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Jonathan Williams Says Utah Won’t Be Number One for Economic Outlook Much Longer Unless Some Bold Changes Are Made

The Utah Business Coalition hosted a breakfast for legislators on June interim day to hear from Jonathan Williams, Chief Economist and Vice President for State Fiscal Reform at the American Legislative Exchange Council (ALEC). Mr. Williams shared his thoughts on tax reform efforts in Utah and across the nation.
Mr. Williams told the roughly 100 attendees, which included legislators and business leaders, that many states have been using the Tax Cuts and Jobs Act, passed by Congress in December of 2017, as a platform to cut taxes on the state level. For example, Iowa and Missouri enacted the largest tax cuts in their states’ histories. Even Bernie Sander’s home state of Vermont cut income taxes. Many states have been proactively enhancing their competitive position while conforming with the federal legislation.
He noted Utah has the envious position of being #1 for 12 years in a row in the Rich States, Poor States Economic Outlook rankings, but that also means other states are working hard to catch up to and surpass Utah. One of the great policies that has kept Utah in the front of the pack is its Truth In Taxation laws regarding property taxes, which the Utah Taxpayers Association and State Tax Commission jointly created legislatively in 1985. The accountability and transparency of that system puts the state in a much better position than those states that sneakily raise property taxes year after year. Utah’s effort to move to a single, flat income tax rate more than a decade ago was a key effort in making Utah a leader.
Utah’s pension reform efforts have also helped Utah avoid what Mr. Williams sees as the “major existential threat” to states in the future. Ballooning pension liabilities and declining funding ratios continue to be a problem even with the decade long rally in equity markets. He said those issues are going to cause major tax increases for those states at some point. Many states have continued to kick the can down the road with the benefit of the equity rally, but another recession will drive even more states to react in crisis mode when they can no longer avoid the problem. Utah’s efforts several years ago to make needed changes to its pension system has made it a leader in the nation and an example other states should follow.
Mr. Williams said Utah has always acted with prudence. Slow, measured efforts have steered the state in the right way on spending and taxation. Observing the rule of “first, do no harm” is important in making sure Utah doesn’t endanger its #1 ranking for economic outlook. On the other hand, states run the risk of falling behind simply by doing nothing. Sixteen states have recently substantially cut taxes and the environment is very competitive.
Similar advice was given by Indiana Senator Brandt Hershman at the recent Utah Taxes Now Conference. In explaining how Indiana moved from 24th place to 3rd place in ALEC’s Rich States Poor States rankings, he advised Utah policymakers to “Act boldly and implement slowly,” something Kansas failed to do with their now infamous bold tax cuts many of which have now been repealed. Utah has followed this advice over the years as the legislature repealed sales taxes on business inputs first by exempting industry groups one at a time and by delaying the effective date for a year and phasing the exemption over three years. This gave the positive economic effects time to kick in while the sales tax revenue from the exempted inputs slowly tapered off.
Mr. Williams said that personal property tax is also an area where many states have worked to eliminate taxes altogether, and Utah could do much more in that arena. Regarding any expansion of sales tax on services, economists and tax policy experts across the political spectrum all agree that any business to business sales taxation should be completely avoided.
Utah is unique in that it has the constitutional earmark for education in the income tax structure. That issue needs to be front and center in the discussions, Mr. Williams told the crowd. Legislators need the ability to do priority-based budgeting and have the flexibility they need in crafting the budget each year. Any conversation about tax reform in Utah should have the removal of that earmark in it.
Mr. Williams mentioned three broad principles that ALEC has learned over the years on a national basis that are important to achieving sound fiscal policies. First, capital based taxes (income taxes, capital gains taxes) are the most damaging types of taxes. A tax on capital, dollar for dollar, is more harmful than a tax on final consumption. For states that are overly reliant on capital taxes (like California with a top tax rate of 13.3%) you see their boom and bust cycle play out over and over again. Even outgoing Democrat Governor Jerry Brown of California admitted that they were overly reliant on progressive income taxes and capital gains taxes.
The second principle to remember is to always resist the urge to have government pick winners and losers with tax policy. ALEC believes strongly in tax neutrality and a level playing field for all. There should be no preferential treatment for an entity that would provide an unfair competitive advantage in the marketplace.
Finally, the third and most important principle is that state governments need to consider spending and taxation as two sides of the same fiscal coin. Going forward, Utah will need to keep spending growth under control as one of the key elements of keeping Utah’s competitive advantage alive regardless of any tax policy that is decided upon. Utah’s future will depend heavily on how frugally the state behaves.
Mr Williams answered questions from legislators before the event was over. One of the questions was: Even though Utah has been ranked #1 for so long, is there an area where we still struggle that we could do better? His unequivocal answer was: Cut Utah’s income tax rate. He said other states have been much more aggressive in cutting their rates. Utah had been stuck at 5% for a long time and only went to 4.95% recently. He said over the last five years we’ve seen well over 30 states reduce tax rates, especially on capital and income. Utah needs to remember how mobile capital is today and remain competitive. Utah has fallen behind on the income tax front. A lower rate is needed to attract capital to Utah and keep taxpayers in Utah.
An additional question was asked relating to Utah’s current effort to expand the sales tax base: How you define what a “business to business transaction” is in relation to the conversation around sales tax on services? Mr. Williams suggested that the best method is a bright line between business transactions and final consumption. The best method would be to establish that line with IRS deductible expenses for a business, using IRC Section 162. If the IRS allows it to be deductible as a business expense, Utah should not impose a sales tax on it.
Mr. Williams provided wise counsel on what Utah can do to remain the envy of the country when it comes to the best economic outlook and sound tax policy. Legislators and members of the Utah Business Coalition benefited greatly from hearing his national perspective.
Another Economic Perspective
Interestingly, later that day another economist put a different twist on Utah’s economic success. In an economic report given to the Revenue & Taxation Interim Committee Mark Knold, Supervising Economist at the Utah Department of Workforce Services reported Utah’s employment grew 22.7% from our Pre-Recession High putting Utah #1 among the 50 states in employment expansion since the Great Recession. He stated the biggest reason for Utah’s economic expansion is that we have younger workers dominating the labor force and that Utah is at the heart of the five states whose populations have grown more than 70% since 1990, much faster than the national population growth of 31%. 
Your Taxpayers Association would suggest that Mr. Knold’s figures better describe the demographic effects of Utah’s economic expansion, rather than the causes. On the other hand, Mr. Williams’ presentation clearly identified many of the causes of Utah’s economic success. 

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