Utah lawmakers pass sweeping tax reform, impacting paychecks and grocery bills

(Trent Nelson | The Salt Lake Tribune) The Utah State Capitol in Salt Lake City on Thursday Dec. 12, 2019 as lawmakers hold a special session focusing on tax reform.

Utahns can expect to see bigger paychecks and bigger tax returns next year, but also a bigger bill for their groceries and other purchases, after lawmakers approved a package of new tax laws during a special legislative session Thursday.

The vote — 43-27 in the House and 19-7 in the Senate — followed months of discussions by a special legislative task force, formed in the wake of a failed reform effort earlier this year. It was approved with only Republican support, although several members of the majority party joined House and Senate Democrats in voting against the bill.

The proposal, which Gov. Gary Herbert promises to sign, leaves unresolved a number of questions raised during task force hearings, including whether to repeal part of the Utah Constitution that dedicates income tax revenue to public education and how to shift the state’s sales tax to better align with an increasingly services-driven economy.

Late Thursday, it was unclear when the tax changes would go into effect as Republicans failed to get the two-thirds majority needed for the bill to become law immediately but a late amendment approved by both chambers sought to do just that.

“Bottom line, I think the residents of the state of Utah are in better shape under this bill than they would be if we didn’t pass it,” said Sen. Wayne Harper, R-Taylorsville, who added that he was opposed to the bill until the morning of the vote.

The bill approved by lawmakers cuts Utah’s income tax by roughly $630 million, according to legislative estimates, through a reduction in the income tax rate, an increase to the per-child dependent exemption and the creation of new tax credits.

But it also raises the sales tax by $475 million, primarily by increasing the tax on grocery sales and adding new taxes to the sale of motor and diesel fuels, resulting in an overall tax cut of $160 million.

The practical result of those changes is a shift of roughly half a billion dollars of state revenue away from income taxes — which support education — and toward the unrestricted General Fund.

Legislative leaders say that shift is necessary to correct an imbalance between the robust income tax and the comparatively more sluggish — but still growing — sales tax, as well as to bypass the income tax’s constitutional restrictions and provide lawmakers with greater flexibility in setting the state’s budgets.

“I think that the most dangerous thing, in the future, for public education is a shrinking general fund,” said Sen. Lincoln Fillmore, R-South Jordan, a member of the task force that created the bill.

Fillmore acknowledged the controversy surrounding the grocery tax hike, describing it as a hard pill to swallow. But he added that the bill’s inclusion of rebates for low-income Utahns allows for a more targeted approach to taxation. A portion of those rebates will be mailed to qualifying residents early next year as part of changes made to the bill in the hours before the special session.

“This is a bill that solves problems in the tax code,” Fillmore said, “because while the bill isn’t perfect, neither is the tax code.”

Additional legislation is expected during next month’s regular legislative session that could repeal the constitutional earmark for school funding — which would require a public vote in November — and replace it with a new education funding model that may include automatic annual property tax increases tied to inflation.

And because the chambers failed to secure two-thirds majorities, the reform bill is potentially vulnerable to a citizen referendum.

Senate President Stuart Adams, R-Layton, said he would have liked to see a larger margin of victory, but that he was not concerned about the law being overturned by a public vote.

“I don’t see anybody trying that anyway,” he said. “I think we’re doing the right thing.”

Lawmakers opposed to the bill focused their remarks on its affect on school funding and families purchasing food.

Sen. Luz Escamilla, D-Salt Lake City, said a tax of a few dollars on a grocery story bill may not seem like much, but has a significant impact on Utahns who are struggling to make ends meet.

“That is the difference between a gallon of milk or diapers for their babies,” she said.

And Sen. Kathleen Riebe, D-Cottonwood Heights, said many Utahns are already buying the least expensive food they can, and failing to afford more nutritious options.

“It concerns me tremendously that the people that are struggling just to keep their head above water, we are not giving them the help they need to rise out of poverty,” she said. “We are actually creating a situation that makes it harder for them to get ahead.”

But Sen. Todd Weiler, R-Woods Cross, argued that reducing the grocery tax roughly a decade ago has done little to improve the situation of Utah’s poor, while increasing that tax will generate revenue that can be used for programs that assist those living in poverty.

“I don’t think anyone could argue, with a straight face, that the poor are better off today than they were a decade ago,” he said.

After the late night votes, the governor released a statement.

“I commend the Legislature for their courage and forward thinking in working to address the difficult issue of tax reform," Herbert said. "The bill they passed this evening takes measurable steps toward improving the stability and equity of our tax system. We have meaningful work yet remaining. However, these steps will improve the future of our state and its people. I look forward to signing it.”

What’s in the bill?

Income tax

This bill cuts Utah’s income tax rate from 4.95% to 4.66% and it increases the per-child exemption from $565 to $2,500. Couples without children can now claim one dependent exemption. The state is also creating an earned income tax credit for low-income residents.

Sales tax

The state tax on grocery sales will increase from 1.75% to 4.85%. Utahns will get some of that money back with their annual tax return through a new grocery tax credit of $125 per person for the first four people in a family and $50 for each person after that. The grocery tax credit phases out for higher-income families.

The bill repeals several sales tax exemptions, including those for ski lift electricity, locomotive fuel, college athletic admissions, textbooks, newspaper subscriptions, car washes, and motor fuel. It also creates a new excise tax on diesel fuel sales that may lead to higher costs being passed to consumers. But it also creates new tax exemptions for feminine hygiene products, repealing the so-called “tampon tax.”

More service-based businesses will now be taxed, including pet boarding, grooming and daycare; transportation services (including scenic tours and ride-sharing apps like Uber and Lyft; car towing, parking lots and garages; dating services; streaming media; and shipping and handling.

Other changes

Other changes include increasing the tax on car rentals from 2.5% to 4%, and in 2025, increase the minimum passenger requirement for high-occupancy vehicle (HOV) lanes from 2 people to 3 people.

Tribune reporter Lee Davidson contributed to this report.