Autumn is not the season we usually associate with discussions of state tax policy. But with comprehensive tax reform failing to blossom last spring at the close of the general session, state legislators are working to bring reform to fruition before winter sets in.
The push for reform comes at a time of prosperity for Utah – but also a time when structural challenges are becoming increasingly apparent. As Utah Foundation revealed in its 2018 Tax Policy Series, Utah has seen the nation’s second biggest long-term decline in taxable sales as a proportion of consumer expenditures. Meanwhile, a proliferation of earmarks and exemptions have diminished policymakers’ flexibility and revenue base as they address challenges such as the rising cost of Medicaid and the declining yield from gasoline taxes.
Efforts to bring about state sales and income tax reforms ran aground in March when the legislative session ended before a consensus could form. After rounds of subsequent public meetings and hearings, the Utah Legislature’s Tax Restructuring and Equalization Task Force in mid-October released a proposal for reform. The plan is to assemble a special session in early December to get the job done.
As expected, reform centers on expanding the sales tax base and lowering income taxes. As with virtually any tax reform, the expansion of the sales tax base creates winners and losers. The somewhat limited scope of the expansion may be welcome news to those who were concerned about “tax stacking,” which occurs when goods and services are subject to taxation at multiple points on the way to final economic output. Tax stacking can create economic inefficiencies and reduce transparency in taxation, and some were concerned that an overly expansive new sales tax base would significantly increase the risk of stacking.
However, with more of an a la carte approach to expanding the base, some business sectors might feel unfairly targeted. If your business offers items on the list – such as taxis and ridesharing, veterinary care, tours, streaming media or parking spots – you might not be thrilled with the reform proposal. That said, finding the right line to draw is a matter of debate, and under the status quo there are already taxpayers who can claim unfair treatment. Broadening the base tends to reduce that problem.
Utah’s strong economy and shrinking tax burden give policymakers room to maneuver. In a report released in early October (A Lighter Load: Utah’s Changing Tax Burden), Utah Foundation revealed that Utah’s tax burden had fallen from sixth highest in the nation in 2004 to 31st by 2016. It also found that growth in personal income – with the nation’s third-fastest increase from 2007 to 2016 – was a key factor.
Perhaps most relevant to reform efforts, our report found that sales tax was the component of the tax burden that had dropped the most. And while the individual and corporate income tax burdens declined significantly as well, Utah in 2016 still had the highest income tax burden among the eight mountain states.
Yet some would already call Utah’s tax system the envy of most states. The nonpartisan Tax Foundation’s new national State Business Climate Tax Index ranked Utah ninth overall. However, this ranking is pulled higher on the strength of Utah’s No. 5 ranking for property tax – which is not at issue in the reform efforts. Its sales, individual income and corporate income taxes ranked 22nd, 12th and 10th, respectively. It can be said that, from the Tax Foundation’s perspective, the sales tax is the weak link in the chain.
The Task Force’s recommendations address all three of the biggest concerns Utah Foundation raised in its 2018 sales tax report: the proliferation of exemptions, the expansion of earmarks and the growing economic role of untaxed services. Some of the exemption changes may be debatable, while others raise questions as to why they ever existed, such as the exemption on exterior car washes when the interior is not also cleaned. Other changes are bound to be more controversial, such as restoring food purchases to the full taxable level (mitigated by a Grocery Tax Credit for lower-income families).
Task Force leaders are likely to point out that taxpayers will get relief in a rather popular form: through a cut in income taxes and an expansion of dependent tax credits that could save families hundred of dollars a year. A spoonful of sugar helps the medicine go down. It might also help bring that Tax Foundation ranking up.