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Economy: Stimulating Thought

Bonding, not budget cuts, could drag Utah out of recession.



As City Weekly went to press, Utah lawmakers were readying to debate a resolution blasting federal efforts to rescue the economy.

The “Joint Resolution Urging Congressional and Presidential Opposition to Federal Bailouts and Promotion of Fiscal Responsibility” says the country can pull itself up by its bootstraps without federal deficit spending. It complains bank bailouts are “moving the free market-based economy another step closer to unconstitutional socialism” and, among other things, calls on Congress to shut down home-mortgage-underwriter Fannie Mae.

Rep. Craig Frank, R-Cedar Hills, the resolution’s sponsor, isn’t the only one spooked by get-out-of recession spending plans. In contrast to Gov. Jon Huntsman Jr., who has embraced the federal stimulus, several Republican legislative leaders are publicly questioning whether Utah should take all of Utah’s federal allocation.

For now, Utah’s Legislature is refusing to dip into the state’s $400 million rainy-day fund and is plowing ahead with deep cuts to balance Utah’s budget in the face of a $1 billion projected revenue shortfall. Initial reductions penciled out in Capitol Hill back rooms amount to a 20 percent cut, potentially resulting in a shortened school year, 3,000 fewer university jobs and deep cuts the state’s safety nets for the poor.

Some outside the Legislature say it doesn’t need to be so grim. The Salt Lake Chamber calls deep cuts to education or human services “untenable.” It’s asking lawmakers not only to avoid deep cuts, but to spend—by taking the federal money, then using Utah’s AAA bond rating for an extra, state version of a stimulus package. It may seem counterintuitive, but some economists say borrowing, or raising taxes, is the fiscally responsible thing for Utah to do during a recession.

Utah State Treasurer Richard Ellis has told lawmakers the state could borrow nearly $3 billion without putting at risk Utah’s AAA bond rating.

Since the bond markets calmed down in November, Ellis says Utah has had the ability to sell bonds at attractive rates, now sitting below 4 percent. The bond rating agencies that currently mark Utah a good credit risk would even be OK with Utah dipping into its rainy-day fund. “They know it’s there to be used,” says Ellis, who nonetheless agrees the fund should be used as a last resort.

Ellis isn’t advocating for or against bonding, but told City Weekly there is an argument for borrowing now, when the economy is down. Rates are good, and with contractors looking for work, construction costs are down. Construction inflation is running around 10 percent per year, so borrowing for projects today at 5 percent “saves money down the road,” Ellis says.

Borrowing for road construction also could free up cash to fill holes elsewhere in the state budget. Right now, Utah is paying cash for its highways through a portion of the sales tax diverted every year to a road-building fund. Bonding for roads could free up $370 million cash per year.

The Salt Lake Chamber is lobbying for a state bond between $200 million and $400 million for roads and buildings. Combined with federal money, the chamber believes state job-creating borrowing can get the Beehive State out of the recession by the end of the year.

“We think we should do all we can within the state government to provide a state stimulus that will contribute, when combined with the federal stimulus, to give Utah a real shot in the arm,” says Wesley Smith, the chamber’s public-policy director. “We are urging [the Legislature] to avoid the temptation of trying to let the federal government bail us out on this. Whatever is coming from the feds is gravy. We’re not planning on a federal bailout to solve our problems.” The federal stimulus, the chamber notes, loses its stimulating effect if the money is simply used to fill holes the Legislature has cut in the budget.

Smith warns that some in the U.S. Congress are already threatening a backlash against states that use stimulus checks as an excuse to slash state spending.

The chamber is urging the Legislature to take full advantage of potential stimulus money that requires a state match, like Medicaid.

State bonding for buildings would have a multiplying effect on the economy, the chamber argues. Private businesses and individuals have already pledged money for many of the university building projects in line for state funding. The chamber estimates a $400 million state bond could bring in an additional $160 million of private money.

Consulting economist Doug Macdonald has been arguing for a recession solution that sounds even less likely than bonding: raising taxes. A former chief economist for the Utah State Tax Commission, Macdonald says the last thing Utah should do in an economic downturn is fire large numbers of employees, since state salaries go directly into the local economy and “multiply” when spent on goods and services. Government work makes up about 10 percent of Utah’s economy. Macdonald calculates that reducing government by the amount lawmakers are considering would result in a 3 percent drop to Utah’s overall GDP.

Macdonald’s proposal calls for returning the sales tax and income tax to the rates they stood at before Utah’s economy boomed and lawmakers passed the 5 percent flat tax. Raising the sales tax by 0.7 percent on everything but food and bumping the flat-tax rate to 6 percent would be enough to make up most of the state’s projected revenue shortfall.

For proof it can work, Macdonald goes back to 1987 when he was chief economist for the state tax commission and Utah was plunged into recession with closings at Geneva Steel and Kennecott. Utah was faced with firing 10 percent of state workers. Instead, the state raised the sales tax by a half percent and sales went up in each of the following three years.

The idea you can’t raise taxes during a recession is, “a myth,” Macdonald says. “Obviously, you don’t want to raise taxes any time, but it’s worth it compared to furloughing teachers.”