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Utah’s last tax reform attempt crashed and burned. What now?

Former Utah Gov. Mike Leavitt urges political bravery for tax reform, but Utah Legislature has yet to revisit the larger debate while chipping away at state’s income tax

By Katie McKellar - Utah News Dispatch | Apr 9, 2024

Spenser Heaps, Utah News Dispatch

Sen. Dan McCay, R-Riverton, and Sen. Kirk Cullimore, R-Sandy, chat on the Senate floor at the Capitol in Salt Lake City on Friday, Jan. 26, 2024.

It’s been four years since Utah lawmakers tried but failed to adopt a tax reform package meant to respond to a changing economy and address a structural imbalance within the state’s revenue streams, but since then lawmakers have yet to revisit the conversation.

On Friday, a pair of Utah legislators with tax expertise — Sen. Dan McCay, R-Riverton, and Rep. Robert Spendlove, R-Sandy, joined a panel discussion with former Gov. Mike Leavitt to discuss the lingering conundrum of Utah’s need for tax reform and where the state goes from here.

They all agreed something must be done — and the answer lies in expanding Utah’s tax base to include taxes on services (something they tried to do at least in part in 2019 but quickly repealed it amid stiff opposition and a looming referendum).

However, they also said it’s a tough problem that requires political courage. And no one had solid answers Friday of when the Utah Legislature might be up for the challenge.

The panel was hosted by the University of Utah’s Kem C. Gardner Policy Institute, the Hinckley Institute of Politics, and the Deseret News at the Thomas S. Monson Center in Salt Lake City. The discussion, moderated by Deseret News Executive Editor Doug Wilks, was part of a forum titled “What’s Past is Prologue,” which unpacked highlights of Leavitt’s recently released memoir series, meant to offer lessons today’s policymakers can use to confront some of the biggest challenges facing Utah today.

When Wilks asked for an “inkling of a solution” to Utah’s need for tax reform, Spendlove who also serves as vice chair of the Legislature’s powerful budgetary body, the Executive Appropriations Committee, offered an answer that legislators have known for years but have struggled to execute.

“We have to be taxing services,” Spendlove said. “We have to be broadening that base of the sales tax to account for this change.”

Utah last saw major tax reform in 2007, when Spendlove worked as an economist for then-Gov. Jon Huntsman. Spendlove said that tax reform effort took years — almost a decade — and it was “really difficult.” Before that 2007 effort, the last time the state saw tax reform was in the 1940s.

“So yes, we can do it. But we’ve seen — we’ve tried to do it since ’07, and it’s been so difficult. And I worry that right now there is not the political will because we got beaten up so bad in the last round,” Spendlove said. “But it has to be done.”

Like the federal government and its national debt issues, the longer it takes to address, “it’s going to get harder and harder,” Spendlove said.

What happened the last time Utah tried tax reform?

For decades, as Utah’s economy has changed, a “variety of structural trends are eating away at Utah’s sales tax base,” as Natalie Gochnour, associate dean in the David Eccles School of Business and director of the Kem C. Gardner Policy Institute at the University of Utah, put it in an article for Utah Business back in 2019.

Gochnour, who is also chief economist for the Salt Lake Chamber, at the time applauded then-Utah Gov. Gary Herbert for taking a stab at tax reform, which she deemed “not for the faint of heart.” As she painted a picture of Utah’s structural tax imbalance, Gochnour said one of the biggest economic changes “eating away” at Utah’s sales tax base are “an aging population that spends a greater share of income on health care, which is not taxed, and a growing service economy, which in many instances is not subject to the sales tax.”

“If these and other trends are left unaddressed, policymakers will continue to face a growing gap between available revenues and the needs of a growing population and economy,” Gochnour wrote. “This challenge will intensify with the next economic downturn as well as over time.”

Lawmakers have long said tax reform is needed to help Utah’s tax system coincide with an economy that’s seen consumer spending shift away from goods and more to services. Thus, sales tax collections have lagged behind income tax revenue. Meanwhile, the Legislature is required by the Utah Constitution to spend income tax dollars on education and social services for children and people with disabilities, while sales taxes pay for other state government operations.

Spendlove, who also works as an economist for Zions Bank, said lawmakers have tried tax reform several times, but “fail every time because it takes a lot of political courage” to shift taxes, which often means reducing taxes for some while raising taxes on others. If raising taxes on services isn’t going to work, he said then “we need to come up with a different way,” perhaps by adjusting property taxes or income tax.

In 2019, the Utah Legislature passed tax reform legislation to raise sales taxes on food, gas and some other services while reducing income taxes — but soon after repealed it amid backlash fueling referendum effort that was on track to qualify for the ballot.

The list of services that would have been taxed was whittled away repeatedly as the tax reform package wound its way through the Legislature, to the point that even some supporters said they wished it was more comprehensive by the time it came to a vote in the House and Senate. In the end, it would have taxed services including Uber rides, streaming media, dating referrals, pet boarding, towing, newspaper subscriptions, and a handful of other services, the Deseret News reported.

The 2019 bill would have also lowered both the state’s individual and corporate income tax rate from 4.95% to 4.66%.

While the Utah Legislature hasn’t since attempted such sweeping tax reform, including raising taxes on a list of other services, lawmakers have moved incrementally over the past several years to lower income tax — and asked voters to do away with the constitutional earmark on education.

This year, the 2024 Utah Legislature lowered the income tax for the fourth year in a row, bringing Utah’s income tax rate down to 4.55%. Gov. Spencer Cox signed the tax cut bill, though ahead of the 2024 session he said he would like to have a larger conversation about removing Utah’s income tax altogether if lawmakers want to keep chipping away at the state’s income tax revenue.

Legislative leaders have long talked about eventually doing away with Utah’s income tax dollars, but that would require major tax reform.

Additionally, legislators have a key question before Utah voters this November: whether to remove the Utah Constitution’s earmark on income tax dollars and thus allow more flexibility within the state’s budget. They’ve also dangled a long-sought carrot if voters approve that constitutional amendment: removal of the state’s portion of sales tax on food, to the tune of $200 million.

These are all steps that could perhaps help lawmakers set the stage for another tax reform debate. But if they still want to shift taxes to services, that would require again asking Utahns and business owners to be open to change — change that could impact some more than others.

What now? Lawmakers muster the courage

After lawmakers were dragged across the coals in 2019, McCay said when he thinks about “the idea of going back through tax reform,” he gets nervous.

“But I do know that it is something that needs to be done,” he said. “The question will then become … will we have the courage to make the hard decisions that need to be made?”

In 2019, McCay said lawmakers ran into challenges when they were trying to determine what services would get taxed and which ones wouldn’t.

“Those problems, I don’t know that we ever fully got great answers for that time,” he said. “And I don’t yet know that we have those problems figured out. But I agree … if you have a shift, the worst thing you can do is make your (tax) revenue less predictable.”

Leavitt agreed that taxing services is a “really tough issue.” However, he said “there’s an opportunity here, that I see.”

The Utah Legislature has enacted significant reductions on Utah’s income tax, putting that “conversation on the table for a big discussion,” Leavitt said. The next piece is likely cutting sales tax and shifting it to services.

“The transition to services, the only way it can happen is if there’s a dramatic reduction in the sales tax generally, then you add services,” Leavitt said. “Broaden the base but lower the rate. Now, if you then mix into that the role and the level of income tax, what you get is an opportunity to completely rethink for the 21st century how taxes should be collected and who should bear the burden.”

“That kind of opportunity,” Leavitt said, “comes along about once every 50 years or longer.”

The former governor said there’s an opportune time to solve big issues, when “it’s big enough you can see it and small enough that you can still solve it, and we may be coming to that juncture.”

He said it’s likely an issue Utah’s current leaders should tackle.

“I think it’s the generation of leadership now that is going to have to do it,” Leavitt said.

By addressing the issue now — while also continually adapting Utah’s tax collections with an ever-changing economy — Leavitt said it could be a crucial part of the state’s future success.

“Economic stardome awaits the state that takes on tax reform and solves this problem first,” Leavitt said. “If you’re able to create a broader, lower set of tax rates, it’s the formula for economic prosperity for a long time.”

Utah News Dispatch is a nonprofit, nonpartisan news source covering government, policy and the issues most impacting the lives of Utahns.


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