The eagerly awaited tax overhaul bill expected to come out this week will call for taxing health insurance premiums, real estate deals, legal and financial services and a wide variety of other services, from lawn care to haircuts.
While the proposal calls for blanketing many more transactions with the sales tax, the average Utah family would actually see some relief through a combination of rate reductions and credits, lawmakers said Tuesday.
A work group of House and Senate lawmakers and executive branch representatives have been talking behind the scenes for weeks on a bill designed to course-correct a state tax structure that has been breaking down over time. The proposal outlined Tuesday wouldn’t change the overall amount of revenue collected by the state — only where it’s coming from.
“We wanted to make this as broad as possible so we didn’t pick winners and losers in this policy,” Rep. Tim Quinn, a Heber City Republican who’s been in on the tax talks, said to reporters.
Here are some details of the bill released Tuesday:
- It would expand the sales tax to a wide variety of services that currently fall outside its purview. Examples include construction, legal services, haircuts, cosmetic surgery, financial services, private flight or golf lessons and professional landscaping;
- It would generate an additional $18 million by imposing a .075 percent transfer tax on all residential and commercial property sales. So for sale of a $400,000 home, the tax would be $300. Refinancing would not be taxed, Quinn said;
- An estimated $66 million in new revenue would come from a 1 percent premium tax on commercial medical insurance;
- By deleting 15 of the state’s 88 sales tax exemptions — specifics haven’t yet been disclosed — the proposal would yield an additional $72 million for state coffers;
- Sales tax rates would be dropped from 4.7 percent to 3.10 percent (that figure does not include the small rate bump that voters approved last year to pay for Medicaid expansion, Sen. Lincoln Fillmore, R-South Jordan, said);
- Income tax rates would fall from 4.95 percent to 4.75 percent. The bill would also expand the personal exemption for low-to-middle income earners, provide an earned income tax credit and expand the retiree tax credit;
- The income tax reduction would kick in retroactively, while the sales tax cut would phase in beginning July 1, 2020, Quinn said. Gradually rolling out the reduction should help businesses adjust and prevent state revenues from dropping off a cliff, he added.
For a median Utahn — 31 years old, married with one child, earning about $65,000 annually — the proposed changes would save about $634 each year, about two-thirds of that from the sales tax reduction. The burden would shift somewhat to higher earners, who tend to spend more on the services that would be newly taxed, said Rep. Robert Spendlove, R-Sandy.
The bill will almost certainly be the object of aggressive lobbying, as industries try to convince lawmakers to leave them out of tax expansion, lawmakers say. The key to pushing it through the Legislature with just over two weeks left in the session will be holding firm and refusing to play favorites with any sector, Spendlove said.
“We have to be strong and we have to resist those attempts to chip away at this and focus on what’s the right pathway for the state going forward,” he said.
Quinn said he does hope to drop the tax rates even further than what’ll be proposed in the first version of the bill, but the final numbers will depend on the outcome of budget discussions.
In his State of the State address, Gov. Gary Herbert suggested pruning the sales tax rate all the way to 1.75 percent for an overall cut totaling $225 million. But legislators have balked at such a record-breaking reduction, claiming that the state would have to tax almost everything, including health care and gasoline — a sales tax on top of the per-gallon levy — to hit the governor’s target number.
Herbert released a statement Tuesday signaling support from the yet-to-be-seen-by-the-public legislation, even though it doesn’t entirely match what he initially suggested.
“Today’s monumental tax reform bill will make Utah’s tax system more fair and stable, keeping Utah on the path of economic prosperity,” Herbert said in the statement. “This tax reform bill significantly broadens the sales tax base, repealing loopholes and asking every major economic sector to help pay for the cost of core government services.”
State leaders have disagreed about how to craft tax reforms, but there is a broad consensus that change needs to happen sooner rather than later.
House Minority Leader Brian King said he agrees that the state must do something about its dwindling sales tax base, but he’s worried about the proposed rate cut for income taxes, which feed the state’s education fund.
“From my back-of-the-napkin numbers, it’s like $200 million to $300 million based on this income tax rate reduction,” the Salt Lake City Democrat said. “And that troubles me because we can’t afford to lose money for education.”
The state could supplement the income tax with money from the sales tax, he said, but there are no guarantees future state leaders will do that.
When asked how much the proposed income tax cut would decrease revenue flowing into the education fund, Quinn said he didn’t know and that the question was irrelevant because the overall reform plan is revenue-neutral.
The state’s sales tax, which supports the bulk of government activities outside of education, has for years been on a worrisome trajectory, as people spend more of their money on largely untaxed services and less on taxed goods. Moreover, a budgetary tool that the state has long used to bolster the sales tax-supported general fund is on track to disappear in the next few years, lawmakers have said.
That means the clock is ticking for officials to reshape the sales tax so it provides a more reliable revenue stream for the state over the long haul. Fillmore said the adjustments will also benefit Utah taxpayers by stabilizing the state’s fickle sales tax and cushioning against major rate swings.
“We are over-reliant on the most volatile source of revenue to the state, and that means we’re more likely to have really rapid government growth in the good years and really rapid declines when a recession happens,” Fillmore said. “What we want to bring is predictability for you as a taxpayer.”
Senate President Stuart Adams, R-Layton, said he’s pleased with the outcome of tax negotiations.
"I think that's a great rate, don't you?" he said Tuesday when asked about the proposed changes to the sales and income taxes.
He said the bill will go through a refining process that hopefully generates input from the public and leads to an even better bill.
“Two weeks is a long time in the Legislature,” Adams said. “I think there’s plenty of time to get it done.”
Tribune reporter Benjamin Wood contributed to this report.