In what can fairly be described as a perfect storm, petitioners gathered more than 144,000 signatures on a referendum petition to repeal SB 2001 which was passed in a December 12, 2019 Special Session of the Utah Legislature. The bill was almost perfect by economic, budgetary, and even social justice standards, but because it was so widely misunderstood, it was easy to stir up opposition.
On its face the bill seemed to restore regressivity to the sales tax by repealing the 3% rate reduction on food that had been put in place more than a decade earlier. That is apparently what the signers of the petition believed. However, had they read it, they would have known the bill was carefully crafted to ensure that low and moderate income families would actually have hundreds of dollars more in their family budgets through tax credits to more than offset the food sales tax. For those complaining that the poor can’t wait for a once a year offset or the poor aren’t smart enough to file to claim the credit, the Tax Commission and Representative Steve Waldrip were working on methods to give these families monthly direct deposits or debit cards to automatically deliver these credits.
Among the many petition signers and advocates with whom I spoke, not a single one knew or believed when I told them that SB 2001 delivered a net tax cut of more than $160 million. When coupled with the fact that about $40 million would be collected from visitors, the tax cut to Utahn’s was upward of $200 million, the largest tax cut in Utah history.
Rep Steve Waldrip developed a one page explanation, which he used at town meetings in his district. He said once he walked through the fact sheet and attendees understood what the bill actually did, they realized the legislature had been thoughtful about tax reform.
The Legislature’s last major tax reform was in 2007 during the Huntsman administration, but the process actually started much earlier with the first legislation relating to the food sales tax reduction passing in 2006. Then, following passage of the major bill in 2007, the income tax component was fine-tuned in 2008. In those days, the Legislature had created a tax reform task force which painstakingly took the time over many months to put together a package which had excruciatingly detailed data and research to back it up. Lawmakers studied “hurricane charts” which showed exactly how every Utah income tax filer of the previous tax year would be affected by the income tax changes.
By contrast, the December 12, 2019 special session tax reform bill was not available for review until December 11, and was changed significantly the next day before opening the special session, adding benefits for intergenerational poverty families and persons on social security. SB 2001 was far more intricate than the 2007 tax reform because it sought to remedy the structural imbalances and fiscal instability produced by the earlier reforms, and exponential growth in income tax revenues resulting in large part from the nearly total elimination of tax pyramiding through the removal of sales taxes on business inputs over the last two decades.
Correcting Fiscal Instability
It is ironic that the state with the most robust economy in the nation and the best economic outlook going forward also faces challenges because of silos around revenue sources, preventing fiscal flexibility to ensure, during economic downturns, stable funding of essential services like education, transportation, and public safety.
The gas tax would have moved the funding of highways away from the general fund sales tax and more toward a user fee, helping to ensure that Utah stays ahead of traffic congestion and gridlock which affects so many other urban areas across the nation.
The food sales tax would have meaningfully stabilized the sales tax by getting the middle class, the wealthy and tourists who benefited most from the 3% reduction to resume paying the tax. The food sales tax would directly benefit low-income people during an economic downturn by protecting funding for social services programs.
While the food sales tax and new gas tax stirred up opposition to SB 2001, the so-called public education advocates climbed on the bandwagon in order to overturn over $600 million of income tax cuts contained in the bill. Ironically, the UEA Teachers Union and its ally, the State PTA leadership (not local school PTAs) endorsed the referendum which would have actually stabilized state budgets during economic downturns, ensuring that the next recession would minimally affect public education funding.
As your Taxpayers Association analysis has noted, in the economic downturn following 9/11, revenues from the sales tax (which included the full sales tax on food) and property tax were relatively stable compared to income taxes. On the other hand, in the Great Recession following the 2008 housing bubble , the food sales tax had been reduced by 3% which caused it to be as volatile as the income tax. If the food sales tax had been completely removed, the sales tax would have dropped even more than the income tax, putting an even greater strain on funding for social services and other necessary government spending.
SB 2001 was a great effort to put Utah’s tax structure on a firm path for economic growth and family prosperity. Unfortunately, the process, which began with a terribly flawed bill in the 2019 general session and continued with a “listening tour” which had no concrete proposal to which citizens could react, was not properly driven. It was a seeming miracle that the awkward process could actually arrive at a sound proposal.
In 2007, the tax reform package was less complicated, but there were detractors who didn’t trust what the Legislature had done. Some claimed it was a hidden tax increase or that it would benefit the rich and corporations. A year later at the 2008 Legislative Session, citizens had seen the bill’s effects and were pleased.
However, with SB 2001, there was not a year for cooling off and to experience the effects of the reforms.
Also in 2007, there was not a wide field of candidates lining up to run for governor as in 2019. All of the 2020 candidates who had filed at that time saw the grassroots referendum process as a chance to show they were “with the people.” During the referendum process I showed some of the candidates for governor who endorsed the referendum, unmistakable evidence that the repeal of SB 2001 would eliminate a net $160 million tax cut and severely destabilize state revenues during the next economic downturn which would require draconian spending cuts to essential services. I asked each candidate how they would deal with such a budgetary crisis. One of them answered, “I would turn to the people and ask them what they want me to do.” Another said, “I don’t have an answer right now, I’m still putting together my position papers.”
In spite of a flawed process, the Legislature sought to solve significant and serious problems. Unfortunately, the Legislature will likely be reluctant for a long time to address the very real structural imbalances and instability plaguing state and local budgets which SB 2001 would have corrected.