We need to accelerate our thinking about what sales taxes in the new economy should look like, according to Jared Walczak, Vice President of State Projects, Tax Foundation speaking at the 2020 Taxes Now Conference. He said, “It does make sense to have a sales tax that looks like the economy we have, and that economy has changed drastically in the last few months, and I don’t think we’re going back.” He said most of the changes would have happened eventually, but the COVID-19 recession has made us jump ahead years in how we work, where we work, and where and how we purchase.

Mr. Walczak demonstrated that sales tax revenue growth in all states which taxed groceries are much more stable than those which do not. There is stability in keeping groceries and digital goods and services in the sales tax code. However, he said, “it does not make sense to tax business inputs which then result in pyramiding. We don’t want it to be more expensive to manufacture or conduct business in Utah.”

Mr. Walczak showed how much less volatile sales taxes are than individual or corporate income taxes. Corporate income taxes plunge deepest and last longest, followed by individual income taxes. Sales taxes drop the least due to the fact that consumption continues. Sales taxes also recover quickest, in part because it is collected monthly and consumption tends to rebound quickest.  However due to the quarantine, this time people can’t go to work or shop so states have seen drops in revenues beyond a normal recession.

Utah to Change NOL to Provide 5 year carryback?

Mr. Walczak pointed out that Utah mirrors federal Net Operating Loss but does not conform with federal tax code. Utah retains an 80% cap and does not allow carry back. He said if Utah would change NOL to conform with the same 5 year carryback allowed under federal law, businesses which are hurting could have immediate cash assistance instead of waiting several years to claim the current losses and have the cash available during the time of greatest need.

Federal Loan Forgiveness Should Not Be Taxable Income

Under the CARES Act federal loans can qualify for forgiveness if certain conditions are met such as not laying off workers. Under normal circumstances this would not be taxable as income.  

However, because the loan forgiveness provisions are part of the CARES Act they are not contained in the IRS Code so some states may tax the loan forgiveness as income. Mr. Walczak said this confusion needs to be clarified so Utah companies do not pay state income taxes on loan forgiveness. 

As noted by other presenters at the conference, Utah and a handful of other states are among the least affected by the recession, experiencing drops in revenue between 5-12% compared to New York at around 40%. Mr. Walczak noted that Moody’s assumes states won’t be back to normal until 2024.

“Utah is feeling the effects of the recession far less than other states,” he said. “Amazingly taxable sales in Utah haven’t been affected as significantly as other states.” 

Mr. Walczak said, “Utah has been prudent in expenditures over the years, you’ve built a more stable tax code than a lot of other states, you have reserve funds, so thankfully you’re in a position that you don’t have your backs up against the wall in these economic times.”