomed, or should those services instead be drastically curtailed?

I believe that one year from now, nearly every citizen will be experiencing the effects of this decision, no matter which alternative is chosen. That is why I would like to ask for your direct and detailed input to guide me in formulating my position on this crucial question that will arise as the Utah Legislature’s General Session begins in late January.

To set the stage: From a 2008 base budget of $5.6 billion, state revenues fell in 2008-2009 by a whopping $900 million. That meant that for the 2009 fiscal year, only $4.7 billion was available to fund all of the services that had required $5.6 billion to fund one year earlier.

In late 2008 and early 2009, the Legislature identified the necessary 17 percent cuts to balance the budget at the $4.7 billion figure. Due to the receipt of $400 million in stimulus funds from the federal government, the Legislature was able to modify the 17 percent cuts to an average of 9 percent this year.

But because federal stimulus funds are not available for 2010, in early 2009 the Legislature warned state agencies to plan to make the additional cuts necessary to implement the full 17 percent reduction next year to arrive at the $4.7 billion figure.

Since the time that warning was issued, the state budget situation has gotten worse, not better. In addition to the $900 million drop in revenues from 2008 to 2009, it now appears that 2010 will see total revenue slide by another $200 million.

Moreover, state government has incurred significant additional expenses for 2010 due to increases in Medicaid claims, state employee health costs, and an enrollment growth of 11,000 students in the K-12 age group. These new costs total approximately $300 million.

When combined with the additional $200 million in decreased revenue, this translates to a new hit of $500 million, or nine percent, to the state budget. From 2008 to 2010, then, the state budget will have experienced a total loss of $1.4 billion out of $5.6 billion, or 26 percent.

To understand how and why the recession has affected state government so dramatically, it is important to keep in mind where the state of Utah gets its money and where that money goes. Fully 52 percent of all state revenues come from individual income tax payments ($2.4 billion), and another 8 percent of state revenues are from corporate income tax receipts ($300 million). Sales tax, the other large component of revenues, accounts for 35 percent of state funding ($1.6 billion). The remaining five percent of funds come from miscellaneous sources.

As to where the money goes, the Utah Constitution requires all income taxes collected in the state to be spent on public education. Of the sixty percent of annual state revenues represented by income tax, K-12 instruction receives three-fourths ($2 billion) and colleges and universities receive one-fourth ($700 million).

Since the income tax is dedicated solely to education expenses, all other state agencies and programs must compete for the 35 percent of revenues that come from sales tax. After public education and higher education, the largest users of state revenues are health and human services ($500 million) and courts and corrections ($500 million).

In the past two years, individual income tax collections are down by 11 percent, sales tax by an identical 11 percent, and corporate income tax by a sobering 37 percent. These are the figures driving the substantial reductions in state programs that are now being implemented.

For the average citizen of Utah, what will the proposed 26 percent cut in state budgets mean if taxes are not raised?

The most widespread effects will be cuts to public education programs and increased class sizes for elementary and secondary students. In higher education, a soft enrollment cap will be experienced at Utah’s state institutions as students become unable to find space in classes even as tuition rises.

In human services, programs for seniors, at-risk youth, and the disabled will be scaled back and many will be eliminated entirely. In the corrections arena, prisons and jails will begin to release many less-violent offenders as funds dry up.

It is clear that many citizens, even when informed of these ramifications, still staunchly oppose any tax increase. As a matter of principle, these citizens believe that in the midst of a recession, government must cut spending by any amount necessary to avoid raising taxes.

Others believe that restoring the sales tax on food (which was partially removed two years ago at an annual cost of $160 million), increasing the tobacco tax, or even adjusting the new flat-rate income tax are preferable to implementing drastic cuts in education and social services.

One thing is clear: Even if (as I expect) the Legislature uses much of the $500 million in the state’s rainy day fund, we will still not be able to cover the $900 million shortfall this year without raising taxes or cutting services dramatically.

That is why I need to hear from you on which alternative you prefer: raising taxes or cutting spending. Also, please tell me which new taxes you would be willing to pay (if any) to preserve which programs.

I thank all of you who responded to my column on legislative ethics last month. After hearing from many of you, I support the goals of the citizen’s initiative on ethics, but am uncomfortable with the methods the initiative uses to reach those goals.

On these or any other topics, the best way to contact me is by email at kraigpowell [at] utah.gov or by phone at 435-654-1550.