Utah Capitol 07

Lawmakers have just under four months to fix the imbalance in the tax system before they have to take drastic measures to fund the basic operations of state government. That was the dire warning delivered by House Speaker Brad Wilson, R-Kaysville, during an exclusive interview with UtahPolicy.com on Friday.

“We are not backing down on this issue,” said Wilson. “We have a $340 million structural imbalance in our tax system, and we need to fix it.”

Here’s the basic problem. Public education is funded out of the Education Fund, which is fueled by income taxes. The rest of the state government is funded by the General Fund, which is the pot of money which sales taxes flow into. The Education Fund is very robust right now, carrying a projected surplus of approximately $900 million. The General Fund, on the other hand, is suffering from anemic growth. The excess funds in that account are just $187 million, which, simply put, is not enough.

In fact, the state has technically overdrawn the General Fund by $64 million this year after paying for the Medicaid expansion and the final construction for the new prison. That doesn’t mean the state is going to start bouncing checks anytime soon, but lawmakers have been transferring money from the Education Fund to the General Fund to cover rising costs for higher education. This is the last year the legislature will be able to do that.

Simply put, legislators have been rearranging the chairs on the deck of a financial Titanic, and they’ve run out of time.

“If we can’t get tax reform done, a year from now we’ll have to start relying on debt to pay expenses out of the general fund,” said Wilson. “We have four months to fix it.”

Besides debt, the legislature could pull some earmarks out of the budget or tap rainy day funds if the tax imbalance is permitted to continue. The new fiscal year for Utah begins on July 1.

The imbalance took place as the economy started shifting from goods-based to services-based. People are buying less stuff, thus the sales tax revenue has been dropping. That drop has gotten steeper as the shift to services has accelerated. In response, lawmakers proposed putting sales taxes on services that previously were untaxed, including Uber rides and legal fees. Not surprisingly, the proposal was causing lots of consternation among the public who were upset over such a massive paradigm shift.

“We’ve known about this imbalance for a couple of years,” said Wilson. The first attempt by the legislature to fix the problem occurred a couple of years ago when legislators began discussions about reinstating the state portion of the sales tax on food. Since then, the problem has only gotten worse.

“The need got more intense this year when we realized how little the General Fund was growing,” said Wilson.

Without the tax reform measure, legislators would normally transfer the money out of the Education Fund to cover higher education. This year, that would be around $300 million.

“If we did that, it would simply buy us another year,” said one GOP lawmaker who asked not to be identified. “But what happens then? We’re in big trouble now, and this is supposedly a ‘good’ year What happens in a year where revenues are flat, or in a year when the economy heads south? We have to get this figured out now.”

Wilson says he was disappointed that they have to punt the tax reform issue to a special session later this year.

“I honestly thought we had enough time to get this done,” he said. “We would not have brought this to the table if we didn’t think it was possible.”

So what went wrong?

Wilson says the delay in the fiscal note on the latest version of the bill was the death knell. They were hoping to have it ready by last Wednesday, and Wilson says if that had happened, they probably could have moved forward with the bill. But, the delay stretched into Thursday.

“We had plenty of votes to pass the bill in the House, but Wednesday night we started to realize we probably shouldn’t,” he said.

That may not be the whole story. Legislative sources have indicated to UtahPolicy.com that there was not enough support in the Senate to pass the tax overhaul as Senators were very suspicious of adding sales taxes to services that had not been taxed before. If the House had passed the bill only to see it fail in the Senate or sent to study, it would have been a massive political defeat.

Wilson says he’s confident they’ll be able to turn the tide of public opinion in their favor once the process begins anew ahead of the coming special session.

“I’ve never seen anything this complex. Our 45-day session is not a great fit for this kind of issue. Once we get a chance to explain the problem to people, they understand the need for change. I’m confident we’ll get this done.”