‘Everything is in until it’s out.’ Utah sales tax overhaul begins to take shape

Utah Capitol 27

Sponsors say the much-anticipated sales tax reform bill will be unveiled sometime this week, and details of what’s in the bill are beginning to take shape. But, any anticipated income tax cut won’t come until after legislative leaders negotiate details for next year’s budget.

Rep. Robert Spendlove, R-Sandy, says they’re not 100-percent sure what the final sales tax rate will be in the bill, but they are targeting somewhere around 3-percent.

“It will have a three in front of it,” he joked on Tuesday morning before presenting the bill to the Republican caucus during their noontime lunch.

A one-sheet shared with the media following the caucus said the rate would be lowered to 3.10 percent.

The bill, which is still in draft form, will see the light of day sometime this week. Spendlove and Rep. Tim Quinn, R- Heber, who is also working on the legislation, say legislative attorneys are working “around the clock” to get the complex proposal ready for prime time.

As UtahPolicy.com first reported last week, $35 billion of sales would be subject to the new sales tax rate. That would represent a monumental change for Utahns and Utah businesses who are not used to paying that tax right now.

“Everything is in unless it’s out,” said Spendlove.

“This is an effort to get the policy right,” said Spendlove repeating the oft-recited mantra on the hill of broadening the base while lowering the rate.

Legislators say there’s urgency behind the tax reform this year. House Speaker Brad Wilson, R-Kaysville, put it in stark terms.

“We are just about out of General Fund money. In fact, we’ve essentially overspent our General Fund by about $40 million this year,” he said. “We need this to pass this year, or we won’t have any more general fund money to spend.”

The reform, while designed to be revenue neutral this year, will stabilize tax collections for the state and give lawmakers a more reliable source of funding for state needs.

Here’s how the reform will work according to Spendlove and Quinn:

The new sales taxes would go into effect in July of 2020. However, the lower rate, whatever lawmakers settle on, will be phased in over a year’s time. The first reduction of the sales tax rate would take place over 6 months. Another reduction would happen over the next three months, with the final reduction going into effect by July of 2021. That will allow the state to assess the impact of the new sales taxes and give lawmakers a chance to make adjustments as needed.

During the phase-in, any excess revenues generated from the new sales taxes will be set aside, Quinn describes it as a “lockbox.” Those moneys would be used to mitigate any negative impacts on local entities from the reduction in the tax rates.

“The typical Utah family will see a net tax reduction of about $620 annually,” said Spendlove.

In addition to the sales tax overhaul, lawmakers plan to make some changes to the states income taxes, including a tax cut. Gov. Gary Herbert and Speaker Wilson called for a $225 million tax cut at the beginning of the 2019 session, but the size of the eventual cut won’t be decided until the final budget negotiations are done in toward the end of the session. In fact, the income tax cut won’t come into the bill until the end stages of the 2019 legislature.

There are three other tax changes that will be integrated into the bill.

First, lawmakers want to implement an earned income tax credit for low-income Utahns to offset some of the impacts of the expanded sales taxes.

“It won’t fully offset that, but we want to make sure we blunt some of those effects,” said Spendlove.

Second, the bill will expand the retirement tax credit to help Utahns who are on a fixed income. The plan is to broaden the credit up to $40,000 of income.

Finally, and probably most important, legislators plan to fix a big problem caused by the elimination of tax exemptions in the federal tax reform passed by the Republican-controlled Congress at the end of 2017. Those exemptions lowered the taxable income for families, which is how the state’s tax bill is calculated. The exemptions were replaced by a credit, which meant a higher taxable income and, consequentially, a higher state tax bill.

Lawmakers addressed some of that tax gap last year, spending approximately $50 million to lower tax rates for all Utahns. The provision in this year’s bill will fix the increased tax problem for all Utah families earning approximately $85,000 per year or less.

“We’re completely backfilling that hole and fixing the problem for those families,” said Quinn.

The income tax provisions, when passed, will apply retroactively to January 1 of this year, so they will be part of next year’s tax filings.

One other controversial part of the bill is a 1% excise tax on private health insurance premiums. While adding a tax to health insurance may raise some eyebrows, Spendlove says currently all insurance policies in Utah, with the exception of health insurance, are subject to a 2 ½% sales tax, so it’s not out of line to impose the health insurance tax.

“It’s a light touch on that part of the economy,” he said. “We’re trying to make sure every sector is part of this.”

Spendlove and Quinn say they’re being extra careful to avoid double taxing services that are already taxed. The legislation removes 16 of 88 current sales tax exemptions on product purchases. The exemptions that remain are already subject to other taxes.

Spendlove adds they’re being careful to craft the reform so they can easily anticipate future changes to the economy, but whatever the plan looks like is simply a starting point for lawmakers.

“We want to put the right kind of system in place so we can make sure the foundation is solid,” he said.