Despite Utah leaders’ dire warnings, sales tax revenue has shot up

Utah lawmakers spent most of last year trying to convince residents of the urgent need to reform the state’s tax system before it resulted in crippling shortages to crucial services and programs.

They warned that the sales tax revenue stream, which used to pay for most government operations, was seriously lagging the growth of income tax receipts, reserved only for education.

But the problem that sounded so dire a few months ago doesn’t show up in recent budget reports. In fact, the recently released fiscal year-end revenue summary points to a sizable bump in sales tax revenue and a decrease in income tax collections.

State sales revenue increased 9.7% over the previous year ($273 million) and local sales tax jumped 12.1% ($193 million), according to the Utah State Tax Commission’s final revenue report. Individual income tax receipts, meanwhile, dropped 7.7% ($335 million) and corporate tax plummeted 31.7% ($165 million).

Last year, when sales taxes showed growth, a Tax Commission spokeswoman cautioned that it might be temporary, because of the then-new Medicaid expansions and new collection of taxes on online sales. And analysts say it still is premature to conclude that the pattern will continue.

Next year’s report will allow for a more reliable year-over-year comparison, according to the commission’s senior economist, Eric Cropper.

A COVID-19-prompted change in the tax return filing deadline skewed the numbers this year, he noted.

“The deadline was moved from April 15 to July 15, which moved [income tax] revenues into [this fiscal year]," Cropper said. That change in the deadline, which included months when Utah’s unemployment rate was at its highest, meant the reported income tax revenue declined dramatically.

According to the Colby Oliverson, spokesperson for the Governor’s Office of Management and Budget, this timing issue makes a big difference. Had the deadline not changed, reported income tax revenue actually would have increased by 9.2% for the fiscal year.

After looking at the tax revenue summary and talking to legislative financial analysts, Sen. Lyle Hillyard said he’s always happy to see an increase in sales tax collections but added that it’s too early to identify an ongoing trend regarding the income tax.

“Income tax is the most volatile revenue we have in the state,” said the Logan Republican.

(Francisco Kjolseth | Tribune file photo) This Nov. 25, 2019, photo shows Sen. 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 panel. Hillyard said it's still too early to draw conclusions from the latest annual revenue report.

Hillyard, the longest sitting member of the Utah Legislature, was the primary sponsor of the unpopular tax reform bill, SB2001, that would have cut the state income tax rate from 4.95% to 4.66% at the same time it boosted the statewide grocery sales tax from 1.75% to 4.85%.

Passed in a special session just two weeks before Christmas, the tax reform package was hastily repealed the next month when lawmakers and the governor recognized the public backlash in the form of a referendum that qualified for this year’s ballot.

Hillyard, whose role in tax reform likely was behind his defeat in the June 30 Republican primary, has continued to defend the effort, saying that over several years a pattern was established of income tax growth outstripping the sales tax and generating the lion’s share of new revenue.

(Screen shot from strongerfutures.utah.gov) This chart was used by lawmakers last year in the push to convince Utahns of the need for tax reform with warnings about the sluggish growth of the sales tax.

Some voices of dissent, though, have always contended the sales tax is a stronger revenue stream than portrayed by lawmakers. David Stringfellow, chief economist in the state Auditor’s Office, for one, has argued the Utah has seen strong, steady sales tax growth for most of the past decade.

Rep. Carol Moss, D-Holladay, is a retired teacher who voted against the tax reform. She’s not surprised by the new numbers showing strong sales tax growth because she says she’s noticed that trend over many years.

She believes those numbers got an extra jolt this year from the federal coronavirus relief checks.

Utahns "were spending it on durable goods,” Moss said.

GOMB acknowledged that federal aid helped Utahns.

“Federal fiscal stimulus programs such as expanded unemployment benefits, stimulus checks, and the Paycheck Protection Program massively increased disposable personal income in the second quarter of calendar year 2020 relative to what would have been the case without any federal action," Oliverson said.

A report earlier this year by the University of Utah’s Kem C. Gardner Policy Institute pointed to the increase in sales of consumer goods as the one bright spot in Utah’s economy during the pandemic.

Senate President Stuart Adams said this latest revenue summary actually bolsters the argument that Utah’s tax spending should be more flexible.

“When the economy is expanding, income tax does better and sales tax does worse,” the Layton Republican said. “When the economy is bad, the opposite happens.”

The failed tax reform effort was intended to maximize flexibility in budget writing to protect both the general fund and the education fund no matter the state of the economy, he said in defending it.

“No other state has this extensive a restriction on their revenue streams,” Adams said. “I still believe we need flexibility.”

Adams, along with other Republican legislative leaders, is supporting proposed Constitutional Amendment G on the Nov. 3 ballot that would ease the education earmark on income tax revenue so that that money could also be used to fund programs and services for children and people with disabilities.

Gov. Gary Herbert said in a prepared statement that even a slight decline in Utah’s tax revenue should have people worried about education funding and argues for a change. “The amendment will allow greater flexibility for state leaders to ensure that public education is kept whole," Herbert said, “even in times of downturn."

On the other hand, Moss warns against the amendment.

“Utah already has the lowest school spending of any state in the nation,” said the retired teacher. “This is the wrong time” to do anything that could reduce future funding of public education.