Legislators pull plug on massive sales tax bill, but will bring it back in special session (UPDATED)

Utah Capitol 13

Even though Utah House GOP leaders had the votes to pass a huge sales tax reform bill Friday, after a scurry of meetings and top-level discussions on Capitol Hill Thursday, GOP Gov. Gary Herbert and Republican legislative leaders decided to scuttle HB441 for now, study the whole issue for several months while traveling the state getting citizen input, and then meet in a spring or early summer special session to reform state sales taxes, broaden the base to include thousands of services not now taxed.

Reforming the sales tax was a huge political lift, one that may have been achievable over the next week, but politically unwise, leaders told UtahPolicy.com after the press conference.

“We had 48 votes” in the 59-member House GOP caucus, House Speaker Brad Wilson, R- Kaysville, told UtahPolicy.com after a hastily-called afternoon press conference by state leaders in the historic Capitol Gold Room.

Republican votes for HB441 in the Senate were more uncertain. 

But, said Wilson, Senate President Stuart Adams, and Herbert in the press conference, it was wiser policy to take a bit more time, listen to more Utahns, educate more Utahns, and come up with a “consensus” sales tax reform bill.

Senators were publicly supportive of the concept, but privately skeptical whether the plan to impose sales taxes on hundreds of services in the state would work. 

“We’re ‘curious’ about what’s in the bill,” said one Republican Senator who was trying to be tactful with their skepticism.

The decision to put the brakes on the bill and the resulting press conference happened very quickly on Thursday afternoon. Republican sources tell UtahPolicy.com that House leaders gave a “rah rah” speech in support of HB441 during their afternoon closed caucus and told GOP House members that they planned to hold a vote on the bill on Friday in order to give them a chance to read the legislation once it became available.

“We were expecting the bill and fiscal note Wednesday night,” said Wilson. “We were going too fast for how technical and complicated this issue is.”

Wilson said the final decision to push the bill off until after the session happened late Thursday afternoon.

After a series of public and private meetings throughout the state – where business people whose services will soon be taxed can come, express their views, and hopefully better understand the “structural” tax problems facing the state, Herbert said he will call a special session – maybe late spring, maybe early summer.

At that time the next version of HB441 will be adopted.

Since sales tax reform was either going to be revenue neutral – or maybe even give a $75 million sales tax cut in the bill – how much of an overall tax cut to give Utahns will have to wait – it will not be adopted by legislative adjournment midnight next Thursday.

“How can we give a tax cut without stabilizing our tax structure?” asked Adams, R-Layton, in the press conference.

Lawmakers will still try to adopt a balanced 2020-2021 state budget before adjournment – something which is normally done at the end of every 45-day general session without much trouble.

But that task got a lot harder Thursday afternoon, as GOP state leaders decided there wasn’t enough time to put together HB441 (a substitute was waiting for a fiscal note). 

So, over the next few months, GOP leaders said, both sales tax reform AND cuts to the state’s sales and income taxes will be hashed out.

2020 is an election year for all 75 House members, half of the 29-member Senate, and for the governor’s office (although Herbert has said he will not seek re-election next year.)

Lt. Gov. Spencer Cox is almost certainly running to replace his boss, and so there is little appetite in the executive or legislative branches of Utah government to drag out major tax reform into 2020.

And tax reform is coming, Herbert, Wilson and Adams all promised Thursday – even if it may wait for a few months.

HB441, as written, was going to spread out the sales tax base to include 1,000s of now-untaxed services, from attorneys’ fees to a 1 percent health insurance policy surcharge, from haircuts to massages, from Uber rides to rented scooters.

More than $340 million would be shifted from now-taxed retail sales to untaxed services, with the state sales tax rate dropping from 4.85 percent to around 3 percent.

Also, the state’s income tax rate was going to be dropped from 4.95 percent to 4.75 percent – a flat-rate tax that was adopted a decade ago. That would be a huge $300-million-plus tax cut over several years.

But those tax cuts will now wait until the final HB441 is adopted later this year, said Herbert and the legislative leaders.

That’s not that big a deal, since the cuts weren’t supposed to take place until January 2020 anyway, leaders said.

Herbert et al. portrayed sales tax reform as not only a technical necessity – the sales tax isn’t bringing in the revenues required because it’s retail-based system is structurally crippled – but required to basically save public education’s budgets.

While true, that is also a good political argument – Utahns have shown in the past that they can stomach just about anything taxwise as long as public schools are protected, or even helped.

The Utah Constitution, amended by voters a decade ago, says all personal and corporate income taxes will go toward public AND higher education.

For years, sales tax from the General Fund has been used to subsidize higher education budgets – giving more money to public K-12 schools.

But because services are not taxed, the sales tax, while growing, is providing less and less of higher education budgets – as General Fund agencies, from public safety to Medicaid to air quality programs – cry out for more funding.

So if sales tax revenue doesn’t get on firmer footing, higher education will draw more and more income taxes, with public schools suffering accordingly, leaders say.

Wilson said as House members talked to businessmen and women, angry their service-oriented businesses were going to be taxed (even at a lower rate than currently), the service community could see the reasoning in expanding the sales tax base.

“They would start saying: “For crying out loud, don’t tax us,” but end up” agreeing that tax reform is needed.

Now, with months of public education and listening to take place, GOP leaders hope soon a special session can be called on a revised HB441.