Humans have always had a fascination with the future. Early 20th century magazines were filled with fanciful notions about revolving buildings and capsule dinners. Their visions may have been through-the-looking-glass, but at least they were looking ahead.
And yet it’s 2019 and Utah derives its general fund revenue from a tax designed around the economy of the Great Depression. We may not know what the future will bring, but it’s time to drag the sales tax out of the world of 1933—and a new tax reform task force may do just that.
Like most states, Utah imposes its sales tax on a base that consists of most goods—with carveouts, including a reduced rate on groceries and residential utilities—and relatively few services. The state’s sales tax is generally imposed on tangible property: appliances but not apps, light fixtures but not landscaping. First imposed in 1933, the tax reflected an era when services constituted a small share of the economy and it was administratively simpler to focus almost exclusively on retail sales of goods.
Fortunately for Utahns, today’s economy has little in common with that of 1933 — or even 1993. Higher incomes and changing consumer tastes have shifted a greater share of consumption to services, while a digital economy is upending traditional categories. We subscribe to streaming services and download digital goods rather than buying (taxable) physical media. Increasingly, younger generations purchase “experiences” more than goods — frequently involving services, whether it’s fitness classes or cooking lessons or excursions.
The shift is not exclusive to new services, either. It also represents older services taking on greater importance in the modern economy. Increasingly, there’s an app for that, whether it’s housecleaning services, dog walking, ridesharing as an alternative to car ownership, or landscaping services in lieu of buying a lawn mower. The mower was taxed. Its replacement (lawn care service) is not.
Unfortunately for Utah, that means the sales tax no longer reflects personal consumption patterns. The breadth of the sales tax base is barely half what it was at its peak. As a percentage of personal consumption, the sales tax has shrunk 30 percent in just 20 years, while as a percentage of state tax collections, income taxes are up 48 percent and sales taxes are down 31 percent over four decades. But should we care?
Yes. Here’s why.
When sales tax bases erode, rates (of sales or other taxes) must rise to compensate. Some purchases are excessively taxed while others skate by untaxed. This inequity is particularly disconcerting when the untaxed transactions are overwhelmingly consumed by higher-income earners, an inadvertent subsidy to wealthier Utahns that makes the sales tax more regressive.
This shift puts more pressure on the income tax, which is more economically damaging than the sales tax, and which is 100 percent earmarked for education — meaning that it’s possible that the state could see revenues rise overall but still face a shortfall for general government, forcing tax increases even when collections are up. And the code puts a thumb on the scale, picking (untaxed) winners and (taxed) losers.
Broadening the base and lowering the rate enhance stability, fairness, and economic growth. Over a decade ago, Utah lawmakers reformed income taxes, improving competitiveness and tax structure, but some of their efforts are being undone by the imbalance created by sales tax erosion. It’s time to finish the job by creating a sales tax fit for the 21st century.
Jared Walczak is a senior policy analyst with the Tax Foundation, Washington, D.C.