Gov. Gary Herbert’s office is readying a proposal to expand Utah’s sales tax — potentially to increase the rate on food purchases and to tap into a ballooning service economy.

The brewing reform effort is related to concerns that consumer spending on taxed goods isn’t growing as quickly as spending on services, much of which lies outside the sales-tax dragnet. While these economic shifts have been gradual, state officials are feeling heightened pressure to adapt because they’re about to lose some budgetary wiggle room, said Phil Dean, state budget director and chief economist.

“We do think that, given some of the constraints that we’re going to run into pretty soon on the budget flexibility side, we think it’s important to act this session on these issues,” Dean said.

The reform plan is still taking shape, he added, and Herbert will release more details with the rollout of his budget proposal next week.

For the most part, policymakers are focused on broadening the sales tax to what Dean calls “consumptive services,” ones that generally require a physical presence in the state. Examples would be pest extermination, carpet cleaning, home repair and installation services, massages, haircuts and other personal care services. Officials aren’t as interested in tacking on the sales tax for financial and health care services, he said.

The governor’s proposal might also call for applying the full sales tax rate to food, which is currently taxed at a level less than half that of other goods.

Dean said these adjustments could be coupled with a slight reduction to the state’s 4.7 percent sales tax rate, potentially yielding a net tax decrease in the near term.

However, the state’s course correction could set the stage for faster revenue growth in the future. It could also mean a heavier tax burden for residents down the road, compared to what they would’ve paid without the changes, said Juliette Tennert, chief economist at the Kem C. Gardner Policy Institute at the University of Utah.

“You’d be getting back on trend with the economy,” Tennert said.

That’s because people have changed their spending habits in recent decades, and the sales tax hasn’t kept up with the transformation.

Goods, which are typically subject to the sales tax, accounted for about 53 percent of consumer spending in Utah in 1960. Now, they make up 31 percent of consumer spending, with nearly 70 percent going to largely untaxed services, according to a report released earlier this month by the policy institute.

Instead of buying movies, people are using Netflix. Instead of purchasing lawn mowers, they’re paying for landscaping crews. Instead of buying CDs, they’re subscribing to streaming services. Increased health care spending is also driving the trend, the report found.

That doesn’t mean sales-tax proceeds have been drying up; data made public Wednesday showed that the state’s sales tax revenues have increased by 7.2 percent so far this fiscal year compared with the same period last fiscal year. But these revenues haven’t been growing as quickly as Utah’s economy, Tennert said.

If people were still spending money the way they did three decades ago, the Legislature would be bringing in an additional $650 million each year, the policy institute’s report found.

Dean said the goal of the reform package would be to widen the tax base rather than straining the current system with rate increases. Raising the sales tax on food might also help distribute the weight, he said.

If they do go that route, he said, officials “feel very strongly” they need to do something to blunt the financial blow to lower-income people.

“Whether that’s an income-tax credit that offsets and more than offsets that [tax increase] or if it’s a reduction directly at the cash register ... some sort of regressivity offset needs to be part of that package,” he said, adding that these benefits might apply to low- and middle-income families.

Bill Tibbitts, associate director of Crossroads Urban Center, said he’s concerned a higher food tax would harm lower-income people, no matter how it’s sliced.

“Any sort of effort to mitigate this at the state level is going to be limited,” Tibbitts said. “It’s going to leave a lot of people out."

For instance, an income-tax break might not help seniors or people with disabilities, he said.

While the overall trends have been moving in the right direction, Utah still has more than 100,000 households that experience food insecurity, said Gina Cornia, executive director of Utahns Against Hunger.

She said her group would generally oppose attempts to raise the sales tax on food.

“While each time you go grocery shopping, that amount that is due in taxes isn’t significant, over time, it is,” she said. “And that tax burden on lower-income families just adds up more than it does for families who aren’t low-income.”

Utah cut its sales tax on food to 1.75 percent in 2006 and 2007 at the urging of then-Gov. Jon Huntsman, whose lieutenant governor was Herbert. Since then, some legislators have attempted to return the tax on food to its full rate. Last year, Senate leaders pushed hard to hike the food tax but finally gave up in the face of House opposition.

Others have sought to eliminate the tax entirely. Rep. Tim Quinn last session advanced a bill to get rid of the state’s tax on food, but the measure failed in the Senate.

“Those who are less fortunate spend a disproportionate amount of their income on food,” the Heber City Republican said.

In 2017, middle-income households spent about 14 percent of their wages on food, compared to about 34 percent for the poorest households, according to the U.S. Department of Agriculture.

Quinn said he doesn’t consider grocery store credits for lower-income families a practical offset for hiking taxes on food, pointing to the possibility for fraud and abuse.

“It makes better sense to either leave it [the tax] as it is or remove it entirely,” he said.

The representative said he’s not planning on renewing his push to eliminate the tax on food this session, but he is drafting a bill that would broaden the sales tax to include certain services.

Utah Sen. Stuart Adams, incoming Senate president, said he’s pleased the governor is leading the way toward tax reform, although he wants to see Herbert’s plan before expressing an opinion on it.

Unlike many other commodities, people keep buying food in good times and bad, so fully taxing it could stabilize state revenues, he said. That way, the state doesn’t have to slash aid and services as the economy ebbs and flows, he added.

“If you can find a stable tax, you might be able to give credits that go to the low-income that stay consistent as you go through those roller-coaster cyclical events," Stuart, R-Layton, said. “That’s why I’m in favor of broadening the base.”

But Stuart said he wouldn’t want to increase the tax on food without doing something to help lower-income families.

Tennert said the policy institute wrote its report on sales-tax modernization because there’s an increasing awareness of the need for reforming the system.

One factor is the impending loss of flexibility in managing the state’s general fund, Dean said. A state constitutional amendment passed in 1996 gave Utah officials the power to support public colleges and universities with income-tax revenues previously reserved for K-12 education. Since then, state officials have been shifting higher education costs from the general fund into this income tax-fed fund.

That changeover has freed up space in the general fund, which is chiefly filled with sales tax dollars. But once the transfer is complete in the next few years, Utah policymakers will have less budgetary wiggle room and will have to rely more heavily on the sales tax to fuel general fund spending growth, Dean said.

“By better aligning the sales tax with the modern economy and how it works," he said, “it changes the long-term trajectory of the sales tax to be more sustainable.”