Lawmakers may be pumping the brakes on a massive tax reform package they started floating last week.
As first reported by UtahPolicy.com, legislators were a few moves to make Utah’s tax revenue base more stable, including restoring the state portion of sales tax on food, dropping the income tax rate, while phasing out exemptions for higher-income earners and re-indexing the gas tax so that any increase will kick in earlier.
Right now, the income tax portion of the reforms seems to be on shaky ground, while restoring the sales tax on food, collecting sales taxes on internet sales and re-indexing the gas tax a much more likely proposition this year.
“This might take longer than we thought,” said Senate President Wayne Niederhauser, R-Sandy, during an interview with UtahPolicy.com.
The sticking point is when those income tax deductions start to phase out. Right now, it’s at about $155,000 of income, but lawmakers have toyed with phasing them out as low as $75,000, which would be a dramatic change.
“We need to take a longer look at the income tax and who pays,” acknowledged Niederhauser. “It’s a shift in the way people pay. We’re trying to be careful with what we’re doing.”
That shift is what’s giving lawmakers pause. Once someone is granted an income tax exemption, it’s very hard for lawmakers to take it back. Utah’s flat income tax is supposed to be 5%, but all of the exemptions and other breaks lower it to around 3.85%. Lawmakers are still trying to figure out when to start phasing out the exemptions and credits.
While the income tax changes may not happen this session, it’s getting more and more likely that legislators will reinstate the state portion of the sales tax on food. Critics say sales tax on food is a regressive tax measure, disproportionally affecting the poorest citizens in the state.
Also, expect lawmakers to re-index the gas tax increase they passed two years ago. That tax was indexed to kick in when gas prices hit a certain level, but with the drop in fuel prices, the trigger moved further away. Changing that trigger level will bring a boost in gas tax revenue much quicker, which means money for roads.
The Senate also seems determined to start collecting sales taxes on sales over the internet. Critics argue that it’s a massive tax increase, but the move would simply be to start collecting sales taxes the state is already owed on remote sales, estimated at around $200 million a year.
The proposed tax reforms this year are not an all or nothing proposition. Restoring the food tax and re-indexing fuel prices can be done independently of any income tax reform. That’s the path that lawmakers will likely take in 2017, leaving work on the income tax for the interim or next year.
“We’d be comfortable with one, but not the other,” said Niederhauser. “The goal is to broaden the base while lowering the rate. That’s just good tax policy.”
Driving this whole tax reform discussion is a proposed ballot initiative from the Our Schools Now group which would raise income taxes 7/8th’s of one percent, which could boost funding for public schools by an estimated $750 million per year. That initiative would appear on the 2018 ballot if the group can gather enough signatures.
Niederhauser acknowledges that there are some pressing infrastructure needs that lawmakers will need to address sooner rather than later, but $750 million more in funding may be overkill.
But, where to find that money? Niederhauser reluctantly admits that state revenues will be inadequate in a few years, especially with an expected doubling of the population along the Wasatch Front by 2040, just 22 years from now. However, he thinks there’s a gradual way to address things.
“There needs to be some kind of tax increase to meet the needs of the state. I see it changing, but we can’t just jump off a cliff. If every legislature does its part, then we’ll be fine. We don’t have to solve all of the problems at once.”
But, there’s always political considerations when you’re talking about tax reform. Next year is an election year, which usually makes lawmakers nervous about anything that even smacks of a tax hike. Niederhauser says staring down the barrel of the Our Schools Now proposal might be motivating enough for lawmakers to pick up that sticky wicket next year.
“When you’re talking about tax reform, there are winners and losers, which makes it difficult to do anything. At the end of the day, it’s still politics.”
