Utah lawmakers hit the road selling tax reform. Will taxpayers buy it?

Richfield • A room of 100 business owners, teachers, taxpayers and elected officials greeted the state’s task force on tax reform here Friday at the Sevier County Fairgrounds in the third stop of a statewide listening tour ahead of potential legislation.

The legislative panel was met with hospitality, as well as encouragement, skepticism and some frustration, as one businessman described Utah’s taxing methods as “bulls---” in a moment of breached decorum met with muted, but genuine, laughter.

Task force co-chairman Rep. Francis Gibson, R-Mapleton, opened a presentation outlining the perceived flaws in the state’s tax structure, and assured attendees that his panel’s work was intended to better position the Beehive State in the modern economy, and not to enrich government coffers.

“I don’t want anyone to think this is how we receive more money,” Gibson said.

After a botched first attempt at reform earlier this year — which raised alarms for its broad expansion of sales taxes on service-oriented businesses — the task force is intended to ensure a more robust, thoughtful and democratic process.

The town halls will be followed by deliberations on a suite of recommendations that could form the backbone of a generational update to the machinery of government enacted during a special session of the Utah Legislature this year, if the task force achieves its goals in a timely and satisfactory fashion.

But the reception by town hall attendees has been ambiguous, with supportive optimism mingled with the trepidation of a post-Great Recession taxpayer base. And some in the state question the underlying premise of the task force’s work.

“They are going to need to tax some services,” said Mike Snow, a Richfield resident, “but they need to not go in swinging an ax and saying ‘we’re going to tax everything’.”

Snow was also critical of the Legislature’s intended timeline for reform, suggesting the series of town hall meetings was not as sincerely focused on feedback from taxpayers as lawmakers suggest.

“They’re supposed to get all this information, digest it and have a special session before regular session? Where there’s no committee meetings where people can come who weren’t able to attend these [town hall] meetings?” Snow said. “They’re trying to push it through, rush it through.”

Mixed bag

Jeff Brewer, a Richfield resident who works in car sales, said he didn’t care much for the bill that lawmakers considered — and ultimately abandoned — during the Legislative session, HB441. But he agrees that the state’s tax code is due for an update to match the modern economy.

“Society is changing so fast and so quick that ways that were good five years ago, 10 years ago, may not be applicable,” Brewer said.

Rodney Hurd, a teacher and president of the Sevier Education Association, said reform is needed, but schools and rural communities must be protected.

He is concerned about how the task force’s presentation pitches the option of ending a constitutional requirement that all income tax revenue be spent on public education. Utah’s schools, Hurd said, need to have a guaranteed source of funding.

“There’s gotta be something in place that will be sustainable, that you won’t be able to mess with,” he said. “The need for education and teachers in this state is always going to be there.”

But Scott Nickle, a funeral director and CPA from Delta, said the state’s move to a flat tax in 2007 has come back to haunt it. Now, he said, the state’s sales and income taxes need to be combined into a single pool of revenue, instead of sorted into separate education and general funds.

“That’s what you do in a household,” Nickle said. “You don’t specify the wife’s income to run the house and the husband’s to go play.”

(Francisco Kjolseth | Tribune file photo) Members of the Utah State Legislature Tax Restructuring and Equalization Task Force listen to constituent concerns during a town hall in Kearns on Thursday, June 27, 2019. The task force is traveling Utah on a statewide listening tour to hear suggestions, concerns and receive input from constituents, local officials, business owners, stakeholders, community leaders and any who want to be involved in the process to review ways to best address the state's outdated tax structure.

A key motivation behind the tax reform discussions is that while revenue from both the state’s income and sales taxes is increasing, the restricted-to-education income tax is far outpacing its more flexible counterpart.

And with population growth straining the state’s noneducation dollars, state leaders say, the “imbalance” eventually could tie budget writers’ hands in the face of potential fiscal crisis.

While the debate on Capitol Hill earlier this year focused on sales tax and services, last-minute budget tensions between the House and Senate saw additional ideas proffered as potential solutions to the impasse.

Among them were a hike in food taxes and a constitutional amendment opening up the state’s income tax beyond schools to any government use — nationally, Utah is unique in restricting income tax revenue this way — which would require a two-thirds majority in both chambers ratified by a majority vote of the public.

A version of that amendment was sponsored by Riverton Republican Sen. Dan McCay and passed by two-thirds of the Senate, but it was not considered in the House.

Members of the education community were rattled by the proposal and have watched the ensuing tax force discussions with ambivalence.

Utah Education Association President Heidi Matthews attended the first task force meeting in Brigham City on June 25 and remarked on the size of the crowd, which she estimated at 200 people. Asked what she thought of the task force’s presentation, she said it includes good information as well as slides and graphics that are “very leading.”

She said it appears lawmakers already are angling toward removing the income tax’s education earmark — which she prefers to call a “constitutional guarantee” — as their most politically expedient option. But public education is already underfunded, Matthews said, and it doesn’t make sense to use its revenue source to prop up the general fund.

“If you just shift the grain from one silo to the next, it still doesn’t provide more food for the cows,” Matthews said. “The cows still need that grain and, at some point, you need to be investing in more grain.”

Nickle, the Delta funeral director, said the growth in income tax could see education become overfunded, and public schools will always be prioritized in the state.

“The teachers have a big enough union,” Nickle said. “They’re going to fight for their rights and the rights of the kids, so, consequently, the Legislature is going to properly fund education.”

A ticking clock?

Even before lawmakers abandoned HB441 — during a decidedly upbeat news conference in the ornate Gold Room at the state Capitol — there was healthy and vocal speculation the effort could fail.

Senate President Stuart Adams, R-Layton, repeatedly described tax reform as a “Hail Mary pass" — he later praised the task force as a “dream team” — and individual lawmakers openly discussed the pressure being placed on them by caucus leadership.

Much of the pessimism was addressed by the pivot to a second attempt after an extended deliberation over the summer months, but legislators, lobbyists and stakeholders are now direct in acknowledging that passing a bill during a special session — or next year, or beyond? — is less than a sure thing.

Blanding Republican Rep. Phil Lyman, an accountant, questions the tax discussion’s premise that there’s a revenue problem to be solved. He says the state’s budgetary constraints could be a blessing in disguise — particularly for taxpayers — since they force lawmakers to control spending.

And sales tax proceeds are by no means stagnant, having grown by more than $1 billion since 2013, he said.

He worries analysts are feeding lawmakers information to convince them the state is on the verge of dilemma, pointing to last year’s Kem C. Gardner Policy Institute report that warned of a dwindling sales tax base and arguing the need for reform.

“Don’t just present one thing that leads people to a conclusion that probably isn’t valid,” Lyman said.

(Francisco Kjolseth | Tribune file photo) Andrew Gruber with the Wasatch Regional Council talks in part about infrastructure and transportation investments during the public input segment as the Utah State Legislature Tax Restructuring and Equalization Task Force hosts a town hall in Kearns on Thursday, June 27, 2019.

Lyman also opposes dissolving the constitutional firewall that preserves income tax dollars for public and higher education.

“I kind of like that we’re pressured to spend more money on education,” Lyman said. “I don’t see a more worthy place for our society to devote a lot of resources than to education, because it does pay us back.”

Jonathan Johnson, the former CEO of Overstock.com and a former GOP gubernatorial candidate, calls the income tax restriction “antiquated” and advocates for scrapping it.

That single change would solve the state’s so-called revenue problem without complex and unwieldy changes to the tax structure, he argued, by giving lawmakers more access to income tax surpluses.

And public schools wouldn’t necessarily lose out, he says. As it stands, lawmakers can shrug off accountability for education by assuming the income tax funding — whatever it may be that year — will suffice. If those restrictions were removed, Johnson said, state leaders would no longer be able to deflect responsibility for school funding levels.

“No one really knows why it’s there," Johnson said. “Every other state in the union lets its legislature allocate revenue the way the legislature sees best.”

Sen. Curt Bramble, R-Provo, an accountant and member of the task force, also challenges the notion that the income tax earmark benefits schools.

“Utah is the only state that has an earmark for education and yet education funding is the lowest in the nation, and it’s been lowest in the nation for some time," Bramble said. "So the question is: How well is that earmark protecting education?”

And while undoing the income tax earmark would be Johnson’s ideal outcome, doing nothing would also suit him just fine, he said.

Like Lyman, Johnson does not believe the state faces an impending threat to its fiscal health and believes analysts in state government and at the University of Utah’s Gardner Institute are driving the conversation.

“They are cherry-picking statistics to make the situation look dire when it is not," Johnson said, “and ignoring relevant but unfavorable-to-their-point-of-view statistics to push forward what ultimately will be a devastating tax increase and scheme for Utahns.”

Gardner Institute Director Natalie Gochnour defended the institute’s work, reiterating that the sales tax base is declining relative to the growth in the state economy. Tax revenue continues to grow, she said, but the diminishing base could leave the state vulnerable in the event of an economic downturn.

“What we’ve tried to point out is we don’t have a revenue problem right now; we have a structural budget problem,” Gochnour said, “and have made a point that the time to fix structural problems is when you have money, not when you don’t.”

Even among those who agree that a budgetary problem exists, there's disagreement over its urgency.

Bramble said after the listening tour is over, it’ll take time for task force members to digest the public input, craft a proposal and draft a bill. So he says he’d be surprised if lawmakers tackle the issue in a special session.

“We have some challenges. I think that those challenges will cause some serious problems if we don’t address them,” he said. “But I’m not in the camp that says we have to do it yesterday or the sky will fall.”

Tax and spend

Bramble agrees with legislative analysts that modern life has pushed many business transactions outside the scope of the sales tax. Instead of buying videos, for instance, people now watch untaxed, online streaming services.

HB441 tried to get at this shift but was rife with problems, he said, chief among them that the bill would’ve caused double or triple taxation by asking companies to pay sales taxes on business-to-business services. While anti-tax advocates have suggested spending reductions as a budgetary fix, Bramble contends that’s easier said than done.

“That’s a great bumper sticker,” he said. “But I’ve not heard any one of them throw out one program where they would cut one dime."

(Francisco Kjolseth | Tribune file photo) Sen. Lyle Hillyard, R-Logan, of the Utah State Legislature Tax Restructuring and Equalization Task Force takes questions from the public as they host a town hall in Kearns on Thursday, June 27, 2019. The task force is traveling Utah on a statewide listening tour to hear suggestions, concerns and receive input from constituents, local officials, business owners, stakeholders, community leaders and any who want to be involved in the process to review ways to best address the state's outdated tax structure.

Heather Williamson, state chapter director for Americans for Prosperity, said the state is not facing a budgetary emergency. Discussion of improving the tax code is welcome, she said, but it should include equivalent talk of where state spending can be reduced.

“We’ve seen a trend in spending and a budget that has ballooned significantly,” she said.

Asked whether she believes the tax force discussion will yield a successful bill, Williamson said it’s equally likely the effort will be a bust.

“I am expecting that either they do nothing after hearing feedback from Utahns on this issue,” she said, “or I’m optimistic that if they do do something, that it will be good.”

Rep. Joel Briscoe, one of two Democrats on the tax task force, said the reform effort’s fate could hinge on how well his panel articulates the connection between state fiscal stability and the needs of average Utahns.

"If the public perceives it as we're having a problem budgeting, I don't think we're going to be successful," the Salt Lake City lawmaker said.

If Briscoe had his druthers, the state would pass a carbon tax to both reduce pollution and fill state coffers, but the Legislature has so far seemed unwilling to embrace this concept. A proposed ballot initiative on that topic is currently in the signature-gathering stage.

Briscoe said he’s open to ideas, although he noted that fully taxing food or removing the earmark for public education would be “harder sells” in the Democratic caucus.

Rep. Steve Eliason said Utah’s sales tax is already broad compared to many other states.

He believes removing restrictions from income tax revenue would put school funding at risk and that a major service tax expansion to industries such as health care or housing doesn’t seem feasible.

“The downside of taxing those types of services is that there’s a far greater cost to society than the benefit of fixing some of our structural issues,” said the Sandy Republican, one of the Legislature’s three certified public accountants. “Taxing someone for getting sick is not a good policy option.”

Eliason said he’s brainstorming some alternatives with task force members but isn’t ready to talk about them publicly.

Richfield reaction

Back at the Sevier County Fairgrounds, former GOP legislator Kay McIff urged his erstwhile colleagues on the task force to restore the full sales tax on food, remarking that he was in the Legislature in 2007 when, “riding high” on a prerecession economy, he had joined in voting to slash the food tax rate to its current level.

Reversing that decision, McIff said, would solve the revenue problem the state now faces.

“We eliminated what is probably the single most dependable source of revenue,” he said.

Dan Bruse cautioned lawmakers to remember the impact on rural drivers if the state’s gasoline tax rate is adjusted.

“Gas tax, I think, is a fair use tax,” he said. “But it unfairly hits the rural area because of commutes.”

And Jonathan Alvey, a contractor and son of a lumber store owner, said any changes to the tax code need to be fair. He objected to Utah’s entrepreneurs and small-business owners footing the state’s tax bill when major corporations are offered public incentives to build in the state.

“I don’t think that’s fair at all,” he said. “I think that’s bulls--- is what that is.”