Lehi • A booming Utah economy has produced more than $1 billion in surplus revenues for policymakers to spend next year, and Gov. Gary Herbert would like a chunk of that cash handed back to the taxpayers.
Herbert released his budget recommendations on Thursday, which prioritize public education while leaving roughly $200 million unspent as a suggested sales tax cut, part of a broader tax reform package pushed by the governor.
“If we lower the [tax] rate and broaden the base, everyone will pay less taxes,” Herbert said. “It’s win-win-win all the way around.”
One question that remained unclear Thursday is whether the governor is supporting an increase in the food tax, to bring it up to the same rate as other retail goods. Herbert told The Salt Lake Tribune he does not favor such a move, but his recommended budget includes it.
In recent years, Herbert and legislative leaders have argued for a restructuring, or “modernization," of Utah’s tax code to better position the state in an increasingly service-driven economy.
Income tax revenues have soared, producing hundreds of millions of new dollars each year for the state’s Education Fund. But the General Fund — the most flexible of Utah’s revenue pools — has been stagnant by comparison as spending habits change.
“The sales tax is dying,” said Kristen Cox, director of the Governor’s Office of Management and Budget.
According to documents released by the Governor’s Office, roughly 40 percent of all economic transactions in the state fall under the sales tax, down from 70 percent in the 1980s. That’s due to a shift away from product purchasing and toward services, which Herbert said are inconsistently subject to sales taxes.
He gave the example of renting a limousine, tax-free, compared to a tuneup for the family station wagon, which is taxed. Or, Herbert said, the inequity of taxes placed on traditional tobacco products but not on their electronic and vapor counterparts.
“If you’re going to tax tobacco, you ought to tax e-cigarettes too,” Herbert said.
The remedy, according to Herbert and his staff, is to significantly reduce the state sales tax rate — currently at 4.85 percent for non-food items — while applying the sales tax to much broader categories of goods and services. Unclear, however, is Herbert’s position on restoring the full sales tax on food, a controversial action floated in recent years by legislative leaders.
Herbert on Wednesday told The Salt Lake Tribune’s editorial board that his perceived support for raising the food tax had been “misreported.” But the budget recommendations released by Herbert’s staff on Thursday included a uniform tax on consumption, “including food and residential fuel.”
Asked to clarify the language, Cox said the food tax was included in the documents only as “an option” for lawmakers to consider. And Herbert said any changes should be targeted and fair to relieve the burden on lower-income Utahns.
“For those below a certain [income] level, they ought not to have to pay a tax,” Herbert said. “In fact they probably ought to be able to get their food for a discounted rate or free.”
Gina Cornia, executive director of Utahns Against Hunger, recently told The Tribune her group would oppose any attempt to raise the food sales tax.
Pointing out that there are an estimated 100,000 households in the state with food insecurity, she said a food tax burden "on lower-income families just adds up more than it does for families who aren’t low-income.”
In addition to a $200 million sales tax cut, Herbert’s recommendations call for an investment of $445 million in K-12 public education and $69 million for higher education. That spending would include a 4 percent increase to the weighted pupil unit, or WPU, a per-student funding mechanism that serves as the backbone of education budgeting.
Government revenue estimates show the Education Fund with a surplus of $1 billion in ongoing and one-time funding, which the Utah Constitution mandates must be spent on public schools. But some of that revenue is reserved in the state’s rainy day funds while the rest is absorbed as a replacement to General Fund revenue pulled from higher education to pay for other state programs, which diminishes the net increase to education spending.
The budget also includes $30 million in one-time bonuses for Utah school teachers — continuing a trend of short-term pay incentives in Utah’s school districts — $32 million to increase the number of counselors in schools and $104 million for upgrades to school facilities.
Another $84 million in unrestricted education funding is proposed for schools, stemming from the partial compromise last year with Our Schools Now that was to be supplemented with money from Question 1, an unsuccessful gas tax proposal on this year’s ballot.
For higher education, Herbert’s budget seeks $50 million for the creation of a new scholarship endowment for low-income students and $6.2 million for the development of a three-year bachelor’s degree program based on a pilot model at Southern Utah University.
Rep. Brad Wilson, R-Kaysville, who will serve as Utah’s House speaker next year, said Thursday he agrees with the “spirit” of Herbert’s budget, while adding that the particulars of state spending will be debated and determined during the upcoming legislative session.
Herbert’s suggestion of a 4 percent bump to per-student spending is “probably the right amount," Wilson said. But other areas of the education budget — particularly those targeted to specific priorities — could differ from Herbert’s recommendations as members of the Legislature’s education committees prioritize bills and funding requests.
“We’ve got some hard choices to make,” Wilson said. “I appreciate the governor’s thoughts about needing to fix them.”
On the topic of tax reform, Wilson agreed that there is an imbalance in need of repair between income tax and sales tax receipts. Spending trends have increasingly pulled from higher education to fund things like roads and public safety, Wilson said, which eliminates a “buffer” in the state budget.
Wilson said its easier to do a tax cut in a year with $1 billion in surplus, but he added that the high revenue number is likely unsustainable and that lawmakers need to be cautious about potential downturns in the economy.
“I love the idea of a tax cut, I think that’s great,” Wilson said. “I’m not sure the particular tax cut [Herbert] is prescribing is where we’ll land. We’ll see.”
The next Senate President, Layton Republican Sen. Stuart Adams, said he looks forward to working with Herbert to balance short- and long-term demands and preparing Utah for changes in the economy.
He agreed on the need to expand the pool of taxed sales, but said it’s too early to tell if the Legislature will cut the tax rate to the 3.9 percent level proposed by Herbert.
“Whether there’s a tax cut or whether it’s revenue-neutral, we need to look at broadening the base,” Adams said.
Asked if 2019 was the year to tackle a tax-reform package, Adams pointed to adjustments earlier this year to Utah’s property and income taxes, and ongoing debate regarding gasoline taxes and exemptions.
“I think every year is the year to deal with this, quite frankly,” Adams said.
Other items in the budget include $100 million for air-quality efforts, $50 million for water conservation projects, $20 million for the creation of Utah’s first state forest in Duchesne County and $17 million for affordable housing programs.
Herbert’s total budget, including federal funds, adds up to $19 billion, of which roughly $1 billion is tied to the cost of expanding Medicaid under Proposition 3, which voters approved in November.
He said the budget is reflective of the state’s current needs, culture and vision for the future.
“It’s reasonable, it’s rational and, I think, it’s responsible,” Herbert said.
Wilson said the state’s increased Medicaid costs pose a “worrisome” risk to Utah’s fiscal health. He and other lawmakers opposed Proposition 3, and prior to the initiative’s passage had approved a less expensive partial expansion plan that sought a federal waiver from the requirements of the Affordable Care Act.
Wilson said he is not seeking a repeal of Proposition 3, but that the 2019 legislative session will need to include discussion of how to pay for Medicaid costs in the event of an economic downturn.
“We’ve got to have a healthy debate about that issue,” Wilson said. “And I think we need to start that debate this session.”
The Salt Lake Chamber immediately praised the governor’s spending blueprint.
“The governor’s 2019 budget proposal reflects key steps to addressing many of our growth challenges,” Derek Miller, chamber president and a close ally of Herbert, said. “And we look forward to working with him, and the Legislature, to ensure our state grows smart and continues to flourish.”