Like Gov. Gary Herbert, state legislators seem of the opinion that Utahns should get some tax relief in a year of revenue growth and budget surplus.
However, the two branches of government might be split over which tax to downsize.
Whereas Herbert has advocated for a $200 million sales tax cut, House Rep. Tim Quinn on Monday said he and some of his colleagues prefer an income tax reduction. Quinn, vice chair of the House Revenue and Taxation Committee, argues the governor’s plan would only exacerbate the problem of a sluggish sales tax.
“We don’t have a revenue problem, as far as the amount of revenue. We just have a problem of where it’s coming from,” Quinn, R-Heber City, said during a legislative session preview hosted by the Utah Taxpayers Association.
In other words, the state’s sales tax is no longer pulling its weight compared to the income tax.
The sales tax structure needs an update, as consumer spending on untaxed services dominates a growing share of the economy, officials have said. To deal with these changing spending patterns, Herbert has proposed expanding the state’s sales tax to some services, a change he wants to couple with an overall rate reduction.
“As we, in fact, broaden the base and lower the rate, everybody will pay less taxes,” Herbert said Monday.
The taxpayers association agrees with Quinn that an income tax rate reduction is a better idea.
"Cutting the income tax rate grows the overall pie, which gives more pie for everyone else," said Rusty Cannon, vice president of the business-backed taxpayers association. "The sales tax rate cut ... typically won't encourage economic growth."
Utah lawmakers last year passed a bill trimming the state’s individual income tax rate from 5 percent to 4.95 percent. But as other states are paring back their income tax rates, Utah should drop its rate even further to maintain its edge, Cannon contends.
He said the taxpayers association believes reducing the income tax rate to 4.5 percent or even lower is doable.
Herbert's budget director, Phil Dean, said the governor is wary of backing off income taxes, the revenue stream that supports Utah's public education.
Utah continues its dubious distinction of having the biggest average class sizes in the nation.
“As you probably well know, [Herbert] is a very passionate supporter of education and is concerned about impacts on education funding,” Dean said.
Quinn — who joined Dean on a panel of speakers Monday — responded that an income tax reduction wouldn’t have to harm Utah’s students.
For years now, the state has been moving higher education costs from the sales tax-fed general fund to the income tax fund, a money pot that was once reserved for K-12 learning. If lawmakers prop up the sales tax, they might be able to halt or even reverse this shift, freeing up more money for grade schools, Quinn said.
An income tax decrease could take the form of exemptions or a flat rate reduction, Quinn said, but lawmakers can't talk numbers until they flesh out the sales tax changes. During the legislative session beginning Jan. 28, lawmakers will debate what services should be covered by the sales tax — and the outcome of these conversations will help determine the size of a potential income tax cut, Quinn said.
If sales tax reforms generate enough new revenue, lawmakers might be able to cut the income tax rate and provide a slight sales tax rate reduction.
Quinn said he’s interested in applying the sales tax to services that have replaced goods in the modern economy. For instance, many people now subscribe to streaming services instead of buying CDs or hire yard workers instead of investing in a lawnmower, he noted.
Herbert said “everything is on the table for discussion” when it comes to broadening the sales tax. But not everything is equally palatable to elected leaders. For instance, Rep. Steve Eliason said he’s opposed to taxing health care and housing construction.
“[O]ur country continues to struggle with the high cost of health care. As we know, we have one of the hottest housing markets and rental markets ... in the nation, and at this point in time, adding sales tax on those two categories in particular would be very problematic," Eliason, R-Sandy, said.