Herbert’s budget cuts sets up a big fight with lawmakers over sales taxes and roads (Updated)

GOP Gov. Gary Herbert is preparing to take on a sales tax fight that other governors have tried, and failed.

In his new 2020 budget recommendation, released Thursday morning, Herbert wants to dedicate $200 million to tax cuts, and in return, he wants to broaden the sales tax base and lower the rate.

“I am committed to that,” Herbert said Thursday morning as he released his budget at the Silicon Slopes Foundation in Lehi.

That means he wants to take away some current sales tax deductions or exemptions, or place the state sales tax on certain kinds of trade services or other things not taxed now, like internet streaming.

He gave one example of 100s “you can find:” If you rent a limousine, you don’t pay sales tax, but if you take your old car down to get it fixed at the shop, you pay taxes.

“That seems backward to me; we need to close these loopholes; take away incentives not needed anymore, if indeed they ever were.”

“Tax reform is not easy. But it is necessary.”

It has long been in Utah GOP politics that certain groups – like vending machines owners or self-service car washes – have not had to pay state or local sales taxes.

The argument being it was just too costly to do so, and the revenue wasn’t worth the hassle.

However, the state sales tax revenue has not grown as the state income tax has. More and more folks are buying service-oriented items – now not taxed — from haircuts to internet services to Uber rides.

While the state’s economy has grown at 5 percent in recent years, the sales tax growth is only 3 percent, Herbert said.

The state’s three-legged tax stool, income, sales and property taxes, is tilting badly, and if not fixed could topple over, the experts say.

But in the 1990s when former GOP Gov. Mike Leavitt fought to remove some sales tax exemptions (he won only a few such exemption take-backs), within a few years those special interests rallied their lobbying forces in the Legislature and got the same sales tax exemptions put back on.

And Leavitt didn’t fight that effort, having been bloodied politically.

Now Herbert will try to do likewise.

This effort, while perhaps laudable – even needed – has been politically difficult.

Herbert, who has high job approval ratings, is not running for re-election in 2020. And 2019 is not an election year for the 104-member Legislature.

So now is the time for him to take on this political hot potato.

Herbert budget aides, in a Wednesday briefing, told reporters that the regressive sales tax harms low-to-medium income Utahns more than rich people because lower income folks spend more of their monthly budget on taxable items.

So Herbert’s tax cut will benefit lower-income households more than the wealthy.

That may be the case. But watch some of those special interests hit with having to pay a new sales tax to fight back.

Herbert is NOT advocating taking away the sales tax break on unprepared food – which was a major achievement of former GOP Gov. Jon Huntsman Jr. (whose resignation as governor pushed then-Lt. Gov. Herbert into the top job back in 2009.)

“Not looking at that,” Herbert said Thursday.

But if lawmakers demand a repeal of the food tax break, aides said Herbert would only agree if there could be some offset for low-income Utahns. Herbert added that low-income folks perhaps should get their food with no taxes on it, but maybe even get their basic food needs discounted or for free. “That should be part of the discussion.”

Senate President-elect Stuart Adams, R-Layton, told UtahPolicy.com that he doesn’t oppose the sales tax cut, and he likes the idea of reducing the sales tax rate while broadening the base.

Herbert aides said a $200 million sales tax cut would lower the rate from 4.85 percent to “under 4 percent,” depending on how it was structured.

The state will have $1.3 billion in one-time and ongoing tax surpluses this year. So it makes sense to look to a tax cut, said Adams, who will take over control of the Senate in January.

Adams has said he wants some of the tax surplus to go toward road construction – paying cash for it instead of bonding.

But Herbert’s budget has no new cash surpluses going into roads.

Adams said it’s his understanding that because of other revenue growth, $100 million more will be going into roads in Herbert’s budget. “I would like more than that,” however, he added.

House Speaker-elect Brad Wilson, R-Kaysville, said he, too, supports a tax cut. But “it will be tricky” to put such sales tax reform into a workable program, he added.

Sales tax reform, “Will be a heavy lift,” said Herbert. He expects “a robust discussion” as Republicans in the House and Senate deal with it.

It’s easy to just cut the sales tax rate, and doubt lawmakers will support that. The tough part comes in taking away sales tax exemptions and putting the tax on some services.

“We can’t keep our heads in the sand” over dropping sales tax revenues – the stool’s short leg – he said.

Some of Herbert’s budget highlights:

The state budget would grow from the current year’s $16.8 billion to around $19 billion for fiscal 2020-2021 or an astounding 13 percent leap.

Some fiscally conservative House and Senate members may gulp that – and want either a higher tax cut or more of these tax surpluses to be saved for a rainy day.

Wilson said $1 billion of that growth is expanding Medicaid – which voters approved Nov. 6 – and $1 billion is in surpluses, all of which must be taken into consideration when looking at 13 percent growth in the budget.

“I want ongoing tax (surpluses) going into one-time spending,” said Adams. That way when the state is hit with the next recession – and one is coming sooner or later – then those ongoing revenues can be pulled out of one-time projects and used to cushion the recession’s drop in overall tax take, said Adams.

Herbert aides said it is too early to say the governor will oppose a GOP legislative tax cut greater than $200 million.

That will depend on how much new revenue is seen in February mid-general session revenue updated projections, and how much the Legislature is giving to public education.

Back in the 2018 Legislature, lawmakers cut a deal with the Our Schools Now citizen initiative leaders: OSN would end their citizen initiative petition drive, and lawmakers promised to pump more than $350 million into public schools.

But voters on Nov. 6 killed Question 1 on the ballot – a referendum to increase the gasoline tax by 10 cents per gallon, most of the money going into schools.

Still, in Herbert’s budget – because of the new revenue estimates – more than $400 million will be going into school budgets. Or even more than the $350 million promised, Herbert aides said.

Herbert wants a 4 percent increase in the Weighted Pupil Unit, the state’s main school funding formula. And he’s funding one-time teacher bonuses of around $1,000 per teacher next year, although that number will be decided by the individual 41 school districts.

$100 million into increased air quality efforts. Pollution along the Wasatch Front is down 30 percent over the last decade, but more must be done, said Herbert.

As the law requires, from the huge tax surpluses, $42.5 m goes into the state’s two Rainy Day funds, which now total $825 million – ready to help out when a recession comes.

Five years ago, Herbert set a goal of $1 billion in new funds going into public education, with this budget he gets there in just four years.

Same with higher education, where he wanted $275 million more in five years, but gets there in four.

Herbert’s recommended budget can be found on his state website, governor.utah.gov.

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