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Discussions to start this week to tackle Utah tax reform

File - In this Sept. 12, 2018 file photo, Utah Gov. Gary Herbert gestures during a news conference at the Utah State Capitol in Salt Lake City.
File - In this Sept. 12, 2018 file photo, Utah Gov. Gary Herbert gestures during a news conference at the Utah State Capitol in Salt Lake City.
Rick Bowmer, Associated Press

SALT LAKE CITY — During much of the 2019 Utah Legislature, tax reform was all anybody could talk about as they waited for details of the Republican leadership's plan to impose sales taxes on a wide array of services.

But there's been nothing but silence on the subject since the session ended March 14 without any action to restructure a state tax base unbalanced by shrinking sales tax revenues.

The tax reform plan surfaced so late in the 45-day session and generated so much controversy that it ended up being shelved in favor of taking up the issue again in a special session later this summer.

Last-minute legislation creating a tax force to put together a new plan passed the final night of the session. HB495 calls for an initial report from the task force in June and final recommendations in August.

Gov. Gary Herbert has already said he plans to call a special session of the Legislature to "get this thing completed" once there's consensus on a tax reform plan.

Now, nearly a month after the Legislature adjourned, legislative leaders are expected this week to formally start discussing the process and settling on the makeup of the task force.

The goal is for what's been dubbed the Tax Restructuring and Equalization Task Force to be up and running by the Legislature's first interim meeting day, typically in mid-May.

"I think there's still plenty of time," said Rep. Tim Quinn, R-Heber City, the sponsor of the tax reform bill that was set aside. "I think we could have accomplished this in the seven-week session."

Quinn said there were enough votes in the House to pass his bill, HB441, but not in the Senate. He said the problem his plan ran into is that it was seen as a tax increase.

Adding sales taxes to services ranging from getting a haircut to hiring an attorney was considered raising taxes even though his bill lowered both the sales and income tax rates and ultimately included a $75 million tax cut, Quinn said.

"I will concede there is still a lot of misinformation in the public," he added.

Yet to be determined is whether Quinn's bill will be a focus for the task force's work or if the 10 voting members appointed by House Speaker Brad Wilson, R-Kaysville, and Senate President Stuart Adams, R-Layton, will start from scratch.

"I always like the 'all of the above' answer," Adams said.

He said that means while taxing services will continue to be discussed, so will other possible solutions, including restoring the full state sales tax on food and amending the Utah Constitution so income taxes can be used for needs other that education.

Last session, the Senate passed a proposed constitutional amendment that, once passed by voters in a general election, would have allowed income taxes to also be spent "to provide services for the poor, the disabled or the elderly."

A bill raising the state sales tax on food from the current 1.75 percent to the full state sales tax rate with a $60 million tax credit for families earning up to $65,000 was drafted but not introduced by Senate Majority Whip Dan Hemmert, R-Orem.

Among other suggestions likely to be considered are boosting statewide property taxes. Rate cuts are part of the picture, too, with $75 million set aside in the budget for some type of tax reduction.

"We don't have a revenue problem," House Majority Whip Mike Schultz, R-Hooper, said. "We have a revenue structural balance problem. That's what we need to work on. That's the No. 1 goal. It's not to generate new revenue."

The problem comes as a result of income tax revenue growth outpacing sales tax collections, thanks to a shift in consumer spending from goods that are taxed to services that largely are not.

Because sales taxes make up the bulk of the general fund that pays for everything other than education, there's a fear that the state won't be able to keep up with increasing needs in transportation, human services and other government functions.

Schultz said including a tax cut in what package the tax reform task force comes up with is "going to be extremely important," at least for the supermajority of Republicans in the Legislature.

Democratic lawmakers already are raising concerns about the impact on education of changing the constitutional earmark on income taxes, and on the poor by increasing food taxes.

With Democrats making up just two of the 10 voting members of the tax reform task force, they're hoping the process won't be a repeat of what happened during the session, when Republicans worked behind the scenes to put together the bill.

"I think they thought this would be easier," Senate Minority Leader Karen Mayne, D-West Valley City, recently told the Deseret News editorial board. "When you get kind of mixed up and things aren't right, you stop and I think that's what happened."

Mayne said a case can be made for adding sales taxes to services, but it's going to be difficult to do. She said the services that may be easier to tax are those that are most likely to have a "big voice" on Capitol Hill.

Even so, the Democratic legislative leader said she expects results.

"I just can't imagine we're going to open up Pandora's box and then shut it again because we can't figure it out," Mayne said. "Maybe it won't be as grandiose as we wanted it to be. Maybe it will be in levels or increments or whatever. But you'll see something."

Matthew Burbank, a University of Utah political science professor, also said what comes out of the task force may be less sweeping than what's been looked at previously.

Making sales taxes a more stable revenue source by taxing at least some services remains the likely path, Burbank said, especially if that's made more palatable by some tax cuts.

"That's still going to be something that will make a lot of sense," he said. "They're probably going to have to find some way of carving out more exemptions or way of not taxing some services."

Putting off the issue until the interim between regular legislative sessions does call into question the urgency of finding a solution, Burbank said, suggesting lawmakers had been hoping to get a bill through late last session "to avoid a big bloodbath."

Lawmakers won't be on their own to come up with a tax reform plan. Herbert, who proposed extending sales taxes to services in his proposed budget released late last year, will stay involved.

The task force legislation allows for nonvoting members with "taxation expertise" to be appointed by legislative leaders, taking into consideration the governor's recommendations.

"We expect to have a collaborative partnership with the Legislature over the next few months," Kristen Cox, executive director of the Governor's Office of Management and Budget, said.

Lawmakers gave themselves some extra incentive to approve a tax reform plan by allocating only temporary funding for $320 million in government services in the new $19 billion budget.

Not committing to pay for services after the upcoming budget year ends on June 30, 2020, including substance abuse treatment for the homeless and tuition assistance for Utah National Guard soldiers, is seen as added pressure to rebalance revenues.

"That's something that is a motivation to get this done," Adams said, acknowledging that in reality, lawmakers don't have to restore ongoing funding for those programs until the next general session begins in January 2020.

The Senate president said he hopes to have a tax plan in place by the end of summer or early fall, even though it make take longer to tackle during the legislative interim than it would during a regular session.

"We've got a problem, but I want the right fix," Adams said. "Whether it takes an hour or it takes a year, for me, it isn't about the time element. It's getting it right. There's too much at stake."

While it's not now or never for tax reform, BYU political science professor Adam Brown said that if something doesn't get passed in the coming months, the issue may not come up again for some time.

"This is a huge chunk of policy they're playing with. Extending sales tax to services touches the economy in so many ways. Everyone is going to want their hands on it," Brown said. "If they really put in the full effort and fail, people are going to be tired of talking about it."