George Washington once observed that “No taxes can be devised which are not more or less inconvenient and unpleasant.” Like most states, Utah depends primarily on a three-legged stool of more or less unpleasant taxes: the property tax, the income tax and the sales tax.
Property and income taxes seem to chafe the public most. Paying these taxes serves almost as a rite of passage into full participation in the economy and the burdens of citizenship.
But we grow up paying the sales tax, and paying it in small amounts here and there every day, so we end up taking it in stride. Whenever my children invest their allowance in a new ball or knick-knack, I always remind them to factor in sales tax.
The sales tax is accounts for 88 cents of every dollar that goes to Utah’s general fund – the money that’s most flexible in meeting the state’s changing needs. The sales tax is a key revenue source for local governments too.
The sales tax also offers an advantage to state and local governments as a means of passing on some governmental costs to visitors. Virtually every tourist who enters Utah will pay some form of sales tax, helping to cover services and infrastructure for the locals.
But it’s fair to say that among many policy analysts and economists, the sales tax is not a favorite. They usually begin by pointing out that it’s regressive. Because people with lower incomes tend to spend a greater proportion of their income on necessities — and these necessities are often subject to the sales tax — these people spend a greater proportion of their income on sales taxes.
Utah has partial exemptions on food and drugs that mitigate this issue a bit. And people with higher incomes pick up much of the slack when it’s time to pay income and property taxes.
Yet there’s another issue related to the sales tax: Revenues are not keeping pace with consumer spending. As the economy becomes more service-oriented, spending follows; but to the extent that services are going untaxed, tax revenues are slipping behind spending. In its new report The Everyday Tax, Utah Foundation revealed that this issue has been especially acute in our state. During the past 45 years, Utah has seen the nation’s second biggest decline in taxable sales as a proportion of consumer expenditures. The shift to spending on services has been a major factor.
Furthermore, in contrast to low earners, higher earners tend to put a greater proportion of their spending into untaxed services, heightening those concerns about regressivity.
Finally, there are concerns about a slipping sales tax base putting upward pressure on the sales tax rate and, in turn, the effects that may have on the overall economy and competitiveness. Utah is in the mid-range of states in terms of its combined state and local sales tax rate, though some states (including two in the West, Montana and Oregon) have no sales tax at all.
In light of these challenges, there’s a change the state could consider: broadening the sales tax base. The Everyday Tax explored the options for doing so. Under one of the approaches Utah Foundation examined, if the state broadened its sales tax base to include all personal consumption transactions, the state could drop the effective rate to 2.1 percent (from 6.2 percent currently) and generate the same amount of revenue.
It’s easier said than done. Every approach to broadening the base produces winners and losers, and none has a neutral economic impact. Furthermore, citizens are wary that efforts to broaden the base might not come with commensurate cuts in the rate. Sales tax reform is a delicate operation, fraught with economic danger, and the political hurdles can be significant.
That said, broadening the base is possible. Hawaii has the broadest base in the nation with one of the lowest rates. And broadening the base opens possibilities beyond just reducing the rate. Texas and Washington both tax many more services than Utah does and even have higher rates, though with a remarkable payoff: Neither state has an income tax.
Determining which approach to sales taxes is the least “inconvenient and unpleasant” is ultimately a matter for debate. And if policymakers intend to pursue reform soon, that debate should begin in earnest now.
Peter Reichard is president of Utah Foundation, a nonpartisan, nonprofit public policy research organization. Reach him directly at firstname.lastname@example.org and find The Everyday Tax: Sales Taxation in Utah at utahfoundation.org.