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.
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.
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.
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.”
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.