Last month, Utah lawmakers established a task force to explore the overhaul of the state’s outdated sales tax code, among other possible reforms. Today, a new study from the nonpartisan Tax Foundation provides a detailed guide for how Utah can accomplish sales tax modernization in a way that improves neutrality, revenue stability, and the state’s overall economy.
Modernizing Utah’s Sales Tax: A Guide for Policymakers provides the economic and historical data necessary to understand why Utah’s sales tax code needs reform, the technical details for how to avoid unfairness, double-taxation, and complexity, and a range of concrete options for revenue-neutral base expansion.
“A well-crafted sales tax reform package could be a trifecta for the state,” writes Senior Policy Analyst Jared Walczak, “enhancing the neutrality and competitiveness of the state tax code; improving revenue stability for the state with a tax code that grows with the economy; and rebalancing state revenues and allowing income and sales tax collections to grow at similar rates.”
Among the report’s key findings:
- Utah’s eroded sales tax base inaccurately reflects the modern economy, capturing only 35 percent of all personal consumption, down from nearly 50 percent just two decades ago.
- The sales tax has declined 31 percent as a share of total state tax collections over the past four decades, while the income tax—which is less economically efficient—is up 60 percent.
- Today, the income tax brings in nearly $4 billion a year, compared to less than $2.7 billion from the state sales tax.
- Utah’s sales tax code has less tax pyramiding than most states with only 26 percent of all taxable sales representing business inputs, an important feature the state should seek to build upon.
- In any expansion of the sales tax base, Utah should exempt business inputs based on the nature of the product, the identity of the purchaser, or both.
- The erosion of Utah’s sales tax base, its only major source of general fund revenue, creates budget stress in some spending categories while surpluses accumulate elsewhere.
- Expanding the sales tax base to include more consumer services (much more heavily consumed by higher-income individuals) would make Utah’s tax code more progressive.
- While several states have achieved moderate sales tax base expansion in recent years (including Iowa, Kentucky, North Carolina, and the District of Columbia), Utah is poised to be a national leader in sales tax modernization if it takes a comprehensive approach to reform.
The study also includes a range of options to expand Utah’s sales tax base, with estimates for the revenue each provision would generate and with the sales tax rate below 4.85 percent for each to remain revenue-neutral.
“A modernization of Utah’s sales tax is long overdue,” Walczak says. “The state’s sales tax system was designed around the economy of 1933—an economy that no longer exists. The formation of a task force dedicated to sales tax reform grants Utah policymakers the unique opportunity to bequeath future generations a flexible, pro-growth tax code that can adapt to a changing economy and harnesses Utahns’ work ethic and creative energy to continue—and build upon—the state’s many economic successes.”
See the full study here.