Utah governance is defined not only by our thriving and diverse economy, but also by our willingness to look down the road and tackle tough issues before they become a crisis.
Reforming tax policy is always difficult. It’s technical, it’s complicated and it can be difficult to both explain and to understand.
So, when Utahns express concerns about the upcoming changes to Utah’s tax code, I understand their anxiety.
For several years, I’ve spoken frequently about the need to stabilize our tax structure. I’ve joined with legislators in pointing out that while Utah’s income tax fund is healthy, our sales tax growth rate is not keeping pace with our modern times or our projected growth.
The state’s tax structure is like a retirement savings portfolio that needs to be balanced to ensure both growth and stability over the long term. Utah’s tax portfolio is out of balance. Under the constitution, taxes collected from income are devoted to K-12 and higher education. Taxes collected from the sale of goods and services pay for core state services, such as public safety, air quality, infrastructure and roads, and also for providing a safety net for the most vulnerable among us.
As our economy has grown and changed, taxes collected from the sale of goods and services are not keeping pace with the needs of our state. The truth is, unless changes are made to how we collect taxes, we run the risk of eroding funding for the aforementioned purposes. This creates untenable vulnerabilities for the people of our great state and for all sectors of our healthy, vibrant economy.
Legislators have been working for years to change how we collect taxes in order to build in more stability. Since the 2019 general session, they have gone through an arduous and extraordinarily transparent process, which included 62 hours of public hearings in 17 meetings held around the state, as well as numerous draft bills.
And honestly, discussions around ways to shore up the sales tax base have been going on for at least 15 years, since the days of Gov. Olene Walker. State economists then and now have tracked the same trends, which show that one of Utah’s critical funds just isn’t keeping pace — while the other is soaring. They have long proposed the same solution: Decrease tax rates and broaden the sales tax base.
Indeed, even the rating agencies in New York City, who impact our reputation and borrowing costs, have suggested that changes to how we collect sales tax are necessary to ensure fiscal stability. Utah now enjoys a AAA credit rating, the highest possible score, and we hold that credit rating with all three rating agencies. We’re one of only 12 states that qualify for this distinction. Our rating could be jeopardized if we don’t move forward with meaningful changes. This is a serious consequence, and not one that we should be willing to risk.
And to be clear, we don’t need to collect more tax revenue, but we do need to change how we collect it. Diversifying from where we collect taxes, while keeping the total tax revenue collected in check, is critical to creating a more stable system.
So yes, Utahns will see some changes in how and where they pay their taxes this year. And we understand that can be confusing, and even worrisome. But we’ve worked hard to build a net $160 million tax cut into the new reforms, so that the vast majority of Utahns — 86% — will pay less in taxes next year than they will pay this year.
Let me briefly explain some of the changes.
First, we are putting the standard sales tax rate on food. Responsible tax policy requires taxing more than luxury products. It also requires taxing some economic transactions that most people participate in, like food, property and transportation. This ensures that the cost of government is broadly shared, is more equitable and is more stable.
Collecting the standard 4.85% tax on groceries will bring in approximately $250 million to help pay for core government services, the bulk of which will be directed toward our lower-income and more vulnerable populations.
The bill adjusts the grocery tax without hurting lower-and middle-income Utahns. Food provided by SNAP, WIC and charitable organizations such as food pantries sponsored by community and religious organizations are already exempt from all sales tax, and that won’t change. But on top of that, the bill gives back $135 million of the money gathered through the grocery tax to those making less than $75,000 a year. In addition, $80 million of the $160 million income tax cut will be sent directly to this very same population. That’s $215 million of new money being invested in those who need it most, low- to middle-income individuals and families.
In fact, under every projection we have run, lower- and middle-income Utahns are better off under the new tax system than they are under the former one. This is moral leadership. But what would be immoral is not having the courage to address these deficiencies in our system, which would have the most negative impact on our lower-income populations.
The bill also expands the sales tax base. Historically, goods alone have been subject to the sales tax. In 1960 goods accounted for about 53% of consumer spending in Utah. Today, in our ever-changing economy, they make up 31% of consumer spending, with nearly 70% going to largely untaxed services. It’s not fair or moral to make a shrinking segment of our economy shoulder an increasingly larger burden. The new system begins the work of fixing this by broadening the sales tax to a variety of services that have historically been exempted.
The bill takes other steps to gather money from sales taxes instead of income taxes. The new system increases the sales tax on gasoline and diesel, largely by eliminating tax exemptions on earmarks for transportation. This will help us improve the capacity and maintenance of our road system, as drivers will help support the improvement of the roads on which they drive. This change is long overdue.
These broadening efforts are a start, not a complete solution. True and lasting stability will require our Legislature to further broaden the sales tax base, and then lower the rate.
And it bears repeating that we’re not increasing tax revenues; we’re reducing them by $160 million by changing the way they’re collected. For example, those who will pay a sales tax on a rideshare will still be better off because their income taxes are now lower.
And, in fact, according to the Utah Foundation, Utahns today enjoy the lowest overall tax burden they have seen in the past 25 years. Additionally, Utahns as a whole have a lower tax burden than their peers in 30 other states. That is not inconsequential, or by accident, and it’s one of the reasons we have the healthiest and most diverse economy in the nation today.
Finally, a word about education. Education has been and will continue to be my No. 1 budget priority.
Historically, all of our income tax has gone to fund education, which is fine as long as our economy is doing well.
But income tax is a historically unstable revenue source and it drops dramatically during an economic downturn. This puts education funding at risk. For example, during the recession of 2008, when income tax revenues dropped by over 20%, we were able to keep teachers paid and classrooms running only by dipping into the general fund, which contained enough money to supplement losses in the education fund. With our current imbalance in the general fund, that would no longer be possible.
Changing our portfolio to collect more from sales tax and less from income taxes provides a better, more equitable foundation for education funding. It’s a win for everyone.
But let me be clear. The Legislature and I remain committed to making continued and increasing investments in education funding. We’ve put more than $1 billion of new ongoing money into education in the last four years alone, for a total of $2 billion of new ongoing money in the last decade. We will continue that effort.
The Legislature and I remain committed to making continued and increasing investments in education funding.
Utah’s economy is strong and growing, mostly because of the ingenuity and work ethic of Utah’s people, but also because of business-friendly policies and an efficient state government. We have bent and are continuing to bend the cost curve of state government, with all of our agencies operating 25% more efficiently than they did just a few years ago. For example, we now have fewer state employees today than we have had at any time since 2001, even though our population has grown by approximately 900,000 people.
Adapting our tax policies to reflect our modern and ever-changing economy is important. These changes are the culmination of 15 years of discussion and work. Together, we can and are taking the first steps toward more stability and a more equitable tax system that will ensure our continued economic success in the future. This benefits individuals and families, businesses, the rising generation and the future of Utah.
Gov. Gary Herbert is the governor of Utah.