Education funding is complicated, worth studying

For the last couple days I have been attempting to understand HB 55 — Education Funding Amendments sponsored by Representative Briscoe. As I was studying the bill, I realized that I could not understand anything. I reread. There was no improvement. I tried again and again until I finally gave up. I started feeling dumb and clueless. The language of the bill was so complicated.

As I forced myself to get back to the bill, I decided to let more people share their perspective on HB55. I was astounded by the fact that even PhD-holders were confused by the technicalities of the bill. That was a relief! That meant I was not dumb. I was just lacking in a particular field of expertise. Luckily, I was able to find help from some people with backgrounds in finance. Here’s what I’ve figured out:

We know that the State of Utah generates its funds from income tax and property taxes. All the Utah income tax money goes to education funding. HB55 will make some changes to the current tax law. But even if this bill gets passed, the effects might not be seen for many years.

I. The first change is that the rate that a person pays of their federal income tax would change from a percentage to the fixed amount. As of now, at the federal level, a person can claim up to a $3800 exemption on their income tax, whereas on the state level, he/she can get up to 75% off the federal level.

Thus, the plan of this bill is to set the rate from the percentage, i.e. 75%, to a fixed amount, i.e. $2,850. By setting the rate to a fixed amount, there are no fears of the amount being less than $2,850.

And with the change in the economy, the difference is likely to grow. Given the fact the federal exemption is not static, the amount of $3,800 is likely to grow every year with inflation. Hypothetically speaking, suppose the economy improves in 2013 and an individual could claim up to a $4,000 exemption. With the rate being fixed to $2,850, the margin could get slightly bigger. As the margin gets bigger, the funding is likely to increase.

Fixed amount=$2,850                         vs.      Percentage=75%

$2,850/$4,000=71.25%                                  75% of $4000= $3,000

100%-71.25%=28.75%                                  100%-75%= 25%

As we know, 28.75%> 25%

As you can see, this configuration would bring slightly more money to education funding. Although the difference is not huge, it is significant to change funding issues over time.

II. As the money for education is dependent upon the property value, the changes in the value of the property can change the amount for the funding. This bill is proposing to put a floor on the tax rate so there will be no fluctuation in obtaining revenues.

For example, suppose I own property that is worth $150,000, but because of the economic downturn it is now worth $100,000. Let’s assume that I am taxed 1% for my property value.

Good Economy                                                   Bad Economy

1% of $150,000                                                 1% of $100,000

Tax= $1,500                                                       Tax=$1,000

Thus, as the property value goes down, the revenue decreases as well. So, my understanding is that by putting a floor on the tax rate, the revenue will stay at necessary levels.

To conclude, I thought this was a creative bill. I am looking forward to its debate on the committee. HB55 was introduced in the House Rules Committee on January 28th, 2013. It was sent to committee on the 29th of January. Interestingly, it has not been heard yet. Should the supporters of this bill be worried?


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8 Comments
  1. William Brough
    Feb, 8, 2013

    As a tax professional I want to comment on the $3,800 federal exemption amount. You said “it is likely to grow every year with inflation.” In fact, it does grow every year–all of the personal exemptions and standard deduction amounts are adjusted every year for inflation. There is no “likely” about it. Even in the recent recession, those numbers ALWAYS went up from one year to the next.

    When filing their 2011 income tax return, taxpayers were entitled to an exemption amount of $3,700 for every taxpayer and dependent claimed.For the 2012 tax year that amount is $3,800, and next year it will be $3,900.That reduces the amount of taxable income BEFORE tax is calculated, and is a constant number regardless of the income level of the taxpayer, although it phases out for incomes over $250K (single) or $300K (joint filers).

    By setting the state income tax amount at a fixed $2,850, rather than as a percentage of the federal, it is true that there is no fear of it ever dropping below $2,850, even in a weak economy. But if it is not inflation-adjusted, that $2,850 will spend like less and less when it comes to covering education expenses, so that eventually it will not be enough, even in a good economy. That is something to keep an eye on.

  2. Barbara Wise
    Feb, 8, 2013

    So, if a retired or underemployed person reports an income of, say, $12,000 and pays $1,200 in Federal Income tax, that retired person would have to pay Utah income tax of $2,850? No way is that fair!!!

  3. Louella Ash
    Feb, 9, 2013

    I am still confused and feeling unintelligent.
    Is this a good thing or not?
    Are there any other ideas being presented on Utah’s Capitol Hill to increase funding for education?

  4. John C. Clark
    Feb, 9, 2013

    What most people miss about H.B. 55 is that it gradually shifts more of the tax burden to those with more personal exemptions–big families and those who care for the handicapped. Many of us oppose the concept of a head tax, which charges parents more for having more children in order to pay for their education. H.B. 55 is innovative, yes, but it is also a virtual, stealthy, steadily growing head tax.

    Sample calculations: (Estimated future increases in Fed. exemption based on IRS announcement for 2013 and statistical trend for the last 30 years. Estimated tax rate = 5%, assuming current Utah flat tax remains steady.)
    Tax Year 2012. Fed. Exemption = $3800, Utah Exemption = $2850
    Tax Year 2022. est. Fed. Exmpt = $4822, Ut Exmpt = $3616, Ut Exmpt (HB55) = $2850
    Tax Year 2032. est. Fed. Exmpt = $5739, Ut Exmpt = $4304, Ut Exmpt (HB55) = $2850
    Tax Year 2042. est. Fed. Exmpt = $6657, Ut Exmpt = $4993, Ut Exmpt (HB55) = $2850

    -HB55 tax increase for all taxpayers
    tax year 2012 = $ 00.00.

    -HB55 tax increase for single taxpayer in
    2022 $ 38.31
    2032 $ 72.72
    2042 $ 106.63

    -HB55 tax increase for two parents with two children = 4 exemptions
    2022 $ 153.24
    2032 $ 290.87
    2042 $ 426.50
    -HB55 tax increase for two parents with 8 children, two of which are handicapped = 12 exemptions
    2022 $ 459.71
    2032 $ 872.61
    2042 $1279.50

    This bill reverses the very purpose of personal exemptions.

  5. John C. Clark
    Jul, 19, 2018

    What most people miss about H.B. 55 is that it gradually shifts more of the tax burden to those with more personal exemptions–big families and those who care for the handicapped. Many of us oppose the concept of a head tax, which charges parents more for having more children in order to pay for their education. H.B. 55 is innovative, yes, but it is also a virtual, stealthy, steadily growing head tax.

    Sample calculations: (Estimated future increases in Fed. exemption based on IRS announcement for 2013 and statistical trend for the last 30 years. Estimated tax rate = 5%, assuming current Utah flat tax remains steady.)
    Tax Year 2012. Fed. Exemption = $3800, Utah Exemption = $2850
    Tax Year 2022. est. Fed. Exmpt = $4822, Ut Exmpt = $3616, Ut Exmpt (HB55) = $2850
    Tax Year 2032. est. Fed. Exmpt = $5739, Ut Exmpt = $4304, Ut Exmpt (HB55) = $2850
    Tax Year 2042. est. Fed. Exmpt = $6657, Ut Exmpt = $4993, Ut Exmpt (HB55) = $2850

    -HB55 tax increase for all taxpayers
    tax year 2012 = $ 00.00.

    -HB55 tax increase for single taxpayer in
    2022 $ 38.31
    2032 $ 72.72
    2042 $ 106.63

    -HB55 tax increase for two parents with two children = 4 exemptions
    2022 $ 153.24
    2032 $ 290.87
    2042 $ 426.50
    -HB55 tax increase for two parents with 8 children, two of which are handicapped = 12 exemptions
    2022 $ 459.71
    2032 $ 872.61
    2042 $1279.50

    This bill reverses the very purpose of personal exemptions.

  6. Barbara Wise
    Jul, 19, 2018

    So, if a retired or underemployed person reports an income of, say, $12,000 and pays $1,200 in Federal Income tax, that retired person would have to pay Utah income tax of $2,850? No way is that fair!!!

  7. William Brough
    Jul, 19, 2018

    As a tax professional I want to comment on the $3,800 federal exemption amount. You said “it is likely to grow every year with inflation.” In fact, it does grow every year–all of the personal exemptions and standard deduction amounts are adjusted every year for inflation. There is no “likely” about it. Even in the recent recession, those numbers ALWAYS went up from one year to the next.

    When filing their 2011 income tax return, taxpayers were entitled to an exemption amount of $3,700 for every taxpayer and dependent claimed.For the 2012 tax year that amount is $3,800, and next year it will be $3,900.That reduces the amount of taxable income BEFORE tax is calculated, and is a constant number regardless of the income level of the taxpayer, although it phases out for incomes over $250K (single) or $300K (joint filers).

    By setting the state income tax amount at a fixed $2,850, rather than as a percentage of the federal, it is true that there is no fear of it ever dropping below $2,850, even in a weak economy. But if it is not inflation-adjusted, that $2,850 will spend like less and less when it comes to covering education expenses, so that eventually it will not be enough, even in a good economy. That is something to keep an eye on.

  8. Louella Ash
    Jul, 19, 2018

    I am still confused and feeling unintelligent.
    Is this a good thing or not?
    Are there any other ideas being presented on Utah’s Capitol Hill to increase funding for education?