Keys to the governor’s budget

By Kristen Cox, executive director, governor’s Office of Management and Budget

Gov. Herbert’s budget proposes right-sizing the amount of funding currently earmarked from sales and use tax in order to invest in education while also addressing the need to fund transportation for the long-term. The significant growth in earmarks merits review and a full understanding of the impact of this trend.

Specifically, the governor’s budget recommends that $94 million of the $517 million earmarked for transportation be transferred to the General Fund in order to invest in education. This recommendation allows for immediate needs in education to be addressed while ensuring that currently programmed transportation projects remain funded. At the same time, the budget proposes to right-size the amount of sales tax dedicated to transportation and to re-examine the proper role of the fuel tax—an approach that would result in a long-term solution to transportation funding. Finally, the governor’s approach supports more accountability for earmarked funds—ensuring that earmarked funds receive the same level of review as all other funds.

Over the past decade, the Legislature has dramatically increased the use of sales tax earmarks, from about two percent of sales tax in FY2005 to nearly 24 percent of sales tax in FY2016. Historically, the Legislature resisted earmarks because earmark-funded programs tend to receive less scrutiny than those subject to the standard intense examination and prioritization of General Fund revenue through the legislative budget process. For FY 2016, 43 percent of all new sales tax growth is earmarked and 20.5 percent of what was historically considered General Fund revenue is earmarked. This results in $586 million earmarked and set aside of the projected $2.85 billion of what was historically deposited to the General Fund (leaving $2.3 billion remaining). These earmarked funds are taken off the table before a prioritization of other needs can occur.

Of the $586 million in total earmarks, $517 million is earmarked for transportation. Transportation funding is critical and the governor has a strong track record of supporting the transportation funding. However, the question remains as to how much sales tax revenue should be used to fund transportation as compared to other revenue streams dedicated for this purpose.

Some have argued that sales tax derived from automotive-related sales should be used for transportation purposes. Assuming that position is justified, approximately 17 percent of sales tax relates to automotive sales, but nearly 22 percent of sales and use tax is earmarked for transportation. The governor’s budget more appropriately right-sizes transportation earmarks by bringing the percentage down to around 18 percent. In addition, the governor’s office and the Utah Department of Transportation (UDOT) are working on methods and measures to both find more efficient ways of building and maintaining roads as well as measures to build in accountability. All earmarked funds should be held to the same levels of oversight and scrutiny as other funds subject to the appropriations process.

The Utah Constitution also dedicates fuel tax to be used exclusively for the purpose of funding transportation. This not only provides an on-going funding stream, but does so in a more transparent way by more directly tying the cost of a product or service with its use.

Due to a loss of purchasing power, the fuel tax has not kept pace with the need for transportation funding. For example, after making an apple-to-apple comparison of funding ratios, in FY2008 the fuel tax comprised approximately 30 percent of the transportation budget and sales tax revenues for transportation were 19 percent. For FY2016 the sales tax ratio is expected to grow —with sales tax comprising 37 percent of the funding and fuel tax 26 percent. This trend will continue over time and is due to legislative decisions on earmarks to sales tax and the flat fuel tax.

For the most part, fuel taxes are used for road maintenance while sales tax revenues for transportation go towards new road construction. UDOT cites that road maintenance is experiencing a much larger funding gap than new road construction—a reality that is exacerbated by the flat fuel tax. The governor’s transportation budget proposal shifts money from new road construction—a recommendation that will have no impact on currently programmed projects over the next three years as sufficient funds exist to bring these projects to completion. The road maintenance funding gap cannot be addressed without grappling with the fuel tax issue.

Why does this matter?
As the State of Utah continues to disproportionately use sales tax for roads, there is a reduction in the funding available for higher education and other state government operations. When higher education is unable to access sales tax funds, there is a greater reliance on Education Fund —dollars which also fund public education. As a result, less of the funding pie is available for education as a whole. In addition, relying solely on current earmarks for transportation will not address the long-term funding gap —a gap which is estimated to total billions of dollars over the next several decades.

Gov. Herbert’s budget proposal seeks to fund education while also addressing the long-term solution to transportation funding. Specifically, the governor intends to work with legislators to find the best way to ensure that the fuel tax is able to keep pace with transportation needs.

Addressing this issue is politically challenging; however, making strategic investments into education and infrastructure is the right thing to do for Utah’s continued prosperity.

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