Carter Williams, File Photo

Services won't be taxed at local level under latest version of tax reform bill

By Lisa Riley Roche, KSL | Posted - Mar. 6, 2019 at 9:45 p.m.

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SALT LAKE CITY — Local sales taxes won't be added to services in the latest version of Republican leadership-backed tax reform legislation expected to surface on the House floor Thursday.

"There were too many hurdles," the sponsor of HB441, Rep. Tim Quinn, R-Heber City, told KSL, so at least for now, local governments would continue to collect sales taxes at the same rate only on the existing tax base.

HB441, already targeted by a number of businesses as well as education and health care advocates, is intended to stabilize the state's shrinking tax base by expanding it to include a wide range of services.

At the same time, the bill drops the state sales tax rate for the current 4.7 percent to what Quinn said will be 3 percent with a $75 million cut in the rate announced Tuesday by House Speaker Brad Wilson, R-Kaysville.

Originally, the bill was also supposed to lower local option sales tax rates to reflect a much broader sales tax base that includes Uber rides, haircuts, lawyers and other professionals, but not most health care or housing rentals.

But trying to figure out how to ensure the reductions in local option taxes did not hurt Utah's 248 cities and towns or 29 counties, or affect bonds issued by the Utah Transit Authority and other entities, turned out to be too tricky to tackle right away.

Quinn said the solution was to strip local option sales taxes from HB441.

"Their current base is their base going forward. They're not in this bill," he said, noting a restricted account intended to be used to hold local governments harmless put a $250 million price tag on the legislation.

Before the tax cut, HB441 was intended to be revenue neutral, meaning tax rates would be adjusted so the same amount of revenues would be collected despite the larger tax base.

Besides sales taxes, the bill also cuts the state's 4.95 percent income tax rate to 4.75 percent and includes a trio of income tax changes to help families, as well as the poor and elderly, reduce the taxes they owe.

Quinn and Sen. Lincoln Fillmore, R-South Jordan, who is expected to be the Senate sponsor of HB411, both said the issue of subjecting services to local sales taxes will be revisited once it's clear how the new tax base is working.

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In the meantime, services will only be subject to the state sales tax rate, easing worries that businesses operating in multiple jurisdictions would have to scramble to determine the specific taxes for each customer.

The revised version of HB441, which was still being drafted Wednesday, will call for reducing the state sales tax rate over three years, starting in 2020, with the tax on goods starting higher than the new tax on services.

Cameron Diehl, executive director of the Utah League of Cities and Towns, said the organization's legislative policy committee voted Monday to support expanding the sales tax base.

"If the state moves forward with base expansion, now or in the future, we want to be part of that solution," Diehl said. "We prefer to be in the bill now, but we recognize where the state’s coming from, trying to collect data first."

He said local governments have the same concerns as the state about the impact on their budgets from a shift in consumer purchases over the years from goods that are taxed to services that mostly aren't.

"The concept of sustainable revenue is what is important," Diehl said, especially in the long term. "In the short term, we get to keep what we have. That’s important because budgets have been built around that."

Lobbying efforts from a variety of groups are ramping up against the bill, which includes a 1 percent tax on health insurance policies and a 0.075 percent tax on real estate transactions.

Even Gov. Gary Herbert, who called for broadening the sales tax base while lowering the rate in his proposed budget released last year, is said by some lawmakers to be pushing hard for a larger tax cut than the $75 million now on the table.

The governor's deputy chief of staff, Paul Edwards, repeated a previous statement about the "many moving parts to this monumental effort to make are tax system fairer and sustainable" that said "it would be unfair to comment on specific pieces of the package in isolation."

During an early evening news conference at the Capitol, a group of small business owners assisted by the Utah Eagle Forum said the bill was being rushed through the Legislature with little opportunity for them to express their concerns.

Maryann Christensen, Utah Eagle Forum executive director, called HB441 "a terrible bill and we need to make sure we put enough pressure on our legislators" that it won't pass before the session ends March 14.

David Saltsman, CEO of Whipple Service Champions, said he'd just heard about lawmakers considering taxing services and had "no clue it was coming." He said it would be an "appalling, horrible change."

Derek Miller, president and CEO of the Salt Lake Chamber and Downtown Alliance, said in a statement that the bill "is a monumental step forward in ensuring Utah continues to lead the nation in economic growth."

Miller said that while the chamber supports the effort to broaden the tax base and lower income and sales tax rates, "we recognize the current version of HB441 is neither perfect nor final. We welcome input from the business community to address concerns and refine the bill.”

The Utah Health Policy Project focused on the insurance premium tax in the bill.

“UHPP will always speak for the consumer and feels it is necessary to point out the flaw in implementing a burdensome tax that will be passed on to consumers in such an already unstable part of the market," Courtney Bullard, UHPP education and collaborations director, said.

For the Utah Education Association, the issue is reducing the income tax rate. Under the Utah Constitution, all income tax revenues must be used to pay for public schools and higher education.

Backers of the tax overhaul say it will end up providing more money for public schools by allowing the state to revert back to using more sales tax money for higher education.

"Utah's broken tax structure is nothing new," UEA President Heidi Matthews, however, said in a statement. "We believe legislators can devise a way to repair the broken sales tax structure without drastically cutting funding for education."

Matthews called the tax reform proposal "a gamble. Our kids’ education must not be used as a political device just to make needed sales tax changes palatable."

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