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Herbert proposes $200 million tax cut — but also new taxes to 'broaden' Utah's shrinking tax base

'This may be the best budget we've ever had,' governor says

LEHI — In a year with more than $1 billion in new state revenue, Gov. Gary Herbert is proposing a $200 million sales tax cut to help Utahns keep more money in their pockets.

But there's a catch.

With it, the governor is also proposing that the state "broaden" its tax base possibly by imposing sales tax on some previously untaxed services — such as haircuts, limo rentals, liposuction or pest extermination, depending on what the Utah Legislature has an appetite for.

Heather Tuttle

"This is a heavy lift," Herbert said during this formal budget speech at the nonprofit Silicon Slopes' headquarters in Lehi.

"Tax modernization is not going to be easy, but is absolutely necessary," the governor said, calling for a "robust discussion" within the Utah Legislature, as well as with the Salt Lake Chamber, to decide exactly which items or services should be included in the broadened tax base.

Options could also include new user fees for roads and water or taxing e-cigarettes like other tobacco products, according to his proposal. In addition, the governor recommended nearly $70 million of state sales tax earmarks for water be shifted to a statewide user fee.

And while it's listed as an "option" within his proposed budget booklet for the Utah Legislature to consider, Herbert made it clear Thursday he's not supporting bringing back the sales tax on food.

"That's something we're not proposing and never have proposed," Herbert told reporters.

Modernizing tax base

The aim is to "modernize" the state's tax base, which has been eroding thanks to what tax experts say is a shift from a goods-based economy to a services-based economy, while also putting money back in taxpayers' wallets, Herbert said.

"We have the ability now to give money back to the consumer," Herbert told the Deseret News and KSL editorial boards Wednesday, the day before his budget proposal was released. "The debate's going to be how to do it and what's the mechanism."

Many services in Utah have been granted tax exemptions over the years, leaving the state with a "narrowing" tax base, said Kristen Cox, director of the Governor's Office of Management and Budget.

Heather Tuttle

Since the 1980s, the state's sales tax base has declined from 67 percent of personal income to about 42 percent today, according to the budget office and the Kem C. Gardner Policy Institute.

As a result, the state's tax base is suffering, and if Utah doesn't see tax reform now, it could lose its flexibility to balance sales tax and income tax within two to five years, Cox said.

So the governor is recommending bringing the state's tax base in line with a changing economy, while also reducing the tax burden on Utah families. A sales tax cut would particularly help middle- and low-income residents, who pay a higher percentage of their incomes in state and local taxes than high-income households, Herbert said.

There's "example after example after example" of "backward" service tax "loopholes," Herbert said, such as the "limo loophole" that allows limousine companies to operate without charging taxes, and yet Utahns have to pay taxes to service their family cars.

Herbert also mentioned how e-cigarettes go untaxed, even though the state taxes tobacco.

"So it's just time," Herbert said. "It's time to take a look at the tax policy and see what we've got right and maintain it. And what we've got wrong, let's change it. With the idea of let's broaden the base and enable us to lower the rate and give back $200 million to the people in doing so."

His mantra, Herbert said, is "broaden the base and lower the rate."

"I believe if we lower the rate as a broader base, everybody will pay less money," Herbert said. "So it's a win-win-win all the way around and ensures we're going to have continued economic growth in the future.

A "good goal," Herbert said, would be to lower the state's tax rate from 4.85 percent to under 4 percent. "But even if we got to 4.25 percent, I'd say, 'Hallelujah,'" the governor said.

The $200 million sales tax cut would eat up about 30 percent of the state's new ongoing revenue growth for fiscal year 2020, which amounts to about $675 million state leaders announced last week.

That $675 million in new ongoing funding also came with $646 million in new one-time funding, meaning Utah is projected to take in more than $1.3 billion in new revenue.

The state's total budget equals about $19 billion, up from about $16.8 billion from last year's adopted budget, according to Cox.

The budget surplus came after voters rejected on Nov. 6 the nonbinding Opinion Question 1, which was put on the ballot as part of a compromise between state lawmakers and backers of the citizen initiative Our Schools Now. The question sought guidance on whether lawmakers should raise the gasoline tax to improve funding for schools.

It also comes after voters approved Proposition 3 to expand Medicaid, bringing in an additional $1 billion into the state's coffers for health care coverage, including $800 million in federal money and $135 million in state money, Cox said. That increased the state's sales tax rate from 4.75 percent to 4.85 percent.

Voters were "probably correct" to shoot down Question 1, Herbert said. "Had we known we would have $1.3 billion in surplus a year ago, we may not have been arguing the same thing for Our Schools Now."

Funding priorities

Of that new money, the governor is prioritizing about $445 million — $293 million in ongoing funds and $152 million in one-time funds — toward K-12 public education, as well as $69 million for higher education.

That new money, the governor said, would meet his goal of investing $1 billion into K-12 education over five years a year early.

"That's remarkable," Herbert said, crediting the strong economy and state agencies for being disciplined in their spending.

As part of that, Herbert proposed $127 million for a 4 percent increase to the value of the weighted pupil unit, the basic building block of public education funding.

Additionally, the governor proposed $30 million in one-time money for teacher bonuses; $115.7 million in ongoing flexible funding (including $50.5 million of new funding) to support counseling, mental health and other needs; $15.3 million for students at risk of academic failure; and $50 million for scholarship endowments.

Herbert also proposed $104 million to upgrade school facilities, $19 million for equipment and technology, and $6.2 million for a three-year bachelor's degree pilot program at Southern Utah University.

Herbert also prioritized $100 million to fund a variety of air quality projects, including a wood stove replacement program and $50 million for water conservation efforts.

Other recommendations

To increase the quality of life in communities, Herbert recommended $30 million to fund efforts to preserve open space as part of mixed-use community plans, including funding for redeveloping underused spaces and large community parks.

He recommended setting aside $17 million in the Olene Walker Housing Loan Fund for affordable housing initiatives.

He also proposed $20 million to purchase about 2,800 acres in Duchesne County to create Utah's first state forest at Tabby Mountain.

Herbert called the budget "rational, reasonable, responsible" and "reflective" of Utah's economic position in the U.S.

Derek Miller, president and CEO of the Salt Lake Chamber, in a prepared statement lauded the governor's recommendations and said it's "critical" that leaders focus on Utah's growth "in a more holistic way."

“The governor’s 2019 budget proposal reflects key steps to addressing many of our growth challenges and we look forward to working with him, and the Legislature, to ensure our state grows smart and continues to flourish," Miller said.

The Utah Taxpayers Association also issued a statement in support of Herbert's budget, specifically the proposal to require users of roads and water to pay for the service, rather than subsidizing transportation and water with sales and property taxes.

"While we have concerns with some of the specifics, the governor’s proposal to broaden the sales tax base while lowering taxes strongly correlates with the Taxpayers Association’s principles of sound tax policy," the group's statement said.

Senate President-elect Stuart Adams, R-Layton, said Herbert's "focus on growth and quality of life is appropriate" as Utah's population grows.

"I look forward to working with the governor to carefully balance these short-term and long-term demands while ensuring Utah is prepared for changes in the economy," Adams said.

House Speaker-elect Brad Wilson, R-Kaysville, also expressed support for the budget plan, saying House leadership agrees "with many of the governor's ideas."

"During the 2019 general session, a careful examination and deliberation of the state budget will occur to make sure we find the right fiscal balance," Wilson said. "We look forward to collaborating with the governor and the Senate to accomplish the people’s work."

Overall, Herbert said, Utah is "in a very enviable position" budget-wise.

"This may be the best budget we've ever had," he said, adding that it "anticipates the future and changing economy" while also adding to past priorities.

"Our future is very bright," he said.

The governor's budget proposal will be considered by the Utah Legislature in the upcoming 2019 general session.