Tax reform collapsed this session. So what are Utah lawmakers going to do next?

(Trent Nelson | The Salt Lake Tribune) The Executive Appropriations Committee meets in Salt Lake City on the last day of the 2019 Utah legislative session, Thursday March 14, 2019.

The Legislature’s pitch for tax reform was ambitious but relatively well-defined: Stabilize sales tax collections by applying it to services not now taxed, like car washes and funerals and legal services, and then offset any new money coming in by lowering the rate people pay on such purchases.

But from the ashes of that failed proposal emerged a more sprawling, open-ended and ambiguous plan. A new task force will likely weigh any and all shifts in Utah’s tax structure ahead of an expected special session this year, which could see tweaks to everything from the traditional revenue pool for public education or a return to a full sales tax on food.

“I’ve said that everything ought to be on the table,” Utah Gov. Gary Herbert told The Salt Lake Tribune on Thursday. “Sales tax on food, a change in the [education] earmark on income tax certainly ought to be talked about.”

The sales tax bill, publicly unveiled in the final weeks of the session, prompted widespread angst among businesses — for its potential cascade of new taxing — and the education community — for its cuts to the income tax, which is constitutionally pegged for spending on public education.

House members moved ahead passing the bill out of committee and preparing for a floor vote, but the proposal lacked support in the Senate and was formally abandoned during a joint news conference with the governor and top House and Senate Republicans.

The problem Utah leaders are trying to solve is that while Income tax funds are steadily increasing, those can be spent only on education, leaving the weakening sales tax to support most everything else, including transportation, public safety and social services.

Opinions vary on how dire Utah’s budgetary situation is, but House Speaker Brad Wilson said if legislators don’t find a permanent fix soon, they’ll have to look at “more creative ways” of defining what counts as an education expense so costs can be moved out of the strained general fund and into the income tax fund.

“The reality is ... we’ll be in a whole new world next year if we haven’t solved this problem, and it’s going to be hard,” the Kaysville Republican said Thursday.

Heidi Matthews, president of the Utah Education Association, had objected to the reform effort, citing the rush to get something done in the short legislative session and cuts to the income tax. But she said Friday she agrees on the need to adjust the tax structure, while adding that any changes should add to, rather than detract from, the state’s investment in public schools.

“This is a decision that needs time,” Matthews said. “It’s going to have impacts for generations. It needs to be done right.”

Starting from scratch

The Utah Taxpayers Association isn’t interested in retooling the bill that failed during the session, saying the idea of applying the sales tax to a broad range of services ended up being fraught with potential pitfalls.

“We would prefer to start from scratch,” said Rusty Cannon, vice president of the business-backed association.

Perhaps the simplest route for fixing the imbalance, Cannon said, would be to run a constitutional amendment to allow the Legislature to dip into the income tax fund. But fully taxing food, reforming property taxes or opening up a new transportation funding source should also be part of the mix, he said.

The Senate approved a resolution, sponsored by Riverton Republican Sen. Dan McCay, to amend the income tax language beyond strictly education spending in the final days of the session. The House never voted on it and legislative leaders said they’d prefer to find another way forward.

“Let’s fix that so we can let the education fund do its thing and pay for education," Wilson said.

Juliette Tennert, director of economic and public policy research at the Kem C. Gardner Policy Institute, said, from a policy perspective, broadening the list of items facing a sales tax is the solution that keeps the state most economically competitive. But, with companies and professionals willing to fight to avoid new taxes, other options could also rise.

“At the end of the day," she said, “I think you’re probably going to see a combination of all these things at play.”

A task force made up of five senators, five representatives and up to four nonvoting members will soon start studying options for correcting the state’s revenue imbalance. The group is expected to issue recommendations over the summer, and Herbert hopes to call a special session shortly thereafter so lawmakers can enact the negotiated reforms and also deliver a tax cut.

Part of the task force’s job will be to go on a listening tour to gather input from residents and businesses and to build the buy-in that was missing during the legislative session.

Senate Minority Leader Karen Mayne said her caucus isn’t wedded to any particular fix for the tax system.

“We’re open to any conversation," the West Valley City Democrat said. "Tax on food is uncomfortable to us, but we’re going to ... work together to make sure our voice is heard.”

And to keep the pressure up through the summer, legislators built $300 million in temporary funding for various programs into the state’s budget that will lapse if not reinstated next year.

“There will be urgency,” said Senate President Stuart Adams, R-Layton. "Three-hundred million reasons for urgency.”

Investment in education

Any solution reached by the task force, and approved by lawmakers, is likely to avoid an increase in overall tax collections, so either the state will take in the same amount of money or less.

But either of those scenarios is likely to require cuts to the income tax to offset gains in sales taxes. That interplay between the education fund and general fund is at the heart of why state leaders say reform is necessary, but also why groups like the Utah Education Association opposed the proposal that failed during the session.

“It’s a problem that needs to be fixed,” Matthews said, “but not on the backs of our students.”

Before the collapse of the tax bill, lawmakers suggested a plan where new revenue from the taxes on services would be spent on higher education, mitigating the effect of an income tax cut on public schools.

Matthews agreed with the concept but said the need for those types of assurances speak to the benefit of delaying the debate until more discussion and study can take place.

“I understand the logic of what they were saying and don’t necessarily disagree that could happen,” Matthews said. “But we can’t function based on what could happen. We’re talking about the education of our students here. We need to know what will happen, and we need to have assurances that there’s going to be investments in education.”

Asked about Wilson’s suggestion that the definition of “education” could be broadened to free up income tax dollars without a constitutional amendment, Matthews said her primary concern is securing more support for schools, rather than sparring over legalese.

“What is a nonstarter is diluting the public education fund even more,” she said.

Wilson said he’s been involved in several tough decisions over his time in office, and many of them span multiple years — picking a location for the new state prison would be one example. So even though he and his colleagues couldn’t get tax reform done in one session, he’ll be pleased if they can figure it out by the year’s end.

He said, “I’ll feel like that’s a great victory."