SALT LAKE CITY — Utah Gov. Gary Herbert said Thursday it is "time to give back to the people of Utah" by shaving the state sales tax rate even lower than what's called for in new tax reform legislation.
HB441, sponsored by Rep. Tim Quinn, R-Heber City, was made public late Wednesday night and is scheduled to be heard Friday by the House Revenue and Taxation Committee.
The bill extends sales taxes to nearly all services and eliminates more than a dozen exemptions while reducing the current state sales tax rate of 4.7 percent to 3.1 percent over time, and also cutting the state income tax rate.
Intended to stabilize the state's shrinking sales tax base, the bill is currently revenue neutral, meaning new tax collections are offset by the rate reductions. Yet to be decided is how much of a tax break Utahns will see this year.
The governor said he believes the new state sales tax rate should be below 3 percent and could go as low as 2.8 percent. In his State of the State address, he had said expanding the sales tax base should drop the rate to 1.75 percent.
During his monthly news conference on KUED, Herbert praised the Utah Legislature for the hard work being done on tax reform, rather than putting off the difficult decision to tax services.
"I think this is a good step in the right direction," the governor said of the massive bill that after months of work now totals more than 250 pages. "Is the bill perfect? No, but then most bills we pass aren't."
While Herbert didn't propose reducing the state's 4.95 percent income tax rate to 4.75 percent, as the bill does, he isn't leaving it off the table. Still, the governor stressed he believes the additional reduction needs to come in sales taxes.
"The tax we should have cut is in the sales tax arena," he said. He said dropping the sales tax rate below 3 percent could give back between $150 million to $200 million in a sales tax cut.
The governor initially called for a $200 million tax cut on top of what he's calling tax modernization in his budget, then upped the number to the $225 million proposed by House Speaker Brad Wilson, R-Kaysville.
But those numbers are getting another look after the latest revenue estimates saw the state's $1.3 billion budget surplus fall by $200 million. Herbert remains confident enough to promise Utahns they'll pay less in taxes.
"When we add up the pluses and minuses and when we end up giving back, say $200 million in a tax cut, the people of Utah will benefit," he said. "We are going to actually collect less money. It's that simple. It's a math problem."
House Republicans and Democrats hashed out the details of the tax reform bill in caucuses Thursday. While the GOP met behind closed doors, Democrats grilled Quinn and House Majority Whip Mike Schultz, R-Hooper.
Schultz said it's easier to explain what services aren't taxed in the bill rather than list those that would be subject to sales taxes starting Jan. 1, 2020, initially at a rate of 3.9 percent that falls to 3.1 percent in October if revenue projections hold.
The bill includes all services in the newly expanding tax base with limited exceptions to ensure sales taxes automatically apply in the future to services that do not exist today.
Exceptions include medical services other than cosmetic surgery, tuition, child care and rental properties. There's a new 1 percent tax on health insurance premiums and a 0.075 percent transfer tax on real estate transactions except refinancing.
Currently, the only services taxed are telecommunications within the state, admission or user fees for athletic, entertainment, recreational and other activities, repairs and renovations, hotel rooms, and laundry or dry cleaning.
Besides reducing the income tax rate, the bill also includes targeted income tax changes intended to help Utah families whose federal income taxes have gone up as a result of federal tax reform, the poor and the elderly.
Those income tax changes would take effect at the same time as the sales tax base expansion, Jan. 1, 2020. Quinn had said he wanted Utahns to get an income tax cut before having to pay sales taxes on services.
"They'll be implemented together," he said Thursday.
Quinn told the House Democrats there may still be some additional services not taxed "because we were looking at what to take out, not what to put in." He said lower- and moderate-income families will benefit from a lower tax rate.
"People with higher incomes who are using many of these services, they're going to be the ones bearing the brunt of this," Quinn said. "Lower-income families are already spending all of their disposable income just on stuff to survive."
Because the bill lowers the sales tax rate, Quinn said for those families, "right off the bat, they're going to see a reduction in their costs of about 40 percent of their tax burden."
Democrats also raised concerns about the impact of an income tax cut on education. The governor warned that by cutting the revenue source that can only be used for that purpose "the optics are, are we really taking money away from education?"
But both Schultz and Quinn said the tax reform plan actually protects school funding.
The argument is that because income tax revenues can be used for higher education as well as public schools, more sales tax money means higher education will be less dependent on income taxes, leaving more for public schools.
One of the reasons behind tackling tax reform is that nearly all of money spent on higher education is now coming from growing income tax revenues. Sales tax revenues are not keeping pace, leaving less for all other government services.
- $72 million in sales tax exemptions eliminated in HB441Electricity to ski resorts for lifts
- Ski resort equipment and parts
- Machinery or equipment purchased by the film industry
- Direct mail address lists or databases
- Database access
- Aircrafts manufactured in Utah
- Some vending machine food costing $1 or less
- Coin-operated laundry facilities and other unassisted cleaning services
- Vehicle trade-ins
- Car washes that don't include interior cleaning
- Newspapers, including subscriptions
- Tickets to college athletic events
- Textbooks purchased by students (not including a college bookstore)
Schultz assured Democrats that the Legislature's GOP supermajority is committed to ensuring education funding is not hurt by tax reform. Quinn said the topic also came up in the closed House Republican caucus.
Tax exemptions were brought up in the Democratic caucus, with Schultz saying the 15 selected for elimination — including water, vehicle trade-ins, ski resort equipment and newspapers — were those that did not add to the cost of a manufactured product.
The majority leader said the delayed implementation date in the bill will allow lawmakers to come back in special session if necessary. The 2020 Legislature won't begin meeting until late January.
Rep. LaWanna Shurtliff, D-Ogden, questioned the need for any tax cut.
"We give people a tax cut and they never know," she said. "Yet we continually think we need to give a tax cut. I don't know when we're ready to bite the bullet. … We don't have to cut those taxes as much as we think we do."
Schultz said lawmakers need to be able to tell their constituents that most of them will pay less in taxes overall under the tax reform plan. But he hedged about how much of an additional cut can still be made.
"Quite honestly, I don't know if we'll have the political will to do it without a tax cut," he said, but the amount likely "won't be anywhere near as high as the $225 million that's been suggested in the past."
No position on the bill was taken by the Democrats, but House Minority Whip Carol Spackman Moss, D-Holladay, joked that if it passes, they may need a bigger caucus room.
Senate Republicans had been waiting to see what happens to the bill in the House before discussing it in their caucus, but the issue could be raised during a special Friday meeting.