Utah state government has several problems. It spends too much money, and taxes are too high and poorly designed, so they slow economic growth.
Unfortunately for taxpayers, fixing these problems is made more difficult by two bad decisions Utah made back in 1931.
First, Utah chose to impose a state income tax. To date, nine states avoided that mistake. And those nine no income tax states – which include Texas, Florida, and Tennessee – attract businesses, jobs, and talent.
Second, Utah voted to silo all state income tax into spending on “education.” This means the most powerful lobby in Utah – the teacher’s union – is an opponent of all pro-growth reductions in the state income tax burden.
Due to this silly arrangement, recent claims that Utahns are starting to purchase fewer goods and more services – which are not subject to the state sales tax – have been causing some panic, as many wonder if government spending programs will have to reduced or eliminated in the future.
Undoubtedly, there are ways to make Utah run on fewer tax dollars. But lawmakers have a remarkable inability to cut spending, so many are rallying around another “solution.” Net tax hikes disguised as tax reform.
The Tax Restructuring and Equalization Task Force was created at the end of the 2019 legislative session following the failure of the House Bill 441, also known as the Utah Tax Equalization and Reduction Act. HB 441 would have applied the state sales taxes to services – lots of services – and reduced the sales tax rate, though not very much. Had HB 441 been implemented, it would have resulted in a massive net tax hike.
HB 441 was also a tough sell politically, though that should not have been a surprise. Florida Governor Bob Martinez learned that lesson back in 1987, when he enacted a 5% tax on services, including advertising, legal fees, construction, accounting, pest control, and architecture.
Martinez subscribed to the belief that “modernizing” the code to tax services was the only way to put the state on firm financial footing, but as he quickly learned, taxpayers disagreed. Polls found that almost eight in 10 voters opposed the new tax and Gov. Martinez’s popularity plummeted.
Less than six months later, Gov. Martinez called for a special session to repeal the services tax. Unfortunately for Gov. Martinez, the damage was already done, and he ended up losing his re-election bid to a Democrat in 1991.
Just last year, Arizona voters reminded politicians just how unpopular services taxes are. On November 6, 2018, Proposition 126, the Prohibit New or Increases Taxes on Services Initiative, which prohibits the state and local governments in Arizona from imposing new taxes or increasing existing tax rates on services, was approved overwhelmingly, capturing just over 64 percent of the vote.
While Utah’s tax task force has made clear that HB 441 is not the starting point of their discussion, their assignment to “address Utah’s outdated tax structure” is likely to land them in a similar spot.
The allegedly shrinking sales tax base is not even the real issue. Utah has a revenue allocation problem. This year, Utah experienced a $1 billion surplus, but because that revenue came from the income tax, under present law it can only be spent on “education.”
The arbitrary requirement that all income taxes must be spent on public education turns the state teachers union in to a lobby for higher income taxes and certainly into an opponent of reducing the state income tax. Somehow nine states manage to run their government without any income tax. Utah’s 5% income tax rate is no longer considered low. Heck, for 2019, Massachusetts flat tax rate is being reduced from 5.10% to 5.05%.
Tax policy should fund appropriate spending and avoid slowing economic growth. Income taxes are the greatest drag on job creation and investment. The sequestering of funds from the income tax to the education lobby is a big mistake. Failure to address this issue will drive further errors.
Grover Norquist is president of Americans for Tax Reform.