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Utah policymakers to consider sales tax reform to keep up with modern economy

SALT LAKE CITY — Utah policymakers might consider imposing sales tax on some previously untaxed services as changing consumer spending habits, technological advances and an aging population eat away at revenue.

The sales tax base is not keeping pace with the state's growing economy, which hurts government's ability to meet public needs. Utah currently taxes most goods but few services.

"I think there is a broad understanding that the there are structural trends that are impacting sales tax," said Natalie Gochnour, director of the Kem C. Gardner Policy Institute at the University of Utah.

"There is no question we have been moving to a service economy that's not taxed like goods are."

The continued growth of online shopping also affects sales tax revenue, though a recent U.S. Supreme Court ruling paves the way for states to collect on internet sales.

Gov. Gary Herbert recently said the state hasn't really considered sales tax changes because of the shifting marketplace, "but I think it’s something we ought to talk about now."

"That’s something we’re going to have to have a debate on as we look at tax reform going forward if we want to have the optimal tax policy that will allow us to have a growing, increasing, dynamic economy," he said at a November discussion at the policy institute.

Herbert is scheduled to released his 2019-20 state budget proposal next week, including some tax reform recommendations. The Utah Legislature, which controls and approves the budget, will meet in general session starting at the end of January.

The state, he said, should be looking at ways to broaden the tax and lower the rate.

"Frankly, I think there will be opportunities to do that, which we’ll be exploring," Herbert said. "We may have a tax cut in our future if we play our cards correctly."

Paul Edwards, Herbert's deputy chief of staff, said the governor's budget proposal released next week will address Utah's reliance on sales tax, though it won't include lots of specifics because it's an issue the Legislature has to work out.

"We do need to find a way to have more of the economy contribute to what the state pays for," he said. "In doing so, it's our great hope that we can lower the rate and return some of the surplus to the taxpayer."

The governor's office, he said, sees the issue as a multiyear discussion.

Edwards said the governor would first look at eliminating sales tax exemptions and then at taxing "luxury" services, such as elective cosmetic surgery and use of limousines.

Services used to account for less than half of personal spending but now make up more than two-thirds. As consumer preferences continue to change, services will represent an even larger share of spending, according to a Gardner Policy Institute report released in November.

Utah now taxes 64 of 176 major services, putting it about in the middle of all states. It taxes amusement park admissions and hotel rooms, for example, but does not tax health care, prescription drugs, medical devices, haircuts, lawn care or legal services.

In the 2000s, the Legislature and governor cut sales, personal income and corporate income taxes and reduced the sales tax rate on food while significantly expanding the personal income tax base.

If lawmakers want to lower sales tax rates, they should consider fully taxing residential energy and food, the report says, posing the question, "Are there better ways to target those in need?"

Edwards said it's "awfully hard" to think of taxing necessary medical services and pharmaceuticals. But increasing the sales tax on food is a "wide-open discussion." Lawmakers have tried to both raise and eliminate the tax since it was lowered a dozen years ago.

Any increase in the sales tax on food, he said, would be offset in a "very direct way" with some type of subsidy or earned-income tax credit for lower wage earners.

Edwards said the governor's office recognizes that a necessity like food is much larger and critical part of a poor person's budget.

While Utah’s average combined state and local sales tax rate is in the bottom third of Western states, the total tax burden is already relatively high compared to most neighboring states, according to the report.

The policy institute suggests dealing with the issue while the's state economy is strong.

"Can Utah use the prosperous time like now to address the structural problem in sales tax? The answer is yes," Gochnour said. "If we act now, can we avoid making more difficult decisions during hard economic times? The answer to that is yes."

Gochnour said if the governor's budget proposal addresses the issue and if legislators take action, it would be a "very forward-thinking move."

According to the report, policymakers have three options to prepare for future fiscal problems: cut or limit spending, change sales tax rates or broaden the sales tax base. A combination of the three might make the most sense, the report says.