State economist rebuts the official line that Utah’s sales tax is broken and needs a quick fix

(Francisco Kjolseth | Tribune file photo) Constituents make their voices heard as they take a turn at the mic during the Utah State Legislature Tax Restructuring and Equalization Task Force's town hall in Kearns, June 27, 2019. The task force traveled 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and any who want to be involved in the process to review ways to best address what lawmakers and the governor say is an outdated state tax structure.

The informational video for Utah’s ongoing tax reform effort illustrates the state’s budget as a Parthenon-style building supported by four pillars: the income tax, gas tax, property tax and sales tax.

Only, the sales tax has weakened, the narrator says, and it’s buckling under the weight of Medicaid, transportation, social services and public safety costs. As the video continues, cracks spread across the pillar, one side of the roof drops and a beehive logo breaks off the gable and plops into the dust.

David Stringfellow, chief economist in the State Auditor’s Office, finds the animation somewhat comical.

“I don’t know who created that; it’s great P.R. Unfortunately, I don’t think it lines up with what’s actually happening in the tax system,” Stringfellow said in an interview.

In recent weeks, Stringfellow has publicly aired his concerns about how state officials are slicing data to bolster their case for a potential overhaul of Utah’s tax system. While he’s spoken as a private citizen and not an official representative of the auditor’s office, he’s used his expertise to push back on the notion that Utah is verging on a fiscal cliff and that the state’s sales tax is broken — two ideas that have fueled talk about reforming the tax code, unlocking the state’s education fund and other major policy changes.

In reality, he says, sales tax revenues since 2010 have been growing nearly as fast as the Utah economy. And while it is worthwhile to consider tax reform, Stringfellow said he is not hearing the state’s Tax Restructuring and Equalization Task Force discuss some of the alternatives.

“My worry is [policymakers] need to be fully informed of all their options and know the full nature of the problem so that they can solve it in the right way,” he said in an interview.

Lawmakers who sit on the task force, formed earlier this year by the Utah Legislature, say they are following the expert opinions of their nonpartisan staff in concluding that the state’s revenue system needs a revamp. One of the task force members, Rep. Robert Spendlove, said Stringfellow’s disagreement with state legislative staff underscores the fact that revenue forecasting is an inexact science.

“The first law of economics is that for every economist, there is an equal and opposite economist,” said Spendlove, who works in the field as the economic and public policy officer for Zions Bank. “That’s kind of what we’re seeing: There are a lot of different ways to analyze the data.”

Spendlove said he and Stringfellow, who voiced his concerns directly to the task force last month during a Layton town hall, are longtime friends and have been “having these kind of debates for 15 years.”

Regardless of whether the sales tax is lagging compared to the economy, the revenue stream isn’t keeping up with the state’s needs, Spendlove argued. And that’s a major problem because — with income taxes constitutionally earmarked to fund public and higher education — sales taxes support most everything else in state government.

Data dispute

Earlier this year, state legislators crafted a bill that sought to solve the reported revenue imbalance by beefing up the sales tax, expanding it to a wide array of previously untaxed service transactions. The legislation crumbled in the waning days of the legislative session amid an outcry from lawyers, accountants, travel agents and other businesspeople who would have taken a hit.

Out of the bill’s ashes grew the tax reform task force, which was charged with conducting a statewide listening tour and using the feedback to formulate policy proposals for consideration by the full Legislature.

But Brett Hastings, a Salt Lake City attorney who has emerged as a vocal critic of the task force, says the group has acted more like a “propaganda campaign” during its series of summertime town halls.

Using slick brochures, an informational video and a special website called Stronger Futures, the task force seems to be marketing the preconceived notion that the state is facing a financial crisis unless lawmakers spring into action, Hastings said.

“Sales taxes are not down; they’re up,” said Hastings, who helped found the group Utah Legislative Watch in response to the tax reform effort. “I would probably agree that it’s always good to look at your tax policy, if there’s a way to improve it. But it’s just very disturbing to me that our lawmakers, our policymakers are essentially peddling this with false information.”

According to Stringfellow’s analysis, the state’s sales tax revenue (including local revenue) climbed on average about 5.7% per year from 2010 to 2018, or only 0.3% slower than Utah’s overall economy. It did trail the income tax, whose revenues grew at an annual average of 8.1%, but Stringfellow said that there’s always been a gap between the two taxes.

State officials have argued that the sales tax has weakened with the changing economy as consumer spending has shifted from taxed goods to largely untaxed services. Where people once bought lawn mowers, they now are hiring landscapers. Where they once bought cars, they now are calling for a Lyft.

Stringfellow acknowledges that today’s consumers spend more on services than those of yesterday, but, again, he says that transition isn’t recent and shouldn’t trigger an emergency response. A recent report from the Tax Foundation, a D.C.-based think tank, shows that the bulk of that transformation in Utah’s economy took place from the 1940s to the 1990s and that the balance between spending on goods and services has leveled out over the past couple of decades, he said.

Spendlove counters that, regardless of when these changes happened, they resulted in an outdated sales tax structure that isn’t standing up to today’s demands and will probably continue to degrade. Even if opinions differ over the state’s financial trajectory, lawmakers must weigh the risk of failing to act.

“You don’t wait until you’re having a flood to buy flood insurance,” the Sandy Republican said.

State lawmakers for years have coped with this trend by cramming more and more public and higher education costs into the state’s income tax fund, thereby freeing up space in the pinched sales tax fund. At this point, nearly all of those school-related expenses are in the education fund, forcing lawmakers to seek out new forms of budgetary flexibility.

‘We have a problem’

Increasing the sales tax on food is on the table as is a broader overhaul of the sales tax structure. And eliminating the constitutional earmark that protects the income tax-fed schools fund is another approach the task force has been considering, an idea forcefully opposed by the state’s education community.

Abby Osborne, Utah House chief of staff, noted that the task force listened to input during the eight town hall meetings they held in June and July and even reexamined their calculations based on Stringfellow’s concerns.

“We ran the numbers in a different way. Really, the conclusions are still the same: That we have a problem and we need to fix it,” she said in a phone interview. “But it was a great process, and we’re looking forward to entering into the next phase.”

Newly released revenue numbers show that sales tax did grow in the last budget year but came in below expectations, potentially opening a shortfall in the general fund, she said.

Stringfellow contends that the most pressing concern is to ensure that internet sales are properly taxed. Lawmakers could also resolve their revenue imbalance simply by shuffling around money from other education funding sources, such as tuition.

For instance, they could use tuition to pay for roads, public safety and other general government services and then replace that diverted higher education funding with income tax dollars. That sort of swap, he said, is something the state has been doing for decades to get around the constitutional earmark.

He said this isn’t necessarily the perfect or even preferred solution, but it contradicts the notion that the state is out of accounting options.

Dave Woolstenhulme, Utah’s interim commissioner of higher education, said he’s unsure if tuition dollars could be used this way, but he isn’t going to summarily dismiss any proposals considered by the task force.

“We’re more than happy to look at everything that’s on the table,” he said.

(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, June 27, 2019.

Sen. Lyle Hillyard, who co-chairs the tax reform task force, said asking students to pay higher tuition because the state needs money for roads or social services would be a political nightmare. When asked about Stringfellow’s concerns, the Logan Republican said he has learned over his years as a lawmaker that he can get himself in “real trouble” if he tries to run down each dissenting opinion on complex economic policies.

“That’s why we really rely on our people and our staff who are nonpartisan,” he said. “They work for the state of Utah, and I think they’re really pretty wise in how they put everything together.”

About 1,500 people attended the task force’s town hall meetings over the past couple of months, according to a legislative news release. Osborne said the panel will next discuss solutions and options in meetings that will likely begin later this month.