When Utah Foundation released a comprehensive study on Utah’s sales tax base last June, we had only a vague sense that expanding the base would become the biggest item on the agenda for the 2019 legislative session. But, depending on the scope of the change our Legislature is contemplating, sales tax modernization could be the most momentous tax reform Utah has seen in years.
As reform efforts churn in the coming days and weeks, the public and policymakers ought to ponder some key points.
Tax reform is a fact of life: Short of repealing the sales tax, which is not on the table, there is no change legislators can propose that would be more radical than the decision Utah made in the 1930s to create the sales tax in the first place. Since then, we’ve made ongoing modifications as times have changed. Utah Foundation’s 2018 report, The Everyday Tax, revealed that our sales tax rates have generally trended upward in response to a changing fiscal picture – but that real per capita revenue has fluctuated over time. Which leads to the next point.
The sales tax base is in relative decline: During the past 40 years, Utah's sales tax base has generally been declining as a percentage of Utahns' personal income. There is an upside for consumers. Among the nine western states that collect sales taxes, Utah has the lowest sales tax burden in terms of personal income. In fact, that burden has declined by about one-third just in the past 20 years.
The narrowing has fiscal consequences: Utah Foundation found that, during the past 45 years, Utah has seen the nation’s second biggest decline in taxable sales as a proportion of consumer expenditures. As a result, Utah had essentially the same real per capita sales tax revenue in 1978 as in 2016 – meaning that, as costs climb, the state is losing purchasing power from this revenue source. This issue is exacerbated by earmarks that reduce flexibility to address the trend.
Exemptions are part of the picture: In the 1980s, a trend began in which the Utah Legislature began creating more and more sales tax exemptions, with the biggest flurry of new exemptions occurring during the past decade-plus. Some of these exemptions may be socially justified or may “pay for themselves” by avoiding economic inefficiencies. But the more exemptions you add to the books, the wider the doorway gets for even more exemptions, as the justification for one new exemption might apply to still others. There are now more than 90 exemptions on the books; 69 of those alone cost roughly $650 million per year, or about 20 percent of all revenues. So it’s important that we see each exemption in the right light – as a public subsidy of something we’ve decided as a society clearly deserves an expenditure of tax revenue.
The existing base favors wealthier citizens: Sales taxes in general are considered regressive, since lower-income citizens tend to spend a greater proportion of their income on purchases. But the regressivity is compounded when the base relies on taxing goods rather than services, because higher-income residents tend to spend a greater share of their income on services.
Broadening the base can yield a big rate cut: Utah Foundation has estimated that if Utah broadened the sales tax base to include all personal consumption transactions, the state could drop the effective rate by two-thirds and generate the same amount of revenue. Now that may represent a long-shot scenario, but it does illustrate the point that a major broadening of the sales tax base can yield a major reduction in the tax rate.
Finally, there are some basic principles that can assist policymakers in approaching reform. For instance, to the extent you can claim a tax is fair, transparent, simple and uniform in its application, you’re probably on the right track. But taxation is a craft of sorts, and at the end of the day, good craftsmanship depends on getting the details right.
Peter Reichard is president of Utah Foundation, a nonpartisan, nonprofit research organization. Reach him at firstname.lastname@example.org. Find The Everyday Tax: Sales Taxation in Utah at utahfoundation.org.