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“Why Must This Be Done?” Panelists Discuss Basis and Answers to State Tax Reform

During the 2019 Session, the message was told that the state of Utah has a revenue and a structural problem, which was the base for HB 441 and the argument for tax reform. After HB 441 failed to pass the Legislature, attendees at the Association’s Taxes Now Conference gathered to hear from experts and policymakers what comes next.

We asked tax experts and economists to weigh in by posing the question if Utah has a revenue problem.

Our first panel included State Auditor John Dougall, Legislative Fiscal Analyst director Jonathan Ball, and Natalie Gochnour,  director of the Kem C. Gardner Policy Institute. The panel was moderated by Association president Howard Stephenson.

Mr. Ball started by mentioning that with the increase of population, the pressure on the state budget is primarily on services funded by the discretionary general fund. As our economy grows, there are more demands on government.

The sales tax base has grown more slowly than personal income and Utah’s gross domestic product (GDP), with the sales tax base growing at 4.6%, as opposed to 5.3% for the other two factors, according to data from Mr. Ball. Ms. Gochnour added that the sales tax base should match economic growth, especially when you look at spending as a percent of the overall economy.

Mr. Stephenson asked whether the collection of remote sales taxes will make an impact, as revenue from these purchases have only been recently collected by the state. Mr. Ball said it was part of the solution, but will not solve Utah’s structural and revenue problem.

Ms. Gochnour noted that until 1998, the sales tax and income tax revenue were relatively equal, with some years the sales tax actually exceeding the revenue brought in by the income tax. Following that point, the income tax revenue outpaced sales tax revenue. While sales tax revenue continued to increase for most years after that, income tax revenue grew at a faster rate. Ms. Gochnour said that when you compare sales tax base and personal income, the sales tax base has dropped from 70% in 1980 to 43% today.

The panel noted that sales tax rates have been increasing as local and boutique taxes, such as zoo and parks sales taxes, have been implemented. But on the flip side, the base has narrowed due to the Legislature’s correct actions in exempting business inputs. Mr. Dougall said that it would be very negative to reverse what the Legislature has done over the past 25 years in exempting business inputs.

Mr. Dougall added that when the state has attempted tax reform in prior years, state leaders and the public understood the shared vision. In 2006 -2007 efforts when the state broadened the income tax base and cut the rate from 7% to 5%, the shared vision was to make Utah more competitive. “What is the shared version this time around” he asked.

He added that in the past, when discussing tax reform, the Legislature and other interested parties spent a great deal of time engaging with the public, business, and other groups to ensure they understood what was trying to be accomplished and to bring them along in the discussions. Utah ought to continue this model, rather than having discussions behind closed doors.

Following this discussion, policymakers were brought in to discuss possible solutions. This panel consisted of Senator Dan Hemmert, Senator Lincoln Fillmore, Representative Robert Spendlove, and Phil Dean of the Governor’s Office of Management and Budget.   

Sen. Fillmore began by addressing several unacceptable common complaints against tax reform he regularly hears. The first is “taxes are evil”. Second, “I’m so special that the tax and regulatory burden should fall more heavily on other taxpayers.” Sen. Fillmore said that special interests try to get themselves exempted out of additional taxes, which shifts burdens to everyone else, and defeats the purpose of updating the tax system. Third, “the current system is unfair in my favor”. He said that no one is willing to admit that they benefit from the current system, and would rather stay in the status quo.

Rep. Spendlove said that he’s been viewing the issue of tax reform by asking three questions. First, “why must this be done”? He said that the state has a structural imbalance that needs to be adjusted, as well as significant changes to the economy, as society moves from a goods-based to service-based economy. In addition, the transportation fund is not providing enough revenue to cover necessary infrastructure.

The second question he asked is “why now”? Primarily, Utah no longer has the ability to move money between the general and education funds. Rep. Spendlove says Utah is in between a rock and a hard place considering there is not the flexibility we once had to fund government services.

Finally, he asked what Utah ought to do about it. There are four broad solutions, which can be used as a standalone or in a combination, Spendlove argued. First, broadening the base, which could include services, as was done in HB 441. Second, raise rates, which is politically unpopular. Third, amend the Utah Constitution to allow for income tax to be used more flexibly, rather than just for education. Finally, Spendlove said Utah could tighten its belt. He said that Utah does not have a revenue problem. He said legislators often perceive that the public is demanding or expecting additional government services as the population increases. Given these four options, the task force has an opportunity to make the call.

Aligning usage of infrastructure and services must closely match to the person who uses it, and this ought to be a central point of tax reform efforts, argued Mr. Dean. He said that $1 billion in sales taxes goes to transportation, but that is still not enough. As the gas tax has less buying power, Utah needs to be inventive in order to provide the service while charging the user of that service or infrastructure.

Cost of doing business should be entirely exempt from sales taxes, said Sen. Hemmert. The tax pyramiding issues in HB 441 creates a hidden tax on the system. A tax on a tax is inappropriate, and will ultimately hurt the economy.

This was only a brief recap of our nearly 90 minutes worth of panel discussion. To hear the whole thing for yourself, click here for the tax experts and economists, and here for the policymakers.

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