Economic Development

Wait 'Til Next Year

Utah was all set for tax reform in 2006. Then it got nervous.
by | June 2006
 

It's not every state that fails to enact an income tax cut because it has too much money, but Utah has managed to pull off the trick this year.

State leaders have been talking about reforming the tax code for a long time. Governor Jon Huntsman Jr. decided to go for it this year for two reasons. One was his belief that the state's top tax bracket was too high at 7 percent, making it harder to attract businesses and their well-paid executives. The other was that all state income tax revenues are constitutionally earmarked for education, and this requirement threatens to blow the bank in Utah, where high birth rates have added 30,000 school-age children over the past decade and are projected to add 150,000 more by 2015. With that many more kids in K- 12, the current tax structure just didn't look solid enough for Utah to ride out future fiscal downturns.

Huntsman therefore decided to replace the current tax code with a new one that would make the income tax flatter but also broader and more stable, getting rid of most deductions. The state Senate seemed willing to sign off on a plan earlier this year, but the House balked. Huntsman vowed to convene a special session for mid-May to push the deal through. But in April, he suddenly called off the session, blaming an accounting error by the Tax Commission. Not many people close to Utah politics believed that explanation. The common assumption was that Huntsman cancelled the session because he just didn't have the votes.

That might seem surprising at first, since most Utahns would have gotten a tax cut under the governor's plan--he wanted to set aside $70 million from the state's surplus for tax relief. But a small percentage of taxpayers would have seen a net increase, and school officials were increasingly nervous about changes to their funding stream.

In an odd sort of way, Utah's relatively rosy budget picture--a surplus of $1 billion in a state with a $10 billion budget--made Huntsman's political problem worse. At a time of fiscal strain, a governor can make the case that tax reform is bound to create losers as well as winners. But no one wants to be the loser when things are booming and other people are getting breaks. Legislators were loath to go back to their constituents--even a minority of them--and report that despite a billion-dollar surplus, their rates would be going up. During its regular session, the legislature slashed grocery taxes by more than 40 percent. Members wanted to be able to talk about that move for a while before having to defend something much more radical and controversial. As legislative research analyst Bryant Howe says, "legislators hear from the losers. The winners don't call them to say thanks. The losers call to complain."

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