SALT LAKE CITY — Utah is counting on yet another state budget surplus, this time adding up to $97 million, and supporters of tax reform say the numbers make it clear why lawmakers need to act, including on a tax cut.

A preliminary report shows that as of the end of the fiscal year on June 30, the education fund that largely comes from income tax collections grew $140 million, an increase of 9.1% over the previous year and well above the projected 6% growth.

Joseph Tolman, Utah Legislative Fiscal Analyst

But it's a different story for the general fund that pays for the rest of state government services and is heavily dependent on the state's share of sales tax revenues.

While the general fund is also up, the report issued recently by the Governor's Office of Management and Budget and the Legislative Fiscal Analyst warns of a potential $43 million revenue deficit because growth was 3.6%, not the 5.3% projected.

The actual numbers are likely to change as the books are closed on the budget year.

Still, the bottom line reflects the concerns raised by legislative leaders and Gov. Gary Herbert about income tax collections booming in a strong economy while sales tax revenues lag as consumer spending shifts from goods to services.

"I think it just underscores that what we've been saying is in fact happening," said House Speaker Brad Wilson, R-Kaysville. "Income tax in general is coming in higher than we forecast and sales tax is coming in lower, in a pretty consistent way."

Wilson said the numbers also make a case for cutting taxes. The 2019 Legislature set aside $75 million for a tax cut that's being considered as part of the overall tax reform package.

"You're also seeing why we want to cut — at least the Legislature — want to cut the income tax," the speaker said. "It's very simple in my mind. We need to fix the structural issues and provide a tax cut."

Senate President Stuart Adams, R-Layton, called the amount of growth in income tax collections "amazing" and also said that might be the best place for the state to cut taxes.

"Whatever we do with tax reform, we won't raise taxes. We may raise them in one area, but we'll lower them in another," the Senate president said. "I think the effort is to try to broaden the base with sales tax but lower the rate for income tax."

It's too soon to say whether the size of the budget surplus means the tax cut will be higher than $75 million, Adams said.

"It should be more," he said. "We're not sure what the tax cut will be, but extra revenue always helps."

The governor had called for broadening the sales tax base to an unspecified array of services and giving Utahns a $200 million tax cut in his $19 billion budget recommendation last year.

Herbert's spokeswoman, Anna Lehnardt, said the revenue numbers demonstrate a pattern tracked for a few years, that "while our economy is strong and is growing along with our population, our sales tax revenue is not keeping pace."

She said the state needs "to modernize our tax structure in order to prepare for a stable financial future, and to be clear, we need to do this without collecting more money overall from hardworking Utahns."

Lawmakers ended up last session considering but abandoning a bill that would have added sales taxes to a wide range of services ranging from haircuts to legal advice, while cutting both the sales and income tax rates, along with a $75 million tax cut.

Instead, a tax reform task force was formed to come up with a more palatable proposal, especially to the business community. The Tax Restructuring and Equalization Task Force just completed eight town hall meetings around the state.

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Now, the task force is expected to meet before the end of the month to start working on a tax reform plan that could be taken up in a special session before the 2020 Legislature begins meeting in late January.

"Everything's on the table," Wilson said, noting "dozens of ideas" have come out of the town hall meetings. "The challenge is to narrow those ideas to those that make the most sense."

Adams said it will be better to deal with the issue while times are good.

"Right now, while the economy is growing, it's not too critical because we obviously have extra revenue coming in," he said. "As we look out into the future, that's when it becomes problematic, when the economy slows."

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