by Howard Stephenson
With Utah enjoying a billion dollars in state revenue growth, it’s time to do something about our unenviable position as 3rd highest among the 50 states in state and local taxes and fees. As a result of surplus projections, Governor Huntsman recommended just $60 million in tax cuts for the coming year’s budget, while the House of Representatives has proposed $230 million in cuts. The Senate meets on December 20 to make their recommendation. Observers expect the Senate to come in below House recommendations.
Contrary to a Salt Lake Tribune editorial calling Utah legislators “Bad Santas” for proposing only “general recommendations” for tax reform, the Utah Legislature’s Tax Reform Tax Force and Interim Revenue & Taxation Committee have produced 30 separate, detailed tax reform bills and resolutions. Many of these proposals are extremely complex and far-reaching changes to Utah’s tax structure.
However, the Tribune’s biggest motivation in criticizing the task force may have been the fact that the recommendations called for more than $325 million in tax cuts. The actual level and timing of cuts will be determined through the legislative process, but the task force has set forth a bold plan to reduce Utah’s 13th highest tax ranking among the 50 states.
This tax reform process was initiated by Governor Olene Walker’s team of consultants who sought to reform taxes for two main purposes: To ensure economic growth and to correct what they called a “structural imbalance” in Utah’s tax system. The Walker team proposed to broaden the tax base and lower the rates, but the task force opted mostly to lower the rates. In the end, the task force was not interested in fixing any supposed structural imbalance – the members seemed to think there was adequate natural growth in the tax base. The task force did, however, focus on tax cuts to ensure Utah’s economic growth and expansion of higher paying jobs.
The recommendations include a flat 5% or lower income tax (down from the current 7%) which can be filed on a postcard, comprehensive redevelopment agency (RDA) reform, an electable single sales factor corporate income tax, expansion of the property tax circuit breaker for the low income and elderly, removal of the sales tax on food, exempting sales taxes on inputs to basic industries and telecommunications, simplification of personal property taxes, repealing the “second” gross receipts tax, prohibiting property taxes on intangible property, cleaning up Utah’s trust laws, changes in distribution of local option sales taxes, changes in the truth-in-taxation property tax law including simpler language in the 1/4 page newspaper advertisement, correction of several instances of confusing and inconsistent language in the tax code, leveling the current unequal taxes between cable and satellite franchise taxes, and much, much more.
So much for mere “general” recommendations.
Because of the complexity of the reform proposals and the short seven-month window forwork by the Task Force, legislative staff was not able to have all of the proposals drafted in final form by the Task Force’s final meeting on November 28. Consequently, a special meeting of the legislature’s Interim Revenue & Taxation Committee has been scheduled for January 11, 2006, just before the January General Session which begins Monday, January 16. This should give staffers sufficient time to get all bills drafted for the committee’s final consideration.
Removing Sales Tax from Food
The Tax Reform Task Force has been considering three different options regarding the removal of sales tax on food:
Option 1: Remove sales tax on food and increase state rate from 4.75% to 5.25% while increasing the city rate from 1.0% to 1.1%.
This option increases the cost of purchasing cars, computers, and other non-food items while providing a net tax cut of $44 million, according to proponents.
Additionally, this proposal increases taxes on business inputs by at least $60 million per year. This would be one of the single largest ongoing tax increase on businesses in Utah history and would negatively impact Utah’s business climate. According to the Utah State Tax Commission, Utah’s business tax burden is currently close to the business tax burdens in other western states.
Conventional wisdom says that businesses already receive preferential tax treatment so increasing business taxes is not a major concern, but the facts say otherwise.
The single largest tax exemption in Utah is the 45% primary residence property tax exemption which annually shifts $218 million from primary residences to other types of property, almost entirely businesses. Households are exempt from paying taxes on non-vehicular personal property like computers, appliances, and furnishings. In 2004, locally assessed businesses paid $106 million in personal property taxes. Businesses received less than half (47%) of all sales tax exemptions. With removal of sales tax on food, the business portion of sales tax exemptions would decrease to 33% of total sales tax exemptions.
Option 2: Eliminate the sales tax on food without increasing sales tax rates or other taxes.
This would reduce state and local government revenues by $226 million per year. Other tax cuts would not be possible, and there would be pressure over time to eventually increase other taxes, considering the magnitude of this reduction.
Option 3: Provide a $75 per person refundable tax credit for low income families to offset the sales tax on food.
Option 4: Remove the sales tax on food and use new revenues already projected to come from taxes on remote sales to make up the revenue difference. Currently, taxes are not being collected on Internet and mail order catalog sales unless the seller has nexus (typically physical presence) in Utah or unless the seller is voluntarily collecting and remitting sales taxes. Internet and mail order catalog sales by companies without nexus in Utah are referred to as “remote sales.” Within a couple of years, Utah along with most other states will begin collecting taxes on remote sales.