State Treasurer Edward Alter has met with state attorneys to decide how to figure what Utah owes under an act that, for the first time, requires states to give everything they earn on bond investments to the Internal Revenue Service.
But Alter said the requirement, which he calls a 100 percent tax, is a serious infringement on states' rights.Utah earned about $550,000 interest in 1987 on $58 million in construction bonds. The state also issued $125 million in tax-anticipation notes, but officials have yet to determine how much interest the state earned off the money.
Alter met with attorneys Monday afternoon and said he will know by the end of the week how much the state will pay. The Tax Reform Act of 1986, which requires the payments, does not include detailed instructions.
"We have the rest of the week to figure this out," Alter said. "There are some loopholes, but suffice it to say we didn't meet any of those."
States are not alone in having to pay. Counties, cities and all other tax-exempt agencies that sell bonds have to hand over the interest earned.
Alter said the requirement violates the Constitution's 10th Amendment, which guarantees states' rights and prohibits the federal government from overreaching its bounds. The federal government never before has taxed a state or local government, he said.
"This doesn't bode well for the relationship between the federal government and the states," Alter said, noting he favors a constitutional convention to redefine states' rights.
Alter acknowledged some governments have abused the privilege of earning interest off bond investments, issuing bonds for no other reason than to invest the money.
"This is an example of them killing a fly with a sledge hammer," he said.
Treasurers have used the money earned on investments as a tool to save money on government construction projects. If a project costs $50 million, and a treasurer anticipates earning $3 million on the money between the time it is borrowed and the time it actually is spent, the government needs to borrow only $47 million.