Now that Medicaid expansion is done, UtahPolicy.com is being told the Republican massive sales tax reform bill – which would shift taxes to the tune of hundreds of millions of dollars – could be unveiled in just over two weeks.
Sen. Lincoln Filmore, R-South Jordan, who is the lead negotiator for the Senate, said ideally the bill, which ie expected to be enormous in both size and scope, will be made public with at least 17 days left in the 45-day session.
“There is no way this bill gets passed if it is dropped with just a few days to go,” he said.
By far, this political effort will be the most difficult of the 2019 Legislature – making the sweat and strain of Medicaid expansion pale by comparison.
You may recall that in his State of the State address, GOP Gov. Gary Herbert said if the sales tax base is stretched to include many services in Utah, the current state sales tax rate of 4.7 percent could be cut to 1.75 percent.
GOP House and Senate leaders tell UtahPolicy.com, learning that Herbert was going to use that number, asked him not to – they didn’t want citizens’ expectations to be too high.
Herbert did it anyway, in part because he wants to see most of the planned $225 million tax cuts coming in sales tax, not income taxes – as some Republican lawmakers want.
In any case, interviews with the two main sales tax bill drafters – Rep. Robert Spendlove, R-Sandy, and Sen. Fillmore – show if enough currently exempt services are included in the enlarged sales tax base, the rate could be cut into the range of 2 percent to 2.5 percent – depending on if conservative legislators also want to reduce state income tax rates this session.
“If we get the policy right, we could get close to 2.5 or 3 percent,” said Filmore on Tuesday afternoon. “We need to aim for good policy and see where the rate eventually lands.”
Watch for some of the following big changes in the sales tax to be debated:
Spendlove, an economist who worked for the governor in 2007, says a “purist” approach to reforming the sales tax would be to “included everything” in the tax base.
And he means everything, from doctor’s bills to attorney fees, hospital costs, all kinds of personal services, like haircuts to massages to tax preparations. “Everything should be on the table” for discussions, said Spendlove, even current exemptions to sales taxes for charities – like The Church of Jesus Christ of Latter-day Saints.
Filmore says the correct approach to reforming the tax system is to make sure “everybody is in the pool” with very few exemptions – healthcare, housing and education costs, like tuition, would be excluded.
“We need to get everybody in the pool and let tax policy apply equally,” he said.
Local government entities – like cities, counties and the Utah Transit Authority – which currently levy their own sales taxes – shouldn’t get sales tax “windfalls.” So while the state sales tax will be dropped from 4.7 percent to make the reform “revenue neutral,” local governments must also be forced to lower their rates.
Currently, the overall sales tax rate varies from 5.95 in some rural unincorporated areas, to 8.7 percent in some resort cities. Those local rates would likely have to be cut in half, to mirror the state sales tax rate reduction.
Herbert is not suggesting any specific services be included in the tax reform, waiting for GOP legislators to do the heavy lifting for now. But he did mention cosmetic surgery bills as one place reform could come – why exempt from taxation such a personal improvement choice?
Spendlove says citizens have to look at the overall reform picture – yes, maybe Utah starts placing its lower sales tax rate on plastic surgeries. So that patient pays more for the doctor’s work, the hospital inpatient charges. But then the patient goes out and buys new clothes and accessories, to compliment their new look.
“And they would pay fewer sales tax on all of those purchases,” says Spendlove. “You have to take a holistic view of broadening the base and lowering the rate.”
Politically speaking, some services must still be exempt, or other carve-outs found. No point in trying to tax a sale where your neighbor buys your old lawnmower for $50. “Trying to collect that $1 sales tax isn’t worth it, on a cost-benefit ratio,” says Spendlove.
Why do all this?
Spendlove – who loves numbers and analysis – throws these numbers in response:
The Utah sales tax was imposed in 1933, a way to keep revenue flowing into state government in the Great Depression. It was solely based on what people bought – products you can grasp in your hand.
In 1967, the service industry made up 17 percent of Utah’s economy, so the sales tax was applied to 83 percent of the economic output. But by 2001, the service industry made up 31 percent of Utah’s economy. We were applying the sales tax to just 69 percent of our economy.
By 2050, within 30 years, more than 60 percent of our economy will be services – meaning we’ll be paying sales tax on only 40 percent of our economy.
Clearly, this can’t continue, or Utah state government will become starved for sales tax revenue, cuts will have to be made to all General Fund programs, like public safety, transportation and water development, health and human services – on and on.
But putting the sales tax on hundreds – perhaps thousands – of services not taxed today will be a huge political lift, even if the rate is cut in half.
“This effort will be hard politically, but it’s the right thing to do,” says Filmore. “We need to protect taxpayers. This is a more stable way to fund the government so we’re not encouraging big government growth in good economic years and incentivizing tax hikes when the economy is not quite so robust.”
Now is the time to do it, says Spendlove, Filmore and Herbert.
Utah this year has a $1.3 billion tax surplus, we can afford to make huge tax shifts.
When the next recession hits – three months or three years – politicians will be busy trimming programs, moving income and other tax revenue around.
“And we won’t be able to address” sales tax reform “for another decade – it must be done now,” says Spendlove.