Utah legislative leaders say state’s tax structure, not revenue, is the problem that needs fixing

Three months after walking away from an urgent effort to expand taxes on service-oriented business, Utah lawmakers have changed their messaging — from an imminent fiscal cliff in sales tax receipts to a long-term, comprehensive economic strategy.

This shift coincides with new state revenue estimates showing roughly 5% and 7% growth in the sales and income taxes, respectively.

“We’ve got plenty of money to run on; we’re not trying to have a tax increase,” said Senate President Stuart Adams, R-Layton. “What we’re trying to do is shift some money around between the income tax and the sales tax in order to maintain the balance.”

Lawmakers now are considering an ambiguous and broad swath of new taxes and reforms that could affect everything from food sales to education funding.

A legislative task force is expected to conduct hearings this summer and eventually submit taxing recommendations to the Utah House and Senate. If agreement can be reached, legislative leaders say, a special session will be called this fall, but the debate could be delayed until the next general session — or beyond.

“This is not something that we need to do today or tomorrow or maybe next year,” Adams said. “If we don’t address it in three or four years, it could be a problem.”

And while Adams and other high-ranking lawmakers insist that “everything is on the table,” their public remarks frequently highlight certain approaches, such as expanding service-based sales taxes, restoring the full state sales tax on food and either loosening or removing a constitutional requirement that all income tax revenue be spent on education.

Each of those proposals is controversial, with critics warning that compounding taxes could hurt the economy and drive up consumer costs, or that schools could see their lowest-in-the-nation funding diverted to other state programs.

Adams said a comprehensive tax package can address those concerns, capturing more revenue from out-of-state tourists, maintaining education funding and using credits or exemptions to mitigate the impact on low-income Utahns, families and businesses.

“Our sales tax base is shrinking; that is the problem, there’s no question about that,” Adams said. “But then it’s compounded and made a crisis by the fact that we don’t have any other [unrestricted revenue] source.”

House Speaker Brad Wilson, R-Kaysville, shared his perspective on reform at a tax policy conference Tuesday. He did not mention restoring the sales tax on food — traditionally unpopular among House members — but emphasized the constitutional restriction on income tax revenue and its impact on road construction, air quality initiatives, law enforcement funding and health care spending.

“The fact is, this high quality of life in Utah is going to be hard for us to maintain unless we do something,” Wilson said.

Business owners and anti-tax advocates are already marshaling their forces against any solution that resembles HB441, the failed bill from March that they say would’ve hobbled the state’s economy.

One group, Utah Legislative Watch, has blasted lawmakers for crafting the sweeping tax reform package behind closed doors and rolling it out in the final weeks of session.

“We reject the increased use of Washington, D.C.-style tactics in our ... state Legislature. We reject legislation by means of stealth, misinformation, hyperbole or alarmism, such as has been on display on occasion in recent legislative sessions,” Brett Hastings, a founder of Utah Legislative Watch, said during a Tuesday news conference.

The state is bringing in plenty of revenue, according to the group, which prescribes spending cuts as the primary solution for the state’s funding shortfalls.

“As a mother and a business owner, how much of our hard-earned money is the ... Utah State Legislature entitled to take from us, whether it’s through the service sales tax or through any other means?” said Tenna Hartman, a health care consultant based in Salt Lake City and another founder of the legislative watchdog group.

Hartman said HB441 didn’t go through proper vetting, and she’s concerned a special session this fall wouldn’t allow enough time to consider an overhaul bill designed by the task force.

Both she and Hastings, a founding partner in a small law firm, would’ve been affected by HB441 and are urging the public to join them in opposing a tax on services as the task force solicits input.

Even so, the group is not opposed to any and all attempts to give lawmakers more budgetary flexibility.

Hastings said lifting the constitutional earmark on the income tax would be one option. Perhaps an easier solution, he said, would be to get around the constitutional earmark by charging a filing fee — of a couple hundred dollars or so — to each income taxpayer and then offsetting it with an income tax credit of the same amount. Proceeds from the fee would flow into the general fund and would be available for lawmakers to spend as they saw fit.

But Heidi Matthews, president of the Utah Education Association, said that even with all Utah income tax revenue currently guaranteed for public education, schools struggle to fulfill the needs of their students.

“It’s a promise that the people of Utah mandated and established for a reason, to make sure that schools have those resources in perpetuity,” she said of the education fund earmark. “There’s no reason to walk away from that promise.”

Wilson said the task force is “on the cusp” of announcing its meeting schedule for the summer months and that the panel would be starting from scratch rather than building off of HB441.

“Perhaps taxing services is not the answer,” Wilson said. “Perhaps it is, or perhaps it’s part of the answer.”

Sen. Dan Hemmert, R-Orem, said Tuesday that HB441 was rightly focused on consumption, but it included too many business “inputs,” leading to multiple rounds of taxation on the same goods. He compared it to the dry-cleaning businesses he owns, which pays taxes on soap before charging customers a tax for laundering.

“It went after the best kind of tax," Hemmert said of HB441, “but it also included the worst kind of tax.”

Hemmert said he has seen a list of 37 tax reform ideas, some, all or none of which could be recommended by the task force. And he added that lawmakers shouldn’t be so stuck in convention that they fail to consider significant changes, like fully eliminating the state’s income tax.

“We should be looking at big, bold ideas that make our taxes better,” he said.

Logan Republican Sen. Lyle Hillyard, the Senate chairman of the tax reform task force, said the first job is to educate the Utah public on the problems facing the state budget. After that, he said, the state can decide whether to help the Legislature solve the problem.

And residents could have a direct role in shaping future tax policy, as any adjustment to the constitutional earmark for income tax revenue would require a majority, public vote.

“You don’t do that easily,” Hillyard said. “Public [education] is really invested with the idea that they are guaranteed that income tax money.”

Hillyard added that he doesn’t see the current constitutional requirement as a protection for school funding. He said the Legislature typically subsidizes public education funding with sales tax revenue — the reverse occurred this year, with public education receiving roughly half the amount of the income tax surplus — but that any change to the education fund should be part of a comprehensive tax package.

Hillyard was one of two Senate Republicans who opposed a constitutional amendment in March — quietly introduced on the penultimate date of the legislative session — that would have broadened the income tax restriction to include spending on social services. He said his vote was based on the process behind that proposal, which hadn’t been adequately thought out.

“I just felt like we were stepping onto the ice without knowing how deep the water was,” he said of that vote.

Asked if the growth in state tax collections undermines the argument for reform, Hillyard said he focuses on dollar figures rather than percentages, and that the issue is bigger than any one set of revenue projections.

“I’ve learned over the long years I’ve been here," he said, “that one month does not a budget make.”