Key Tax Reform Takeaways

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For the last several years policymakers have worked hard to draft well-informed policies that rebalance the state’s tax code. During the Dec. 12 special session, a tax reform package passed that will help Utah’s economy stay competitive while also alleviating some of the tax burden placed on Utah families through a $160 million ongoing tax cut and an estimated $70 million one-time tax cut.

The timing of tax reform is not happenstance. Under the current tax structure, the state would face major challenges in funding core government services. The problem? Sales tax, which finances the general fund that pays for most government services, is not keeping pace with the current economy. As an example, if the economy grows by 5 percent, the sales tax grows by about 3 percent. Policymakers commendably chose to address this issue now during a special session rather than wait until it became a crisis.

Key takeaways from the enacted tax reform legislation include the following:

  • Sales tax broadened to include some key services and gasoline
  • Sales tax placed back on unprepared food, with tax rebates and credits available to offset the food tax increase for low- and middle-income Utahns
  • Car rental tax increased from 2.5 to 4 percent
  • New diesel excise tax
  • $160 million ongoing tax cut and an estimated $70 million one-time tax cut for Utah taxpayers

Understandably, you may wonder how the state is able to give a tax cut when the problem Utah is trying to resolve is a shortage of funds in the general fund. Stability is the key with tax reform, not collecting more taxes overall. This is an important distinction.

The state’s tax structure is like a retirement savings portfolio that must be balanced to ensure both growth and stability over the long term. Utah’s tax portfolio is out of balance. Under the constitution, taxes collected from income are devoted to K-12 and higher education. The income tax is strong and is bringing in record revenue, but it is unstable and unreliable when the economy slows.

As previously mentioned, taxes collected from the sale of goods and services pay for core state services such as public safety, air quality, infrastructure and roads, and for social services that provide a safety net to the state’s most vulnerable citizens. Utah’s sales tax is struggling and not pacing with the economy or population. Economic transactions covered by the sales tax constituted 70% of the economy as measured by personal income in the 1980s but has fallen to a little over 40% today.

In short, the economy is changing from a goods economy to a services economy. One example of this shift is the way people consume entertainment. Instead of renting movies at Blockbuster, people now stream them. Policymakers did not consider things like streaming services when the state first instituted the sales tax. Because of the changing economy and the fact that most services are not taxed, a smaller portion of taxpayers are carrying the burden of paying for government. The tax reform package is a first step toward addressing some of these inequities. It changes the way taxes are collected but does not increase tax revenues.

In fact, because of the net $160 million tax cut, the vast majority of Utahns – about 85 percent – will pay less in taxes next year than they will pay this year. Many of the remaining 15 percent received significant tax relief during the federal tax reform package enacted a few years ago. Utah’s tax reform package was designed to consider the various and disparate needs of its citizens.  

Thanks to you and your efforts to be as efficient and effective with taxpayer dollars as possible, the state has been able to shrink the size of state government while continuing to provide quality services. In FY 2019 there were fewer state full-time equivalent employees (20,700) than in FY 2002 (20,850), despite considerable growth in Utah’s population. In part, the tax cut is made possible because of this effort.

While additional tax reform efforts will be considered, including taxing a wider array of services, the changes enacted by the Legislature will shore up the general fund enough to allow government to meet the service and infrastructure demands of the state’s growing population for the near future. Tax reform is an ongoing effort that both the Governor and Legislature are committed to.

The Governor wrote an op-ed that further explains the need for tax reform. You can view the article by clicking here.