Utah Capitol 17

Legislative leaders are struggling to sell their tax reform proposal to the public, and several legislators are getting caught in the resulting maelstrom.

A number of lawmakers UtahPolicy.com spoke to say their constituents are puzzled by the need for tax reform, especially since the state has been running a healthy budget surplus the past few years. 

Legislative leadership says they need to change the tax structure, not because the state has a revenue problem, but the way that taxes have to be spent. The state constitution requires that all income taxes go toward public and higher education. When the economy is good, the education fund is flush with cash, as it has been in the past few years. 

Another big piece of the tax pie comes from sales taxes, which essentially funds most everything else that government pays for. That part of the budget has been declining as Utah’s economy has been shifting from goods-based to service-based. Many services used by consumers are not subject to sales taxes. Lawmakers originally sought to increase sales taxes to stabilize that part of the tax base. Legislative leaders have warned that expenses will soon outpace revenue from that part of the tax equation. 

Gasoline taxes are supposed to pay for roads, but Utahns are transitioning to more fuel-efficient or even alternative fuel cars, which means that source of revenue has been shrinking. Lawmakers raided $600 from the General Fund to make up for the deficit in transportation funding. 

The tax reform task force’s latest proposal puts sales taxes on some services that were not taxed before. It also includes a $121 million income tax cut for individual taxpayers, dropping the overall tax rate from 4.95% to 4.64%. But, businesses would see a $41 million tax hike, which puts the net tax cut at $80 million. The plan removes a sales tax exemption for wholesale gasoline purchases. Retailers would likely pass that cost along to consumers, which would mean a hike in prices at the pump. 

The most controversial element of the plan puts the full state portion of sales tax back on food, which was taken off during Jon Huntsman’s administration. To make up for the increased burden of paying for groceries, the proposal includes a $125 per person refundable tax credit for low-income residents.

Tax cuts are usually catnip to voters, especially in an election year. But, they don’t seem to be having the desired effect this time around. Privately lawmakers are expressing wariness about the effort to pass the proposal in a proposed December 12 special session. Voters in their districts don’t know why lawmakers can’t wait until the regular session, which is about a month and a half away. 

“They’re telling me they don’t understand why we need to do this,” said one lawmaker who asked to remain anonymous. “Leaders have done a horrible job explaining why this needs to happen.”

“When I talk to the people in my district, they’re not seeing a compelling reason to do this,” said another. “They think we’re moving too fast.”

Lawmakers have been pushing for some sort of tax overhaul since efforts were abandoned during the 2019 legislature. The current task force held meetings all over the state throughout the summer to gather input on what to include in any tax overhaul. The current proposal is vastly different than the original idea, which sought to impose sales taxes on services on a large number of services. That part has been scaled back, and now only includes a handful of previously untaxed services. 

Polling shows that Utahns aren’t buying what lawmakers are selling with their tax reform efforts. An August Utah Political Trends survey found ⅔ of Utahns oppose putting the sales tax back on food. Nearly half of Utahns oppose raising the gasoline tax to pay for transportation, while about a third favor such a move. 

Another controversial piece of the tax overhaul effort is a move to undo the constitutional requirement earmarking income taxes for education. Lawmakers want to get rid of that, which would require a vote by Utahns during the 2020 election. They argue the change would give them more flexibility in budgeting as all money would go into a single pool, instead of the two segregated funds used now.

In exchange for removing the constitutional earmark, lawmakers are proposing a series of measures to guarantee education funding does not get short shrift. Ideas include allowing property taxes to rise with inflation in order to boost school funding on the local level and a constitutional guarantee that the state would fully fund student growth in public schools every year along with tying per-pupil spending to the economy.

UtahPolicy.com polling from Y2 Analytics shows Utahns mostly don’t like the idea of removing that constitutional education funding guarantee. Half say they oppose taking away the earmark, while just 30% favor the move. 

 

Lawmakers will have at least one more chance to make their case publicly this month. The tax reform committee will meet again with their latest tax reform proposal on December 9 with a possible special session to approve the proposal on December 12.