Utah’s Republican lawmakers and GOP Gov. Gary Herbert have said for months that they plan big sales tax shifts as part of their overall revenue-neutral tax reform efforts this year.
UtahPolicy.com has gotten an exclusive peek at some of the proposed changes – reported below.
But first some caveats: The House’s bill – to be sponsored by Rep. Tim Quinn, R-Heber – has not yet been filed, so these numbers and the specific services to be taxed could still change.
The GOP caucuses in the House and Senate have not made final decisions on these matters.
A power-point presentation obtained by UtahPolicy.com (below) could change, as final decisions are made.
With that understanding, here are some of the big (and little) ideas coming from Republican legislative leaders:
If all sales/transactions in Utah were placed in the reformed sales tax system, all $325 billion transactions in a year would be taxed – lowering the state sales tax rate from 4.7 percent to 0.87 percent.
But this is clearly impossible. Among other things, this would include so-called “inputs” in business operations – something GOP leaders have already strictly forbidden.
Still, $55.303 billion in mostly-service-type sales will be included in the expanded sales tax base Republicans are considering. This is a big number – both in total service sales, and in the number of services that would be taxed for the first time in Utah.
Now, it is understood that the current 4.7 percent state sales tax rate will be lowered to accommodate that larger base – making the overall sales tax reform revenue neutral.
This is an important point.
The GOP’s sales tax reform proposal IS NOT a tax hike, overall. However the lower rate – yet to be determined in Quinn’s bill – will be applied to all kinds of services that are not taxed now —from haircuts to massages, from attorney fees to tax-preparers – and 1,000s more.
To make the overall tax reform neutral, if the sales tax rate is dropped to 2.5 percent, the broader base will bring in $1.382 billion annually from new services taxed under the GOP plan.
If the rate drops to 2 percent, then the broader tax base will bring in $1.106 billion in new services taxed.
Also, it is important to note that Herbert and GOP legislative leaders promise a $225 million tax CUT this year.
Herbert wants all of that in sales tax reductions. GOP leaders want it in income tax reductions, with a mix reduction in both tax rates likely.
Also, when the sales tax rate is dropped from 4.7 percent, many low-income Utahns will benefit – they already spend their money on taxable items, like clothing or buying a used car. They probably don’t spend a lot of money on accounting fees or plastic surgery. So a broader-based sales tax with a lower rate helps the low- and middle-income more than the wealthy, Utah GOP leaders want to note.
Now, what everyone wants to know is what new services will be taxed. It would be more accurate to list what WON’T be taxed.
Your doctor, hospital and other medical bills won’t be taxed directly.
However, there will be a new 1 percent tax on medical insurance premiums, referred to as an “excise” tax. This new tax will bring in $66 million to state coffers. (Remember, this is NOT a tax hike overall, but an offset by lowering the overall sales tax rate.)
Currently, there is a 2.5 percent tax on all non-medical insurance premiums, like homeowners, renters, and vehicles. So while there will be a new tax on medical insurance, it will be less than other insurance premium taxes.
The new sales tax rate WILL be charged on all plastic surgeries, as UtahPolicy.com has reported before.
Manufacturing inputs will not be taxed – like steel used in making an exercise machine. The machine itself is already subject to sales tax when sold at retail.
Utilities will not be taxed more, as they are already taxed.
= Wholesale sales will not be taxed, and aren’t now.
= Agriculture production will not be taxed.
= Lodging and food services provisions will not be taxed.
= Government activities will not be taxed since you would just be taxing yourself, and what’s the point in that.
= There is already a per-gallon tax on fuel sales. The new lower sales tax rate will not apply to gasoline sales.
Here are some of the big sales/fees, mostly services, that will be taxed:
= One of the largest changes – and will be hated by those providers – will be professional services.
Yes, attorney fees will be taxed, as will accounting and tax preparation fees. Engineering fees, design fees, computer services, consulting services, advertising, vet fees for your pets – the list goes on and on.
Already taxed in this area of the base is $730 million in transactions. But that “professional services” base will increase to $12 billion and could bring into state government more than $250 million each year.
= Construction. The state already taxes $1 billion worth of construction activities. But that tax base will be increased to $10.4 billion – or 10 times more than is taxed now. Overall, around $200 million (depending on the final tax rate, not yet determined) more will be brought in from new construction work not now taxed.
= Software will be taxed.
= Traditional broadcasting will be taxed, including Internet-based broadcasts.
= Telecommunication services (cell phone plans) will have sales taxes applied.
= Web search portals, data processing, and information services will be taxed.
=Many transportation and storage services will be taxed, like Uber rides. This sales tax base currently taxed is $168 million, and will balloon to $2.5 billion. It could bring in more than $50 million a year to the state.
= Financial services will see a big expansion of its service-based products – including the change in ownership of financial assets.
= The sale of real estate itself will not be taxed. But appraising real estate will be taxed, as will the management of real estate on behalf of others.
= Education tuition and fees will not be taxed. However, there are some “educational” services that will be taxed, like golf lessons and private driver training lessons.
= Government operations that compete with private providers will be taxed, like golfing fees on public courses will be subject to the sales tax, since they compete with private golf courses.
= Arts and entertainment expenses will be taxed, including producing and promoting live performances, events and exhibitions.
Other internal changes to how state government deals with its slow-growth sales tax may need to be made.
For example, Quinn’s huge bill will take away 16 current sales tax exemptions on product purchases – the final list is still being worked on. There are 88 sales tax exemptions already, so many of those will still stay on the books, UtahPolicy.com is told.
All of the state sales tax receipts go into the General Fund, out of which most non-education state expenditures are made.
But only 76 percent of the General Fund revenues are “free,” or unrestricted by state law.
That means that currently 24 percent of sales tax revenue is “earmarked” for special spending – in dozens, if not hundreds of programs.
That “earmarking” will be looked at, if not now, later.
Lawmakers wanted to build more roads over the last 20 years, and so put sales tax money into the Transportation Fund.
In fact, 22 percent of the total sales tax base (90 percent of the earmarks) now goes into roads. It’s unlikely that can continue, as it ties the hands of lawmakers who want more sales tax money going into the General Fund.