Reforming Utah’s Tax Structure: What Educators Should Know and Can Do

By: Deborah Gatrell

Buckle up folks – we’re headed into a wild ride. Your voice in the conversation about how we adjust our tax structure is crucial to ensure sustainable funding for education in Utah. Town Hall meetings discussing tax reform start June 25th and end July 30th. The Utah State Tax Restructuring and Equalization Task Force will make their final recommendation to the Legislature’s leadership in September, so we could see a Special Session to revamp Utah taxes this Fall, significantly impacting Utah education funding. Although the task force committee members want to get this right however long it takes, I’m confident they would rather handle the question of tax reform prior to the 2020 election year.

A separate post covers what was discussed with task force members at the kick-off meeting. There, the committee is introduced, a Legislative Fiscal Analyst describes the current problem, a town hall meeting schedule is presented and a set of guiding principles for the task force is adopted. Here, I share some background on how tax reform has impacted education in the past and suggestions on how you can engage in the discussion to inform the task force effectively.

Background: Impact of Previous Tax Reform on Education

According to an excellent explanation of The Education Tax by the Utah Foundation, published in March 2018, Utah started collecting income tax in 1931, during the Great Depression. Originally, 75% of the income tax was designated to support Utah schools with the remaining 25% going into the General Fund. We designated all income tax to support public education exclusively in 1946.

In 1985, then-lobbyist (now recently retired state senator) Howard Stephenson was instrumental in getting a Truth-in-Taxation law passed. This law required property tax rates to float down, preventing revenue increases automatically tied to increases in property values or inflation unless taxing entities held public hearings to discuss tax ‘increases.’ Intended to encourage responsible and informed taxation, these meetings generated so much hostility that many taxing entities, including school districts across the state instead opted to just their property tax revenues flat for many years, eaten away by inflation in practical terms. According to the UEA position statement on Taxation,

What used to comprise about 25% of public education funding has now been reduced to 16%. The state minimum education tax levy has been cut in half over that time. Most troublesome is the fact that the current system actually forces continued reductions in that state rate and further exacerbates the situation. There is a need to incorporate some type of inflationary adjustment as part of the state rate-setting process. A similar situation exists at the local level with the impact of truth-in-taxation.” (italicization added)

In 1996, Utahns approved a constitutional amendment allowing the dedicated Education Fund (which is 100% of state income tax revenue) to be used to fund higher education. This addressed budget concerns that demands on the General Fund (primarily sales tax) were increasing 20 years ago by shifting a large budget item into Education Funding over time. According the 2018 Utah Foundation report, had that change not occurred, Utah K-12 schools would have had an additional $686 million in 2018. Worse, a separate 2016 Utah Foundation report looking at the combined impact of various tax reform measures including the 2008 flat tax, titled Getting By With Less: Two Decades of K-12 Education Revenue and Spending found that,

Utah’s K-12 education funding effort – or the amount spent per $1,000 personal income – has decreased from 7th highest in the nation to 37th. The decline has resulted in a nearly 29% decrease in tax revenue, which equates to a $1.2 billion reduction of funds available annually for public K-12 education.”

Looking at the shifts in funding ‘effort’ (government spending per $1,000 of personal income), it becomes clear that previous tax reforms have been paid for by Utah’s K-12 schools, as reported by a 2015 Utah Foundation report blog post. While spending on most government services trended up during the 90s and early 2000s, there was a significant jump in Transportation spending in 1996 and higher ed in 2000 while K-12 spending dropped over the long term. Despite the fact that education is the largest share of the state budget, it is clear that the overall trend in K-12 education funding effort has been downward. Other things simply seem to be increasing in importance.

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It took more than 20 years to complete the transition of funding higher education exclusively from sales tax to income tax, and that shift means there is no more flexibility in the General Fund for Legislators to prioritize other needs over education.

While accepted as necessary and appropriate at the time, the 1996 shift including higher education in the Education Fund now seems to encourage some legislators to take money from the income tax for entirely different purposes. The Senate voted late in the 2019 session in favor of a Constitutional Amendment that would allow the income tax to be spent on services for the poor, disabled, and elderly in addition to public education. Education leaders supported the change in 1996 but were outraged by the 2019 proposal, voted on without committee hearings or public input. This proposal was not taken up by the House before the Session ended, but you can be sure it is on the table for discussion by the task force.

Utah remains stuck firmly in last place for per-pupil education spending. Although the governor and most Legislators declare education to be their top priority year after year, increases in education spending by the Legislature barely keep up with inflation. According to a March 2019 CBS report, accounting for inflation, Utah per student funding (a metric that differs slightly from per-pupil spending) is actually 8% lower now than before the Great Recession. The 2019 Voices for Utah Children’s Budget report finds that per student spending fell 1.9% between FY 2017 and FY 2018 and remains 1.3% below the pre-recession peak.

Although the numbers may differ, the trend is consistent: Utah consistently makes minimal investments in education despite the relative importance publicly placed on this budget item. It’s true that Utahns have larger families than the national average, but birth rates and family size are trending down and we still aren’t making up ground in per-pupil spending. While education is a large share of the Utah state budget each year, running about a quarter of the total budget at $5 billion for K-12 alone, the claim that a $1 billion surplus in income tax revenue is a crisis makes one wonder how truly committed legislators are to truly investing in education. For a deeper look at K-12 education spending in Utah, read the Utah Foundation’s February 2018 report titled Simple Arithmetic: K-12 Education Spending in Utah. To get a detailed look on how tax revenue streams have shifted over time, dive into this presentation on The Way We Tax: Utah’s State and Local Tax System from 2015.

Each time taxes have been restructured at the expense of Utah’s school children, Utah’s leaders have promised long-term increases in education revenue would materialize. For example, then-Governor Huntsman and many legislators took great pains to assure educators and parents that economic growth would more than make up the difference in cuts to the Education Fund arising from the switch to a flat tax from 2006-2008. This has not proven to be the case, as found by a 2013 study on the impact of the flat income tax from Voices for Utah’s Children.

In 2014 when Utah Congressional Representative Rob Bishop blamed the high proportion of Federal lands in Utah for preventing the state from adequately funding education, the Center for Western Priorities, a non-partisan group pointed out that Utah consistently cut income (previously discussed) and property taxes AND failed to collect reasonable tax revenue from extractive industries such as oil and gas.

They state, “While North Dakota, Montana, and Wyoming all have effective oil and gas tax rates north of 10 percent, Utah’s effective oil and gas tax rate is 3.3 percent. Even nominal tax increases, in line with those assessed by its neighbors, would generate much needed funds for K-12 education in Utah.”

The 2017-18 Our Schools Now initiative, led by business leaders working collaboratively with education leaders to increase education funding was partially successful. The interesting compromise made with the Legislature to put a non-binding opinion question on the 2018 ballot ended the citizen initiative in exchange for about $350 million in additional education funding above funding for growth of the student population at that time. Additional money was promised by Legislators if Utahns supported the gas tax increase, creating more revenue dedicated to the Transportation Fund, which would siphon less money from the General Fund (sales tax), which could then be shifted into additional funding for education. In the end, the vote against a gas tax increase wasn’t even close. Some Legislators have interpreted this to mean Utahns are satisfied with current levels of education funding. My understanding, from multiple conversations and reviewing of comments on supportive Opinion Pieces, suggests that many Utahns voting against the gas tax increase either did not understand how increasing the gasoline tax would translate to more money for education OR they did understand, but did not trust the Legislature to follow through on the promised funding shift in the short and long term given that the General Fund (sales tax) is discretionary – the Legislature can spend General Fund money on whatever it prioritizes, unlike the income tax which is dedicated as the Education Fund.

Now, looking at the ‘structural imbalance’ legislators are concerned about, a key point being made is the fact that some revenue is ‘siloed,’ or restricted use. The income tax, specifically, is dedicated to the Education Fund and cannot be spent on anything else.

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Removing that restriction on the use of the income tax, which is growing at a healthier rate than sales tax revenue, is an idea that already has traction with many legislators. It is one of four possible policy solutions outlined by the Legislative Fiscal Analyst in the kick-off meeting for the Tax Restructuring and Equalization Task Force committee that will be gathering public input at Town Hall meetings across the state from June 25th – July 30th. Read Tax Task Force Kick-off Meeting: The Problem and the Process for more information on how the problem was described and what legislators are doing to put together a tax reform plan.

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Looking at the history of tax reform in Utah and its impact on education funding, it is clear that parents and educators have reason to be concerned about this new tax reform effort. There are areas Utah can increase tax revenue without harming Utah’s school children or removing constitutional protections from the Education Fund. Multiple polls show Utahns consistently support increasing education funding, even if it means tax increases, to make targeted investments that will improve outcomes for Utah students: 2015, 2016, and 2017 serve as relevant examples. Even in 2014, Pignanelii and Webb argued in the Deseret News that Utah’s education funding needs a boost, not a crisis.

We don’t believe “throwing money at the problem” will improve education, but as the Salt Lake Tribune Editorial Board recently observed with their suggestions for tax reform, “Money is to public education as oxygen is to life. Having it does not guarantee success. Not having it guarantees failure.”

In the Deseret News, Jay Evensen asks in his opinion piece “Would any lawmaker, let alone a majority of them, have the guts to propose changing the Utah Constitution so that income taxes could be used for something other than education? Even if they promise to continue giving schools what they need, such a thing might look like a step back from that commitment.”

It’s crucial that educators and concerned citizens understand the pressures spurring calls for tax reform and the history of tax reform’s impact on education so we can engage productively in the policy conversations that will lead to a tax overhaul proposal, likely this year.

Effective Policy Engagement

Effective engagement requires us to communicate effectively with the decision makers – in this case the legislators who are members of the Tax Restructuring and Equalization task force. Coming to the table with solutions that will address mutual concerns is the most powerful approach. Picking a fight is destructive.

From the perspective of Legislators, Utah is fiscally sound because of responsible budgeting. They are in the unenviable position of picking winners and losers every time they make budget choices. It’s a question of simple economics: there are unlimited wants (demands for government services) but only limited supplies, or revenues for meeting those demands.  They’re human and they do the best they can. According to a good number of national rankings, they do a darn good job.

It’s also worth noting that Utah gets an incredible return on the investment that is made in education. Despite our low per-student spending, we get decent results. Whether this is sustainable in the face of changing demographics is another question entirely, but it’s worth celebrating what we do well right now.

At the same time, it’s not enough to simply maintain the status quo by funding growth and barely keeping up with inflation in education. We have a problem with teacher retention, and that turnover has a high cost, both financially and through decreased teacher effectiveness and student learning, with negative cumulative effects, especially in schools with the highest needs.

There is ample evidence that targeted funding in areas with greatest needs produces significant gains that can close achievement gaps. This is of critical importance, and something many Utah Legislators may not understand in light of a 2017 Issue Brief by Utah Legislative Fiscal Analysts on What Drives Student Achievement Across States that found, among other things, that “spending alone does not drive improved academic achievement.” To be fair, the report called for further study to identify which specific inputs produced significant gains, but many Legislators reportedly left the presentation before that nuance was presented. Worse, no teachers were involved in the research project.

To participate effectively, be sure to review the tax reform task force Vision, Purpose, Principles, and Process document. It clearly outlines the steps the task force will take in collecting information and developing a proposal for consideration by the full Legislature, potentially in a Fall special session. Understand their concerns and acknowledge the realities of the problem: slowing sales tax revenue growth means less money to meet increasing needs for most budget items as the population and demands for government services both increase rapidly. The income tax dedicated Education Fund is growing healthily, which makes it an attractive target for restructuring. At the same time, education would definitely benefit from significant funding increases.

Whatever policy suggestions you make should be solutions-oriented and positive. Whatever decisions are made, some people will pay more taxes and others less. The Legislature is committed to a tax cut as part of the restructuring process, which will most likely result from another cut to Utah’s income tax (Education Fund), and many seem interested in removing the constitutional dedication of income tax to the Education Fund. Taking the long view, looking at least 20 years out, how do you think Utah can best invest in education and maintain a strong economy?

Communicate those ideas to members of the Utah State Tax Restructuring and Equalization task force in person at Town Hall events June 25th-July 30th and through email if you can’t make it (or want to follow up). Task force member emails can be found here.  

UEA put out an Issue Brief summarizing tax policy solutions that organization supports on 30 May you can find here if it is helpful to you. Just remember the most powerful message you communicate with Legislators will include your personal story.

Be brief. Be bold. Tell your story. You are the expert on your classroom experience and there is no question that Utah’s commitment to investing in education funding (or the lack thereof) has a direct impact on you. Let’s be sure educators are active participants in the task force discussion on Tax Restructuring and Equalization to ensure we invest adequately in education.

Let’s ensure articulate educators make it to every Town Hall meeting and propose tax reform solutions that will meet Legislators stated goals while increasing and protecting our investment in high quality education for all Utah students. We can broaden the base, reduce some rates, cut taxes (I’m looking at you, food tax), stabilize revenue flows AND protect and invest in funding education for our children who will drive the economy of the future.

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