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Legislature following good process, but should take it slow on tax reform

7-11-2019

 

During last winter’s session, Utah legislators nearly plunged into far-reaching tax reform that could have instituted sudden and dramatic changes. However, facing criticism from the industry groups and the electorate, the Legislature pulled back.

The result is the Tax Restructuring and Equalization Task Force, a panel of legislators and public finance experts, which began holding town halls last month to explain the issues facing the state to citizens and seek public input.

The task force has framed the problem as an imbalance in state government revenue sources, combined with restrictions on revenue use.

A video presented at the beginning of town halls said, “If the imbalance is not addressed, a constrained sales tax base will negatively impact important funding priorities such as transportation, water, air quality, law enforcement, recreation and health care.”

Under the Utah Constitution, different sources of taxes are earmarked for different purposes. All income tax, along with state property tax on utilities, transportation and natural resources, is allocated to public and higher education. (Local property tax on residential and commercial property goes to local government units.)

Funds from gasoline and sales tax go into the general fund to pay for everything else.

For many years, the present structure worked very well. But today, Utahns are spending their money in different ways. No longer are they buying so many goods, and paying sales tax on those items.

Rather, they are using their cell phones to stream movies, music and TV, and to replace radios, cameras and paper items. Digital services are just that, services, and as such are not subject to sales tax.

According to the task force, income tax was responsible for $4.4 billion in revenue last year, while sales taxes only garnered $2.7 billion, property taxes raised $0.8 billion and the gas tax raised $0.5 billion.

In the winter session, the Legislature proposed a solution that would have imposed sales tax on services to try to “balance” the revenue sources. The proposal set off huge alarm bells from small businesses and from professionals, such as physicians, attorneys and accountants.            The town halls have been a mixed bag. The task force members have done a good job of explaining the Legislature’s position that tax reform is needed now, in order to be prepared for the future rather than waiting until a fiscal crisis blows up in our faces.

But town hall audiences have sounded as if they are not convinced the possible solutions from the Legislature would not end up hurting them, including a local businessman who described the notion of raising taxes on local business while giving tax breaks to corporations as B.S. (except he use the expletives).

The task force appears to have already rejected some ideas, such as a sales tax on culinary water delivered by municipalities and a sales tax on advertising.

Alternatives that came up at a recent town hall in Richfield included reinstating a sales tax on food that was cut in the mid-2000s and imposing a carbon tax. A sales tax on food would be, as a proponent stated at the town meeting, broad based. Everyone would pay it. However, we encourage the Legislature to consider the disproportionate impact such a tax would have on lower income individuals and families.

A case can certainly be made for a carbon tax. But such a tax would hit hard in a state with significant coal, oil and natural gas industries. A carbon tax could cut into coal mining and trucking employment in Central Utah.

Other people are saying it’s time to remove the “silos” around income and property tax, even if doing so requires constitutional amendments. We tend to agree. It makes sense to earmark revenues that are essentially user fees—such as directing gasoline tax to roads and driver’s license fees to administering the driver’s license system.

But revenue from a universal tax, such as income tax, needs to be available for allocation to all needs as prioritized by the Legislature. The education community must recognize that financial support for schools and colleges must rely not on earmarked funds but on public support

The Tax Restructuring and Equalization Task Force is in a tough spot because whatever plan it recommends will face opposition from some quarters. That’s all the more reason to proceed cautiously. Legislators should not feel any pressure to enact reforms in a special session this summer. It would be folly to jump off the edge of the fiscal cliff without knowing what’s at the bottom.