SALT LAKE CITY — Gov. Gary Herbert and GOP legislative leaders see eye to eye about broadening the state's sales tax base to include some still-to-be specified services — but not on where the 2019 Legislature should cut taxes.
At Friday's 2019 Economic Outlook and Public Policy Summit, both incoming Senate President Stuart Adams, R-Layton, and House Speaker Brad Wilson, R-Kaysville, said they'd like to see the state income tax rate lowered.
In his proposed budget released last month, the governor called for a net $200 million sales tax cut, while at the same time beginning to impose taxes on some services, to lower the state's 4.7 percent sales tax rate below 3.9 percent.
"We can try to lower the rate on sales tax, but it basically makes the problem worse," Adams told the 1,000 business and community leaders gathered at the Marriott Hotel at the City Creek Center.
The new Senate leader said states that focus on lowering income tax rates have better economies, calling it "just statistically true that income tax is an economic driver. So if we're going to lower taxes, that's what tax we're looking at."
Wilson said there are a lot of options on the table when it comes to cutting taxes during the 45-day session that begins Jan. 28. This year, there's more than $1 billion in budget surpluses and revenue growth available.
"You're going to see some interesting discussion over the legislative session of how we move into a more service-oriented sales tax and broaden that sales tax base but lower the rate. We're not attempting to generate new revenue," he said.
But when it comes to a tax cut on top of that, the new speaker also preferred to look at the state's 4.95 percent income tax rate, already reduced from 5 percent by the 2018 Legislature.
He said any changes to the tax structure need to continue to support the state's "vibrant economy, and we will continue to have employers that want to be here and grow here. So that's why you're seeing conversation about the income tax."
Earlier, the governor told the summit audience that now is the time to make changes to the state's tax structure, particularly what he called an "out of balance" sales tax base.
"We don't want to wait until we're in a crisis," he said. He reminded everyone of the last major tax cut under then-Gov. Jon Huntsman Jr., when the top income tax rate was cut from 7 percent to a single rate of 5 percent.
Herbert, who served as Huntsman's lieutenant governor, said it's sales taxes that need attention now.
"We ought to take a look at, in fact, our sales tax, which is getting more and more unsustainable," the governor said, noting the base has shrunk from goods making up about 70 percent of spending in the 1980s to just 40 percent now.
"We've lost about 30 percent of the economy paying its fair share to help us run government. Sales tax is not keeping up — as the economy grows by 5 percent, we only pick up about 3 percent on the sales tax," he said.
While state income taxes go toward education, sales tax makes up the bulk of the state's general fund that pays for much of the rest of the budget, even a significant chunk of transportation costs despite gas tax revenues.
The governor has not yet offered details of which services should be taxed, although he has talked about limousine rides. He said imposing a tax on all services would allow the rate to drop to below 2 percent and still bring in the same revenue.
There is no price tag on the proposal outlined in his budget, but it's been estimated that some $800 million in new sales taxes would have to brought in to be able to lower the rate to 3.9 percent.
"We're going to be working closely with the Legislature to see what we can do to broaden the base and lower the rate and give at least a $200 million tax cut back to the people of Utah," Herbert said.
He said he wants to avoid a "sudden shock to the economy" by ensuring the changes to the tax system are sustainable long term, fair to all taxpayers and simple to administer.
The governor also offered an upbeat assessment of Utah's economic future.
"We're on the right road and we're going in the right direction. I understand the ups and downs of the business cycle," Herbert said, adding that a downturn doesn't mean a recession is imminent.
"We, in fact, don't allow anyone in the administration to use the 'R' word. I don't want it to become a self-fulfilling prophecy," he said, citing Utah's quick recovery from the Great Recession a decade ago.
"I certainly reject any kind of gloom and doom," the governor said. "But I'm also wise enough to know that we need to make sure that we do what we can do to insulate ourselves and prepare ourselves as we go forward."
Herbert's deputy chief of staff, Paul Edwards, said in a statement that, "Admittedly, tax reform is complex and everything is on the table. What changes should be made depends on the objectives of tax reform."
He said "lower- and middle-income households make disproportionately large contributions to the state's general fund; remedying that unfairness is very important to the governor."
Simplifying how taxes are collected by reducing compliance costs is also something Herbert is eager to do, Edwards said, as well as reducing what he described as the volatility that comes from changes in the business cycle.
He said "there could be adjustments to both sales and income tax that return $200 million of this year's surplus to taxpayers, but those adjustments will need to be demonstrably more equitable, simple and sustainable than our current system."
During the legislative panel discussion at the summit, incoming House Minority Whip Mike Schultz, R-Hooper, said that tax policy will the be the top topic for lawmakers this session.
"We've been hearing it for years," Schultz said of the concerns about the tax system, including the instability of the sales tax base. "We've been talking about it for years and years. It's time to address it."
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