Thinking Cyclically in Utah

With all the red ink states have seen in the past four years, it's sometimes hard to believe that there was a time when states had "surplus" revenues. But, of course, there was: in the late 1990s, states enjoyed short-term revenue surpluses driven largely by growth in personal income taxes, which in turn was driven by fast-growing capital gains. Lawmakers were quick to enact tax cuts that sent these surpluses right back to taxpayers, rather than socking these revenues away to help offset future shortfalls. These excessive tax cuts came back to haunt lawmakers in many states when the recent economic slowdown created budget shortfalls starting in 2001.

Now, it seems, the good times are back. Utah revenue forecasters see a surplus of over $100 million for the fiscal year ending in June. Not surprisingly, state leaders have ideas about what to do with this surplus. The pleasant surprise is that one of the three middle-aged white males who are running the show in Utah seems to have a very good handle on the situation. House Speaker Greg Curtis (R) says that "We've had some pretty lean years, and there are some things that probably ought to be looked at before we say tax cut." An article in the Deseret News has more:

After all, Curtis said, no one talked about raising taxes during the last few years when revenues were down. "We were not jumping out there and doing tax increases," he said. "This is all cyclical. We need to make sure we've addressed all the important issues."

This is great stuff. When surplus-laden states choose between tax cuts and increased spending, they often forget a critical third option: shoring up their rainy day funds. The cyclical nature of state tax revenues means that today's surplus is tomorrow's piggy bank. And Curtis clearly sees this. Of course, the other two guys who matter (Senate President John Valentine and Governor Jon Huntsman) have a more typical (and more myopic) take on things. Valentine sees this news as "a powerful argument for tax cuts." As for Gov. Huntsman, he was already advocating the repeal of the state's corporate income tax before the surplus news broke. Oddly, he advertised this plan as a revenue raiser, since the added economic development from corporate income tax repeal would counterbalance the direct foregone revenues. Maybe the surplus news will make him admit that tax cuts actually have a price tag...

Tax reform is squarely on the agenda in Utah, with a tax reform commission just getting underway and scheduled to meet throughout the summer. It will be interesting to see how these new fiscal developments shape the debate there. We'll have more on Utah's tax reform debate in the near future.