Legislative panel recommends sweeping changes to Utah’s tax code

(Francisco Kjolseth | Tribune file photo) Senator Lyle Hillyard, R-Logan, left, chairman of the tax structuring and equalization task force and Utah Rep. Francis Gibson, R-Mapleton, along with other members of the tax reform task force speak during what may be its final meeting at the Utah Capitol on Monday, Nov. 25, 2019.

A state legislative panel on Monday voted in support of a massive tax reform plan, teeing the package up for consideration in a possible special session later this week.

But the task force’s decision was by no means resounding, with a Republican — Rep. Tim Quinn — siding with two Democratic legislators in opposing the draft tax proposal. To Quinn, the plan he and his colleagues have spent months crafting wouldn’t make significant strides toward addressing the core budgetary problems that brought the group together.

"If I voted for this bill, I would have to get a shoeshine afterward, because my shoes would be scuffed from kicking the can down the road," the Heber City Republican said.

Ultimately, he and other critics were outnumbered by six task force members who recommended the drafted bill to the full Legislature.

Sen. Lyle Hillyard, who is a co-chairman of the task force, acknowledged that the proposal isn’t perfect, but he said it will buy the state time as it seeks to tackle its budgetary challenges.

“I don’t let perfect get in the way of good,” the Logan Republican said, making a motion to recommend the draft plan to the full Legislature.

Monday’s meeting capped off months of public hearings and meetings held by the legislative task force assigned to update Utah’s tax code, balance the state’s revenue streams and ease the overall tax burden. The group entered Monday’s meeting with a drafted bill that would hike the sales tax on food and extract revenue from certain service transactions and motor fuel purchases, while making an array of income tax reductions that would yield an overall tax reduction.

It’s a plan that has drawn opposition from anti-poverty advocates, educators and certain corners of the business community while earning rave reviews from select anti-tax groups and industry representatives.

And some have doubted the need for a special session just weeks before state lawmakers are already scheduled to convene at Capitol Hill for their annual 45 days of legislating. But several speakers Monday said waiting would inject uncertainty into upcoming budget planning.

“Going into a session with unresolved issues as big as tax reform could really create instability throughout the session,” said John Nixon, who formerly served as state budget director.

Representatives from the Utah Taxpayers Association, Utah Association of Realtors and Utah Apartment Association praised the proposal for leaving more money in the pockets of state residents and encouraged the task force to proceed into a special session.

“With this tax cut, or tax savings, of $500, it would be a game-changer for many Utahns, making it much easier to qualify for a home mortgage,” said Christy Vail, president of the Utah Association of Realtors.

The proposed overhaul plan delivered an overall tax cut of $80 million up until Friday, when state leaders announced they were doubling that amount in light of large projected revenue surpluses.

That additional tax relief is partly due to an improved forecast for income tax revenues, which suggests the state would forgo more money than initially anticipated by dropping the rate from 4.95% to 4.66%. The task force’s proposal to roughly quadruple the dependent exemption will also bring about a greater reduction than previously estimated — especially because childless couples would be allowed to claim one dependent exemption under the most recent version of the plan.

For a family of four, the average annual cut would total $300 if their income was $25,000; $525 if they earned $60,000; and $120 if they made $85,000, legislative estimates show. Overall, about 78% of tax filers would experience a reduction, while about 22% would pay more, according to fiscal analysts.

The package would also apply the state’s sales tax to gas at the distributor level and to a list of previously untaxed service-oriented transactions, including towing, streaming media and peer-to-peer ride sharing. In a Monday statement, Lyft expressed opposition to the bill as currently written.

“This tax will be one of the highest in the country and will effectively price people out of our service, meaning fewer rides for Utah drivers on our platform and less money in their pockets,” Lyft’s statement read.

Utah’s Democratic lawmakers have also expressed dismay about elements of the plan, especially the idea of hiking sales taxes on groceries. Anti-hunger advocates have estimated that this change would inflate food bills for low- to middle-income families by $172 to $252 each year. And although task force members have proposed a grocery credit to counterbalance this increase, Gina Cornia of Utahns Against Hunger predicted it would still represent a hardship for lower-income residents.

“The thought of families going without should shame us into doing better,” Cornia said.

Left out of the Monday night meeting was a major piece of the reform plan that is meant to help replenish funding for education. That part of the package, which hasn’t had much public discussion, could result in annual automatic property tax increases for local school districts.

Legislative leaders have also signaled their desire to amend the Utah Constitution to either remove or adjust language that sets aside all income tax revenue for funding public schools, but the education-related portions of the overall package are not expected to be part of the upcoming special session on tax reform.

Heidi Matthews, president of the Utah Education Association, said her organization was staunchly opposed to a bill that would decrease income tax revenues by more than $635 million — money that would’ve been dedicated to the state’s public schools — without a solid plan for offsetting the loss.

“Cutting $650 million from the education fund with nothing but an I.O.U. for the general session is not enough for us to bank on,” she said.

Hillyard opened the meeting with a warning about the consequences of inaction, repeating the panel’s refrain that the state’s sales tax isn’t keeping up with growing needs.

“We face some very serious issues,” he said. “Unless we choose to address them, the Legislature is going to be forced to face them.”

The drafted bill seeks to bolster the state's general fund by increasing the sales tax on food, repealing some exemptions and adding the sales tax to fuel and some previously untaxed services. Those changes could pump several hundred million dollars in additional revenue into the general fund each year, legislative analysts say.

But Quinn pointed out that the bill also calls for moving $534 million in higher education costs into the general fund — and he wondered if that shift would consume all the new revenue to that fund and eliminate any meaningful progress on the state’s underlying budget imbalance.

“How did we solve the problem that you and I agree we have?” the Heber City Republican asked John Valentine, chairman of the Utah State Tax Commission.

Valentine responded that lawmakers are free to move higher education costs around between funds, so the changes would still give them additional budgetary flexibility.