According to Gov. Gary Herbert, Utah could fall off a “fiscal cliff” if it doesn’t fix its sales tax problem and both he and legislative leaders are making averting that catastrophe their top priority.
"This is not a matter of, let’s just think about it,” Herbert said last week. “This is a matter of, we need to do something about it, because there is a crisis looming ahead of us.”
The governor is right. Utah’s tax system is out of whack. The question is whether our government has the political will to fix the problem they have led us into.
Gas taxes don’t cover roads, so they patch the hole by siphoning off sales tax. But sales tax collections have been lagging, so there’s not enough left to pay for public safety or corrections or human services, so they start sucking money out of higher education. That, in turn, leaves less money to pay for our public education system which is (say it with me) last in the nation in per-pupil spending.
Over the past few years, lawmakers have pulled $800 million of sales tax revenue out of higher education to prop up other areas of government. The real problem that is looming now is that there isn’t much sales tax left to draw from. Herbert noted last week that, while 27 percent of the higher education budget used to come from sales tax, now it’s down to 3 percent.
That 3 percent left is the cliff, because under Utah’s Constitution, income tax money has to go to education. So once those remaining millions — that 3 percent — are gone, they’re in a real mess.
Our state leaders have known about this cliff for years, but only now are they getting serious about addressing it.
Voters could have helped out, had they approved the nonbinding ballot measure last November that sought to raise the gas tax to help with road costs and stop the bleeding of the higher ed money — but it failed.
The solution the governor is pushing is the right one. He wants to start charging sales tax on a slew of services that currently are exempt. That could include things like hiring an attorney, paying a real estate agent, visiting a doctor, higher education tuition, all the way down to things like getting a haircut or hiring a Lyft or Uber ride.
Herbert and Rep. Tim Quinn, the House point-person on tax negotiations, both insist that everything is on the table. Maybe that’s true.
But the people I talk to say the most powerful groups in the Capitol — real estate professionals, lawyers, bankers and doctors — have made sure they won’t be touched. Sure, some of them might be included in early proposals, but they’ll be protected before the bill is up for a vote or else the bill will fail.
It’s not just because they have scores of lobbyists. They have thousands of wealthy and politically motivated members. They have been generous donors to scores of legislative campaigns. And, they have their own members in positions of power in the Legislature.
House Speaker Brad Wilson, Senate President Stuart Adams, and House Majority Whip Mike Schultz are all developers with close ties to the real estate business. Do we believe they’re going to be eager to start charging sales taxes on real estate transactions?
House Majority Leader Francis Gibson and Senate Majority Leader Evan Vickers both work in the health care field. Are they going to support taxing medical expenses?
Senate Majority Whip Dan Hemmert perhaps inadvertently highlighted the issue during a media briefing last week when he noted that his business — Hemmert owns a chain of dry cleaners — is one of those few services that is currently taxed and would like to be treated the same as other service-providers.
If they try to broaden the sales tax base without having the courage to include attorneys and doctors and accountants and real estate in the mix, that leaves them nibbling around the edges and imposing taxes on things that average Utahns actually will feel.
If you’re like me, you don’t spend a lot of my money calling lawyers, but you do call a Lyft. You’re more likely to get a haircut than hire an accountant to trim your taxes.
Complicating matters further, Herbert and legislative leaders have set out to cut taxes by $225 million — an arbitrary target, but whatever.
As of December, ongoing sales tax revenues were projected to grow by $189 million. That’s what is available to, say, hire new highway patrol troopers or prison officers, improve air quality, maybe give state employees a raise, that sort of thing.
So, if they really want to hit the $225 million tax cut mark, they will have to cut income taxes — and that means slashing millions that would go to education. That would be a mistake from a policy standpoint and would draw a severe backlash from voters who consider education their top priority.
All of these factors, plus the pressure to make these decisions quickly will test the political will of legislators over the last half of their 45-day session. The most likely outcome: We might see a small tax cut and some minor attempts to tax more services. But the bigger problem will be put off for another year, while we get even closer to the edge of the cliff.