‘You need a state to be willing to take that plunge’ — report says Utah could lead the way on sales tax modernization

(Francisco Kjolseth | Tribune file photo) Utah Gov. Gary Herbert, Utah House Speaker Brad Wilson, R-Kaysville, and Senator Dan Hemmert, R-Orem, from left, attend a tax reform discussion hosted by the Eagle Forum at the Provo City Library on Wed. May 8, 2019.

A D.C. think tank is urging Utah lawmakers to blaze a trail for other states by updating sales tax structures that are rooted in Depression-era consumer spending patterns.

A number of states have taken stabs at modernizing their sales tax systems, but the most comprehensive attempts have been stymied by political challenges inherent in such a large undertaking, the Tax Foundation’s Jared Walczak said.

“Often you need a first mover on something like this. You need a state to be willing to take that plunge,” said Walczak, a senior policy analyst with the foundation. “Utah seems uniquely positioned to take that next step.”

The Tax Foundation on Tuesday published a 35-page guide for the Utah policymakers as they look at reforming the state’s tax code, possibly in a special session later this year. A poorly designed tax reform package could cause inequity and act as a drag on the economy, while a strong plan would set the state up for future revenue stability, the foundation argued.

Senate President Stuart Adams called the report a "decent blueprint" for state lawmakers in ongoing tax reform talks.

“I’ve got 15 grandkids,” the Layton Republican said. “This is our chance to put tax policy in place for future generations, and the key to this is we need a tax code that can be adapted to a changing economy.”

The problem, as perceived by state leaders and the Tax Foundation, is that an ever-increasing share of consumer spending is on service transactions that generally escape the sales tax. The result is that the Utah’s sales tax stream — the supply line for most of state government — is growing at a sluggish pace, officials say.

The state says it has enough money overall, but its surpluses are mostly from income tax revenue, which is constitutionally earmarked for public and higher education and can’t be spent elsewhere.

The May state revenue report showed a 5.2% increase in sales tax revenues the first 10 months of the fiscal year. Individual income tax collections during the period were up 7.3% during the same period.

That income tax earmark, unique to Utah, makes the state especially dependent on its sales tax and could provide an added impetus for modernization, Walczak said. Consensus among Utah’s leadership gives the state’s reform effort another added boost, he said.

“You rarely get this convergence where you have a governor and two chambers of the legislature that are all saying that sales tax modernization is a serious consideration,” he said.

Ultimately, Walczak argues, states across the nation will be forced to confront these economic realities.

“Eventually, the dam is going to break,” he said. “Utah has the opportunity to lead on this and it’ll be exciting to see how this plays out over the course of the summer.”

Brett Hastings, a founder of the Utah Legislative Watch, says the Tax Foundation report left him unconvinced about the existence of a revenue problem. State lawmakers have plenty of money, he says, and they can achieve more budgetary flexibility by cutting government spending or finding workarounds to the income tax earmark.

But he believes lawmakers are naturally drawn to new taxing opportunities, whether or not they’re necessary.

“They see all these services out there, and they have tax envy. ... They can’t help themselves,” Hastings said.

Lawmakers this year tried to balance the state’s revenue sources with a bill that would’ve extended the sales tax to a wide range of services, but the legislation, HB441, faltered amid opposition from the business community.

After the bill’s collapse, state leaders formed a task force charged with examining a wider array of options, from expanding the sales tax to removing the constitutional earmark on income tax funding. The task force is holding a series of public meetings and is scheduled to present findings to fellow lawmakers at the summer’s end.

One of HB441′s major flaws was that it would’ve applied sales taxes to a swath of business-to-business transactions — when a company hires an architect, engineer or accountant, for instance, Walczak wrote. These layers of taxation accumulate and ultimately inflate the cost of the product or service that a consumer buys.

Business-to-business transactions would've accounted for about three-quarters of the sales tax base added by HB441, according to the tax policy report.

Policymakers can avoid this problem by exempting businesses from paying sales taxes on services or by refraining from taxing services used chiefly by companies, like advertising or business consulting, Walczak advised.

Sen. Lyle Hillyard, who is co-chairman of the state’s tax task force, said “the devil is in the details” when it comes to tax reform, and public buy-in will be key to any success. The perception that lawmakers are trying to increase taxes could derail the effort, the Logan Republican said.

“This is not a tax increase. This is a tax change,” he said.