SALT LAKE CITY — A new state tax reform proposal released Friday that slices Utah’s income tax rate while slapping on hundreds of millions of dollars in new sales taxes on food, gas and services still means a tax break for most Utahns regardless of their earnings, the lawmakers who authored the plan said.
“When people say, ‘All you did is give a tax break to the rich because you cut the rate,’ they haven’t read the (proposal),” said Sen. Lyle Hillyard, co-chairman of the Utah Legislature’s Tax Restructuring and Equalization Task Force, citing planned grocery and Social Security income tax credits and expanded dependent exemptions.
“I think we’ve done the best we can in that regard,” Hillyard, R-Logan, said.
“I think what you will see is that almost everybody in the state of Utah receives some sort of tax credit, a tax discount, their tax burden is lessened,” said House Majority Leader Francis Gibson, R-Mapleton, the task force’s other co-chairman.
But the proposal is already being criticized as hitting the poor hard, particularly by restoring the full state sales tax on food to bring in some $250 million. Even former Utah Gov. Jon Huntsman Jr., who pushed through the reduction in sales tax on food a decade ago as part of tax overhaul during his administration, raised concerns.
“It was driven by the need that people have to make sure food is accessible and affordable and that, so far as I can tell, hasn’t disappeared as a need in our community,” said Huntsman, who recently returned to Utah after serving as U.S. ambassador to Russia and is expected to soon make a decision on running again for governor.
“I think that continuing that obviously is a good thing, and the right thing to do,” he said.
Exactly how much additional revenue the state could expect from all of the new sales taxes in the proposal was unclear, although Gibson said there may be another $300 million to $400 million that would be more than offset by the income tax cut and new credits.
He said overall, tax collections would be reduced by at least $75 million, including “anywhere from a 6-10% income tax rate reduction,” dropping the current 4.95% state income tax rate to as low as 4.49%, as well as an additional $70 million in other tax breaks.
The draft copy of the proposal set to be discussed at the next task force meeting on Tuesday said a family of four earning $60,000 a year would see an estimated $400 annual tax break.
In addition to raising the current 1.75% state sales on food to the full 4.85% state rate, the proposal would also impose sales taxes on gasoline purchases and on a number of services, as first reported earlier this week by the Deseret News.
The list of services subject to sales taxes would include those provided by veterinarians, tour guides, portrait photographers, sports instructors, fine arts and other types of schools, tow truck services, wedding planners and taxi, limousine, Uber and other ride-sharing drivers. It goes on to include parking lots, software, streaming media and shipping.
Also, a number of sales tax exemptions would be removed, including for some construction materials, electricity used to operate ski lifts, admission to college sporting events, textbooks, electricity produced by alternative energy sources, gold, silver and platinum, vending machine food and fuel.
It’s lifting the sales tax exemption on motor fuel that will allow the state’s 4.85% sales tax to be added to the wholesale price of gasoline, on top of the state’s 31-cents-a-gallon gasoline tax. The measure is seen as a stopgap until a new user fee for drivers, such as charging by miles driven, can be implemented.
On the income tax side, the plan also would increase what’s known as the Utah dependent exemption on state income tax returns from $565 to as much as $2,500 for lower income residents, to help offset the impacts of the last federal tax reduction that eliminated personal exemptions on Utah’s larger families.
The grocery tax credit would give Utah’s low-to-middle-income residents a $100 credit for each member of their households. A family of four earning up to $60,000 annually would qualify for a $400 credit. Those earning less than $15,000 a year would qualify for a $150 credit.
The task force was created by the 2019 Legislature to come up with a fix to the structural imbalance in the state budget, the result of sales tax revenue growth lagging behind income tax collections that, under the Utah Constitution, can only be used for education.
The plan calls for a constitutional amendment to remove the earmark, a process that requires voter approval, while maintaining funding for public education at current levels and creating what is described only as “an alternative, more stable funding mechanism” to pay for public schools.
“We’d like to see more detail of what that’s going to look like,” Jay Blain, Utah Education Association director of policy and research, said. He said because income tax “is one of the largest funds, of course it’s going to be one of the targets of reform. It has to be.”
But Blain said that doesn’t mean there needs to be an “across-the-board” reduction in the state income tax rate.
“We’re open to talking about it. We’re not drawing a line in the sand on anything. We understand the need to do this,” he said. “We look forward to positive discussions with the Legislature and working toward the best interests of the state and the students of Utah.”
House Minority Leader Brian King, D-Salt Lake City, said he believes the proposal could end up costing education close to half a billion dollars. King called removing the constitutional earmark “unacceptable” and said he also has problems with an income tax rate cut.
Republicans in the Legislature, he said, “are all about money. It’s all about reducing taxes and that’s the end-all and be-all. The things Utahns really care about, many times, you can’t put a price tag on,” such as clean air and an educated population.
An attempt last session to solve the budget issue largely by adding sales taxes to a much longer list of services, including those provided by lawyers and cosmetic surgeons, was scrapped by legislative leaders amid protests from the business and professional communities.
The task force held town halls around the state over the summer before members sat through nearly a dozen hours of presentations on a wide range of tax reform options during four meetings without making any recommendations or accepting public comment.
The public is expected to be able to weigh in at the task force’s next meeting, set for 4:30 p.m. Tuesday at the Utah State Capitol. Two additional task force meetings are scheduled on Nov. 7 and 21, and public input is being accepted online at StrongerFutures.utah.gov.
It remains unclear whether tax reform will be considered in a special legislative session. Both House Speaker Brad Wilson, R-Kaysville, and Senate President Stuart Adams, R-Layton, have said they hope to put a plan in place by the end of the year so Utahns can have a tax cut starting in January.
Gov. Gary Herbert, who supported pulling the controversial service-tax bill last session in favor of the task force, had little to say Friday about the new plan.
“We’re reviewing the proposal and have no further comment at this time,” the governor’s spokeswoman, Anna Lehnardt, said.
Jeff Burningham, one of the Republican candidates seeking to succeed Herbert, who is not seeking reelection next year, said in a statement no taxes should be increased and called for a “top to bottom review of spending” to look for budget savings.
“Let’s move forward with an income tax cut which will make a big difference for middle class families, but let’s stop with the tax increases,” he wrote. “Just because general fund revenue isn’t increasing as fast as state government would like to spend it doesn’t mean we need to raise taxes.”
Advocacy groups also took issue with the plan.
“Economic policy should begin with the premise that the most vulnerable will not be harmed,” said Jean Hill, director of the Catholic Diocese of Salt Lake City’s office of life, justice and peace. “Raising the sales tax on food will cause harm. A tax credit for people who don’t make enough to file a return is not a viable solution.”
Utahns Against Hunger Executive Director Gina Cornia said the sales tax on food is “incredibly regressive, and hurts Utahns from all walks of life.” She said increasing the food tax “is a drastic and permanent change to Utah law and to families’ budgets. Frankly put — the sales tax on food in not a math problem. It’s a moral problem.”
Lauren Simpson, Alliance for a Better Utah policy director, raised similar concerns.
“What we tax and what we exempt is ultimately a reflection of what we value,” Simpson said. “The Legislature is proposing to continue granting sales tax exemptions for some well-connected industries while nickel-and-diming low-income Utahns on basic necessities of life” like groceries.
“A sound tax reform policy would fix Utah’s long-term revenue problems while benefiting those already struggling to get by,” she said.
Simpson also questioned the process that led to the plan and said it should be dealt with during the 2020 Legislature rather than in a special session.
“Unfortunately, we have seen an inadequate public process since day one,” she said, adding, “The political interests of lawmakers who want to avoid tax reform in an election year should not outweigh the public’s interest in being able to scrutinize this major proposal during a general legislative session.”
The pro-business Utah Taxpayers Association said in a statement it was “very encouraged” by the work done by the task force on tax reform. The group has advocated for restoring the full sales tax on food and lowering the income tax rate.