clock menu more-arrow no yes

Filed under:

Utah needs to expand taxes on personal services to catch up with digital age, report says

Rep. Tim Quinn, R-Heber City, discusses the GOP leadership-backed tax reform bill during a meeting of House Revenue and Taxation Standing Committee at the Capitol in Salt Lake City on Friday, March 1, 2019.
FILE - Rep. Tim Quinn, R-Heber City, discusses the GOP leadership-backed tax reform bill during a meeting of House Revenue and Taxation Standing Committee at the Capitol in Salt Lake City on Friday, March 1, 2019.
Jeffrey D. Allred, Deseret News

SALT LAKE CITY — Utah's income taxes have soared over the past four decades while its sales taxes have declined, according to a new report.

The report released Tuesday by the Tax Foundation, a tax policy nonprofit based in Washington, praises Utah's growth and strong economy but offers some constructive criticism for what it describes as an outdated tax system.

Since 1997, Utah's gross state product has nearly doubled, growing at almost twice the national rate. But the report says the problem is that sales taxes in Utah are stuck in 1933 and "constructed around an economy which long since vanished."

"Today's economy has little in common with that of 1933, with higher incomes and changing consumer tastes shifting a greater share of consumption to services, while a digital economy upends traditional spending categories," it notes.

Toward the late 1990s, income taxes started to far outgrow sales taxes.

"Today, the income tax brings in nearly $4 billion a year, compared to less than $2.7 billion from the sales tax," the report states.

The state's sales tax breadth is currently at about 41 percent, when it should be about 77 percent of Utah's income, according to the report.

The report comes as lawmakers in Utah are working to reform the state's tax system. During the 2019 Legislature, a Republican leadership-backed bill that would have broadened the sales tax base by imposing new taxes on services ranging from haircuts to legal advice was pulled amid protests from businesses and consumers.

The bill, sponsored by Rep. Tim Quinn, R-Heber City, would have lowered the state's now 4.85 percent sales tax rate as well as the state income tax rate, with breaks for families, seniors and the poor and an overall $75 million tax cut.

Quinn said he has met with the analyst who prepared the Tax Foundation report and its suggestions match with what he was trying to accomplish through HB441. Though, he noted, the report included suggestions to "help prevent tax pyramiding or tax layering" that would double-tax businesses. Similar language would've been added in the Senate, he said.

If lawmakers had gotten a chance to add that language to the bill in the Senate, he believes it would have addressed some business owners' concerns.

"We're out of balance. The tax code doesn't adjust for the modern economy, and we need to expand the base and lower the rate. I think that, in many ways, there's details we need to look at. But it in many ways validates the direction, at least, we were going with (HB)441," Quinn said.

Tuesday's report urges lawmakers to "right-size" the base by taxing personal services, such as dry cleaning, haircuts, lawn care and construction. Business-to-business services should be exempted, according to the report, to ensure only final products are taxed and avoid double taxation.

The report largely aligns with one completed last year by the Utah Foundation. The foundation pointed out that during the past 45 years, Utah has seen the nation's second-biggest decline in taxable sales as a proportion of consumer services. That's been happening as society has shifted from a goods-based economy to one emphasizing the purchases of services, which are largely exempt from sales tax, the Utah Foundation said.

Utah Gov. Gary Herbert has also repeatedly stressed the need for the state to broaden its tax base and at the same time lower its tax rate.

Paul Edwards, Herbert's deputy chief of staff over communications and policy, said Tuesday in a statement: "It is generous of a group as reputable as the Tax Foundation to analyze Utah’s aging and imbalanced tax system with such systematic rigor. This document is must reading for everyone interested in the problems facing Utah’s system of public finance.

"It not only highlights the structural challenges facing the state, it offers some potential solutions to some of the thorniest issues of tax modernization. … It also expresses the Tax Foundation’s optimism for Utah’s ability to successfully address the challenge of public finance modernization."

In the report, researchers explained that, like most states, "Utah imposes its sales tax on a base that consists of most goods — with economically significant policy carveouts — and relatively few services. With limited exceptions, the state’s sales tax is imposed on transactions involving tangible property — appliances but not apps, light fixtures but not landscaping."

According to the report, it's important to expand sales tax income because the income tax has "risen as the dominant" tax. The income tax, however, is fully earmarked for education funds. A large share of the state's current sales tax income is also earmarked for things like transportation and infrastructure.

Because less than one-third of Utah's land is privately owned, the report states, property taxes are "insufficient" in small counties, with the majority of the state's population concentrated along the Wasatch Front.

Therefore, sales tax is extra important for funding the state's government, researchers said.

The report encourages lawmakers not to focus on increasing revenue but on creating a "greater balance" of taxes.

"While several states have achieved moderate sales tax base expansion in recent years (including Iowa, Kentucky, North Carolina, and the District of Columbia), Utah is poised to be a national leader in sales tax modernization if it takes a comprehensive approach to reform," researchers said.

Ten Utah lawmakers and four nonvoting tax experts, making up the Tax Restructuring and Equalization Task Force, are meeting to develop a plant to overhaul the system. Taxing services is still on the table for the task force, but other options are also expected to be considered, such as restoring the state sales tax on food, road user fees like expanded express lanes and boosting statewide property tax rates.

"Everything's on the table right now. First thing we want to do is go on this eight city tour and listen to the communities, listen to the business community, get their input, get their ideas," said Quinn, who is on the task force. "We've not decided on anything and we'll start discussing solutions once we've been on the eight city tour."

The tour begins June 25 in Brigham City. Town hall meetings will also be held in Salt Lake County on June 27, in Richfield on June 28, in St. George on June 29, in Davis or Weber counties on July 8, in Roosevelt July 9, in Moab on July 20 and finish in Utah County on July 30. Specific times and locations for the meetings have yet to be determined.

For more information about the report, visit the Tax Foundation's website.