Lawmakers may put $100 million aside this year as a hedge against an economic downturn

Utah Capitol 19

Majority Republicans in the Utah Legislature are discussing putting as much as $100 million of extra income tax money into the state’s rainy day funds as a hedge against any number of bad economic situations.

Legislative sources tell that even though the state’s economy is roaring with record-low unemployment, there’s a growing worry that a downturn could have a major impact on the state’s rosy financial picture.

For example, an uptick in unemployment from the current 2.3 percent would result in an increase in Medicaid costs to the state as more people would seek services and more would be eligible because of Medicaid expansion. An increase in unemployment would also mean a drop in the income tax, which would affect the state’s ability to fund public education as all income taxes must be spent on schools.

More urgently, legislators are becoming spooked by the threat a potential coronavirus outbreak could pose to the state’s economy. On Tuesday, the Centers for Disease Control warned it’s a matter of when, not if the virus hits the United States. Financial markets plunged on Monday and Tuesday because of the threat from the spread of the disease.

“When the economy does slow down, are we being thoughtful about the future?” asked Sen. Dan Hemmert, R-Orem. “We can’t spend it all today. If there is a slowdown, what have we done today to be ready for that?”

While lawmakers have a combined $921 million in extra tax revenue this year overall, only about $100 million of that is available in the General Fund. The Education Fund is much more robust, which has $841 million in extra tax revenue. 

Remember last year’s “skinny budget”? In the 2019 session, lawmakers adopted a minimal spending plan, with only meager increases for everything except for public education, which saw a 4-percent boost in funding.

Last year, the “skinny budget” was by design as lawmakers were waiting to enact tax reform. This year, it’s more of a necessity as that tax overhaul plan was repealed in the first days of this year’s session, which is the reason the Education Fund is flush with cash while the General Fund looks anemic by comparison. 

Public Education is set to do quite well this year. Lawmakers have already fully funded the expected enrollment growth in public schools for next year, which comes to about $50 million. They’ve already recommended a 4 percent increase in the Weighted Pupil Unit (WPU), which is another $132 million. Legislative sources say there could be another $100 million for teacher recruitment and retention. 

If all of those recommended items are funded, Utah schools are looking at approximately $400 million in new funding next year. And, given the extra money in the General Fund, lawmakers could put $100 million in savings and maybe consider some sort of tax relief. 

But, will there be tax cuts this year? That’s the big question. Lawmakers certainly have enough income tax revenue to tackle some sort of tax relief this year. 

“We have to determine whether we have the ability to do that now,” said Senate President Stuart Adams, R-Layton. “All of us would like to do tax cuts. That sounds good and feels good, but we don’t want to do tax cuts that would impair our ability to provide services in the future.

While there are hundreds of millions of dollars in extra income tax revenues for schools, the outlook isn’t quite as rosy for the rest of the budget. 

Lawmakers are targeting a 2 percent increase in salary for state employees, with extra monies going toward job classifications where vacancies can’t be filled, like prison guards. That will likely account for half of the extra money in the General Fund, while Medicaid costs will probably eat up most of the rest. 

“There’s money in the General Fund,” said Hemmert. “But as soon as we give raises to employees and pay for health insurance and some social services, it’s all gone. That’s the hard part to talk about.”

And, unsaid in all of this budget talk, is what lawmakers are going to do with tax reform and a new governor taking office in 2021.

Keeping the fiscal 2021-2022 budget lean and not cutting taxes would give maximum flexibility to the new governor and the 2022 Legislature to deal with tax reform. And not giving tax cuts now could be a wake-up to Utah voters and anti-tax-reform citizens that this issue is real, and it must be solved in the long term next year.

Giving a large tax cut now — in the range of $160 million to $200 million — could lull voters into believing that there is NOT a real problem with state revenue balancing and that the current constitutional earmarking of all personal and corporate income taxes to public and higher education, is not a problem. 

But, as lawmakers learned the hard way, the economy can turn sour quickly as it did in 2007 and 2008 during the great recession when income tax revenues dropped by double digits in a single year.