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Could sales taxes on services be delayed?

By Lisa Riley Roche, KSL | Posted - Feb 26th, 2019 @ 7:01am

SALT LAKE CITY — Still-unseen tax reform legislation extending sales taxes to a wide range of services may not take effect until next year — and may call for a corresponding drop in the state sales tax rate over time rather than all at once.

Rep. Tim Quinn, R-Heber City, offered some new details about the discussions surrounding the bill he is sponsoring during a meeting Monday with the Utah League of Cities and Towns Legislative Policy Committee.

Quinn told about 100 local government officials that the 240-page "working draft" of his bill could be made public Tuesday, the same day it is expected to be presented to House Republicans in a closed-door caucus.

He said the "targeted" income tax restructuring that's part of the tax reform effort should take effect before the sales tax base is broadened and the state sales tax rate, currently 4.7 percent, is lowered.

That could mean changes to the state income tax including an additional tax break for families to compensate for the loss of personal exemptions on federal income tax returns would be put in place for the 2019 tax year.

And, Quinn said, the new sales taxes piece of the package could be implemented for the budget year beginning July 1, 2020, with adjustments to drop the rate six months later and again through the remaining two quarters of the year.

Under that scenario, the final sales tax adjustment to "the rate we ultimately propose" would not come until July 1, 2021, he said.

"That gives us a year of data to go back in and say, 'Were we wrong, were we off and if we were, where was it?'" he said, noting that at least initially, the new sales taxes would bring in additional money to the state.

"We think we have buffers in the number so that if we miss, we miss on the high side of revenue," Quinn said. "So we may be able ultimately to have the rate lower. But we want to be prudent."

Senate Majority Whip Dan Hemmert, R-Orem, said delayed implementation has been talked about and "might be a better approach." He said he has mixed feelings about waiting.

"Part of me would almost rather rip the Band-Aid off," Hemmert said.

He said it's not clear the $225 million tax cut backed by GOP legislative leaders and Gov. Gary Herbert will be part of the tax reform bill, but there is "some shifting" from sales tax to income tax.

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The size of a possible tax cut this session has been called into doubt as a result of updated revenue estimates released Friday that reduced the $1.3 billion budget surplus by about $200 million.

A slide shown to the local government officials said more than $55 billion in new services and sales would be taxed, generating nearly $1.4 billion at a 2.5 percent state sales tax rate and $1.1 billion at 2 percent.

"Whatever way we go, we're going to be cautious about the way we move forward for good reasons," House Majority Whip Mike Schultz, R-Hooper, said. He said lowering the state sales tax to 3 percent remains the goal.

"I think that 3 percent still is going to be tough to hit but that's still kind of the target," Schultz said. "I haven't heard exactly the number but I think it's in that range. Maybe a little bit more."

No specifics were mentioned about what services would be taxed under the bill other than a new 1 percent excise tax on health insurance premiums that would raise $66 million.

Sen. Lincoln Fillmore, R-South Jordan, who will be the Senate sponsor of the bill, has said prescribed medical services, tuition, paying rent and buying a house are off the table but just about everything else is being considered.

Fillmore said Monday the Senate "will wait and see" what happens with the bill in the House before taking up tax reform again in caucus. "We want to talk to the bill that we get."

The local government officials who heard from Quinn raised concerns about what broadening the state's shrinking sales tax base and lowering the state rate means for local option sales taxes.

Quinn assured them the bill will hold local entities harmless.

Otherwise, he said, cities that are home to some of the professional services being taxed would see a windfall while others that depend on retail sales would see a decline in collections as the rate drops.

"There will be no losers in this," Quinn said. He said delaying the implementation and gradually reducing the rate would provide enough time to work out how that should be done.

Several in the audience asked why local government officials haven't been part of the efforts to put together the bill, now anticipated to be discussed by House leaders after Tuesday's caucus.

The Utah Business Coalition, which represents a wide range of business interests, circulated a statement on tax reform to lawmakers Monday that raised concerns about the "lack of transparency and the uncertainty it creates."

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