Gov. Gary Herbert and legislative leaders announced Thursday that they are abandoning efforts during the current session, which ends March 14, to overhaul the state’s tax code. The abrupt turnabout came in the face of mounting pressure and criticism from industry, community and education leaders.
The announcement follows weeks of closed-door negotiations over HB441, which sought to dramatically expand the state’s sales tax through the addition of new taxes on service-based business. Those new taxes would have been offset in the aggregate by a corresponding cut to the state’s income tax, which is earmarked for spending on public education.
“For a number of reasons, this session we’re not going to be moving forward with pursuing the passage of HB441 over the next week or two,” said House Speaker Brad Wilson, R-Kaysville.
Herbert, Wilson and Senate President Stuart Adams, R-Layton, committed to continuing discussions of tax reform over the coming months, with the governor saying he hopes to call the Legislature back into special session “by this summer.”
Utah’s economy is shifting away from traditional sales, Adams said, leading to dwindling receipts for the state’s general fund and prompting lawmakers to pull between $200 million and $300 million in sales tax revenue out of the higher education budget this year to fund other programs.
“We cannot sustain that,” Adams said. “It affects the education community, it affects every agency in the state. We have to have a solution to this problem.”
While Thursday’s news conference in the ostentatious Gold Room added some formality to those statements, major tax reform has been a recurring subject on Capitol Hill for years. A 2017 effort similarly saw weeks of closed-door discussions, which ultimately gave way in the final days of the session to talk of interim discussions that never fully materialized.
The governor even pointed back to similar efforts by Gov. Olene Walker in 2003-2004 and, later, by Gov. Jon Huntsman.
“This is not easy," Herbert said Thursday. "It would have been easy to kick it down the road as we see too often on tough issues around the country. ... That’s not how we do it in Utah. We’re embracing the challenge, we’re going to find the right solutions.”
The governor had declared tax reform to be his No. 1 priority for the 2019 session during his State of the State address, and had built a combination of reform and hundreds of millions of dollars in tax cuts into his budget recommendations.
On Thursday, he bristled when asked if he and lawmakers had “caved” to public pressure, saying the word is pejorative and that government leaders instead “responded to what the public understands and wants to do.”
“I don’t think we caved to anything,” Herbert said.
Wilson said that it is “tricky” to tackle a topic like tax reform during Utah’s annual 45-day session, and that there is value to taking more time to consider the proposed changes.
“We’ll keep at it,” he said.
The sweeping tax reform proposal, in the form of HB441, was publicly released last week, with the session’s March 14 adjournment fast approaching. The measure would have begun taxing everything from funeral services to lawn care, from legal services to ride-hailing services such as Uber and Lyft.
(Christopher Cherrington | The Salt Lake Tribune)
Bill sponsor Rep. Tim Quinn, R-Heber, on Thursday morning said he had enough votes to pass the reform package out of the House. And even after state leaders put the proposal on ice, he continued to assert that House members would’ve passed HB441 in a floor vote.
He would not say whether the Senate was responsible for the bill’s demise this session. Now, he says, he’s focused on building statewide support for the legislation.
“And then we pass it in a special session," he told The Salt Lake Tribune. "We accomplish the same thing, we just do it a few months down the road.”
Adams, the Senate president, said in an interview with The Tribune that he’d held out hope the plan could be enacted right up until Thursday. “I still wanted to try to catch that Hail Mary, but the reality is, there just wasn’t time,” he said.
“When our senators find out that there’s a policy that’s worth doing, they’ll march through all kinds of adversity to do the right thing. And we just need to get the policy right," he said. “We’re very close to it.”
Discussion on the bill will likely focus on the taxation of business inputs, or services that one company provides to another, Senate and House leaders said. Taxing each of these inputs — the accounting, legal and architectural services that a construction firm might use, for example — has a snowballing effect that can add significant cost to the company’s final product, lawmakers and businesspeople say.
The bill’s authors had prepared some language addressing these concerns and planned to insert it on the Senate side, Quinn said. But they didn’t get the chance.
Quinn acknowledged he’s disappointed that HB441 didn’t clear the Legislature this session but said every new policy benefits from more input. He’s just keeping his fingers crossed that lawmakers don’t give in to the industries pressuring them for tax carveouts.
“I hope we can stand strong and realize that we have a good framework and foundation for good policy,” he said.
The snowball effect of cascading service taxes was a primary sticking point for the state’s business and technology community. And after Thursday’s announcement, Salt Lake Chamber President Derek Miller issued a statement taking credit for the decision to postpone HB441 for interim review.
“After hearing from a number of our member businesses and listening to their concerns, we called upon the governor and the Legislature to allow for more time for deliberation on efforts to modernize Utah’s tax code,” Miller said. “We recognize a policy change of this magnitude requires a robust public process and ample discussion.”
Last week, the Salt Lake Chamber sent out a news release quickly declaring support for HB441 and calling the legislation a “monumental step forward.” But by Thursday, the organization was lobbying state leaders to push the pause button.
Abby Osborne, the group’s vice president of public policy and government relations, said the chamber was never fully on board with the bill but is solidly behind tax modernization in concept.
Misconceptions about the proposal are running rampant in Utah’s business community, she said. So in addition to suggesting changes to the tax-reform package, the chamber will spend coming weeks and months trying to educate its members about it.
“We all know that all of us are going to have to pay a little bit of the price. But how and what and how and when needs to be addressed,” she said.
The bill was also opposed by the Utah Education Association, which met with House leadership earlier in the week and objected to cutting the state’s income tax rate in lieu of significant investment in public education. Sara Jones, UEA’s government relations director, said the organization was happy with the decision to reconsider immediate passage of HB441.
“We recognize that the sales tax and the impact on the general fund need to be restructured,” Jones said, “and we’re supportive of that process.”
The proposal’s effect on education funding was also cited by the left-leaning Alliance for a Better Utah in its reaction to Thursday’s announcement. In a prepared statement, executive director Chase Thomas urged lawmakers to allow for public input as part of its ongoing deliberations on tax reform.
“We support these efforts to modernize our tax system, securing much needed revenue for the future," Thomas said. "But we would urge lawmakers to leave the income tax rate alone so that our schools can receive much-needed investment. Our children are counting on us to secure a bright future for them, and we can’t do it without adequate funding for K-12 education.”
Democrats, who make up a minority in the Legislature, also praised the delay.
“We are glad the people of Utah made their voices heard to slow down the process of developing tax reform legislation which will affect every resident and every company that does business in the state,” House Democrats said in a statement.
"We agree that as we shift from a goods-based economy to a service-based economy, tax reform is necessary to balance our state finances. But it cannot be done on the backs of small local businesses and cannot come at the expense of education. "
If lawmakers are unable to reach a consensus for a special session, their next scheduled opportunity to pass tax reform would be during the 2020 session, the same year the full House and half the Senate will face election.
Asked Thursday about whether changes to the tax code become more difficult the closer it gets to the next election, Herbert, who has indicated he won’t run for re-election, hesitated and then said, “I’ll just let the Legislature answer that.”
Adams said “that may play into effect but I don’t think so. I think we’re looking for a good policy.”
Wilson said the election for most lawmakers next year hadn’t even been on their radar.
“Election cycles — we just finished one for crying out loud," he said. "We don’t want to think about that right now, we just want to think about getting this [tax imbalance] fixed.”
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