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Utah state sales tax rate drops to 3.1% in tax reform proposal

FILE - Utah Gov. Gary Herbert delivers his State of the State address at the Utah State Capitol, Wednesday, Jan. 30, 2019, in Salt Lake City. Behind Herbert are Speaker of the House Brad Wilson, left, R-Kaysville, and Senate President Stuart Adams, R-Layt
FILE - Utah Gov. Gary Herbert delivers his State of the State address at the Utah State Capitol, Wednesday, Jan. 30, 2019, in Salt Lake City. Behind Herbert are Speaker of the House Brad Wilson, left, R-Kaysville, and Senate President Stuart Adams, R-Layton.
Spenser Heaps, Deseret News

SALT LAKE CITY — A new bill taxing a wide array of services to broaden a key part of the state's revenue base will lower the state sales tax rate to 3.1 percent as well as reduce income taxes.

Details of a GOP leadership-backed tax reform bill sponsored by Rep. Tim Quinn, R-Heber City, were released Tuesday, after House Republicans heard a presentation during a closed-door caucus.

"We talked about what was in the bill, as far as who is being taxed, and the very few who are not," Quinn told reporters. "We wanted to make this as broad as possible so we didn't pick winners or losers by this policy."

Real estate, health care and tuition are the only services left largely untouched by the tax reform plan, which will tax everything from haircuts to legal and other professional services.

"It's probably much easier," Quinn said, "to talk about what's not taxed."

The legislation is intended to bolster a sales tax base that makes up the bulk of the state's general fund yet is shrinking because consumer spending has shifted to services that are not taxed.

The state's other major revenue source, income taxes, can only be used for education, so lawmakers fear growth in other areas of the budget will stall without action despite a $1.1 billion surplus.

Quinn said the bill is revenue neutral, reducing tax rates by the same amount of additional revenue expected. But Quinn said he expects further cuts, likely in the state income tax rate.

House Majority Whip Mike Schultz, R-Hooper, said the size of any additional tax cut remains to be seen. He said Republican leadership agreed on a $225 million cut before the latest budget estimates reduced the budget surplus by $200 million.

The "Tax Equalization and Reduction Act" is not expected to be made public until Wednesday or Thursday, but it is touted to save a typical Utah taxpayer married with one child and making $65,325 a year a total of $634 in taxes.

That analysis also stated that the additional revenue brought in by expanding the state's sales tax base would be mostly paid by businesses, with about a quarter coming from consumers.

The bill lowers the current 4.7 percent state sales tax rate to 3.1 percent gradually over the next budget year ending July 2021. Quinn said that will help service providers adapt to collecting taxes.

"The other thing is, we want to be careful. We want to be prudent, like we try to always be in Utah, to make sure we have our numbers and our estimates right," he said. "We hope we will have an even further reduction."

Sen. Lincoln Fillmore, R-South Jordan, said the tax increase set to take effect April 1 to fund the state's share of Medicaid expansion are not included in the 3.1 percent rate.

That increase, in both the Medicaid expansion ballot initiative approved by voters and the replacement plan passed by lawmakers earlier this session, was 0.15 percent.

But Fillmore, who is leading the Senate's efforts on tax reform, said because of the money that can be collected from a broader sales tax base, the size of the increase should fall to 0.09 percent.

The bill will also drop the state income tax rate from 4.95 percent to 4.75 percent.

Other, targeted income tax cuts include making up for the loss of personal exemptions in federal income taxes for Utah families with up to $70,000 in earnings, increasing the threshold for taxing Social Security.

The bill also creates an earned income credit to help ease intergenerational poverty. Quinn said the income tax changes would take effect retroactively to the start of the year.

He said there was sensitivity to what he called "an affordability crisis" in health care as lawmakers looked at adding sales taxes to about 20 broad areas of the economy, including construction, manufacturing and mining.

When it came to housing, Quinn said building materials are already taxed but now would be subject to a lower rate, while new sales taxes will be charged on architectural, engineering, surveying and other services.

There will be a 1 percent tax on health insurance premiums, and cosmetic surgery would be taxed, as well as 0.075 percent transfer tax on all real estate transactions except refinancing and leasing, a $300 tax on a $400,000 home.

Some private lessons would also be taxed, Quinn said.

In addition to extending taxes to services, the bill will also repeal 15 current sales tax exemptions worth about $72 million, although the specific exemptions were not detailed.

For local sales taxes, the bill will maintain the statewide local sales tax rate while redistributing some of the revenues collected to hold local entities harmless. Local option rates would be reduced proportionate to the new tax base.

Gov. Gary Herbert called for expanding the sales tax base by taxing services in his budget proposal last December, and, later, in his State of the State address, for reducing the state sales tax rate to 1.75 percent.

In a statement Tuesday, the governor praised House and Senate leaders as well as the lawmakers who have worked behind the scenes for months on putting together the proposal.

Herbert said he is "very proud of our legislators for their foresight on behalf of Utah's middle class. Today's monumental tax reform bill will make Utah's tax system more fair and stable, keeping Utah on the path of economic prosperity."

He lauded the legislation because it "significantly broadens the sales tax base, repealing loopholes and asking every major economic sector to help pay for the cost of core government services."

Lowering the sales tax rate, the governor said, reduces the tax burden on lower- and middle-income families. Rep. Robert Spendlove, R-Sandy, who worked on the bill, said higher income earners will likely pay more in taxes under the plan.

Once the bill is formally introduced, a hearing is expected to be scheduled quickly, since the 45-day legislative session ends in mid-March. The House majority whip said he expects to see a lot of lobbying on the bill.

"There will be groups lobbying against this but I think we're resolute in the fact that something needs to be done," Schultz said. "We have a structural problem that has to be addressed."