We currently collect three basic types of taxes in Utah:

1) Property taxes, which go to local governments;
2) Income taxes, which our constitution requires must be spent solely on education; and
3) Sales taxes, which fund everything else—higher education, transportation, health care, public safety, the criminal justice system and more.

Historically, most economic activity in Utah involved the sale of goods. More recently, however, our economy has shifted strongly towards services. What that means in practice is that our sales tax has eroded along with the shift in economic activity. In other words, we tax an ever-smaller piece of the economic pie and we’re left with an ever-smaller amount of sales tax revenue, in relation to the overall economy. As general fund revenues associated with sales taxes decline, the legislature has three choices: (1) impose ever higher sales taxes on that shrinking piece of the economic pie, (2) cut funding to programs and services, or (3) find ways to expand the tax base.

Over the last two decades we have used higher education funds to help offset the lack of growth in sales tax. Starting next year there will be no more general fund money available to pull from higher education to fund the basic needs of the state and our growing economy.

The Utah Legislature is a part-time legislature, with a short, 45-day session each year. This means that when major areas of public policy are addressed, they are solved in a relatively short window. Rep. Tim Quinn has been working on the issue of tax reform since the spring of 2018, crafting the components of his bill to a point where it’s ready for public input and debate. While there are elements to be fine-tuned, the bill has a delayed implementation date so as to allow for the Utah Tax Commission to implement systems and conduct rule-making with public input prior to the changes going into effect in 2020.

Even with a reduction in income taxes from 4.95% to 4.75%, education funding will be held harmless through the implementation of HB 441. In fact, the legislation will result in significant positive outcomes for education by slightly enhancing funding in the short term while stabilizing General Fund revenue and ensuring education funding remains strong through economic downturns and future growth in the state. To help offset the inability of the state’s General Fund to keep up with growth the last decade, over $1 billion is annually being used from the Education Fund to pay for higher education costs that historically have been paid out of the General Fund. By collecting service-based sales taxes, the legislature will be able to separate funding mechanisms for higher education funding and public education funding. This will provide stable, more predictable funding sources for students and educators throughout Utah.

No one wants their own industry taxed. But every business working to exempt their own industry would result in imbalanced, inequitable tax policy. HB 441 seeks to broaden the tax base and then lower the overall sales tax rate for everyone, while taxing the final consumption of goods and services rather than taxing every transaction along the way. 

The new sales tax structure on services will mirror the same structure currently in place for goods. Additionally, the sales tax will be assessed based on where the customer lives, meaning that sales tax will be assessed even on transactions between customers in Utah and out-of-state businesses. The Utah sales tax will not need to be charged by Utah companies on transactions with customers outside of Utah. This will ensure that Utah businesses and out-of-state competitors remain on a level playing field from the standpoint of sales tax assessment.

With a delayed implementation date, there will be ample time for the development of educational materials and programs to help citizens and businesses understand and comply with new requirements resulting from HB 441. The Utah Tax Commission will work closely with the legislature, other state agencies, local businesses and industry associations to ensure a smooth implementation with adequate tools, training and resources.

At full implementation, business owners will be impacted by HB 441 in a number of ways.
1) The tax they are paying for many products they use, including vehicles, equipment, supplies, etc., will decline by 39% for most industries.
2) Business owners will see their income tax rate decline, and if they qualify for personal exemptions, will see further tax relief.
3) Some businesses may be required to pay sales tax on services they use as part of their business. The providers of these services will collect and remit this transaction tax.

The goal of HB441 at full implementation is to achieve revenue neutrality. Nearly every business will see some taxes go up, some go down. The long-term benefit of this new tax structure is the state will be able to have a tax system based on a 21st Century economy to help ensure Utah has resources to invest in maintaining the vibrant economy and quality of life we currently experience.

The sponsors of this legislation have worked hard to prevent tax pyramiding from occurring. As mentioned above, business input exemptions were maintained in an effort to avoid tax pyramiding and ensure as level a playing field as possible across industries and economic sectors. Additionally, legislators have worked to exclude business inputs in limited cases where taxing them would put undue burden on continued economic growth in the state.

A modernized tax structure will reduce the incentive of future legislatures to raise taxes because it will provide stability in funding sources. Under our current tax structure, future legislatures may face greater pressure to raise taxes in order to make up for uncollected sales tax revenue from the rapidly growing service-based sector of our economy.

While the legislature cannot control how market forces will react to HB 441, it is expected that service-based businesses will pass the newly-implemented sales tax on to consumers in a similar way we all pay sales tax on products we purchase today as a separate item. Consumers, however, will see a reduced cost on all of the other products for which they are currently charged a sales tax. For this reason, when coupled with the propsoed income tax rate reduction, a typical family earning $65,000/year should see a benefit (tax reduction) of $634/year under the proposal when fully implemented.

All local sales tax options remain the same in the bill.

Favorable economic conditions have created a window in which tax modernization can occur. An historic budget surplus will allow the legislature to hold harmless important areas of our budget–including education funding and important social services–while implementation of HB 441 can occur.