Tax Modernization: About HB 441

Learn Why the Utah Legislature is Working on Tax Modernization

Utah faces a serious problem with its current tax system. With the rise of the service economy and the dramatic growth of e-commerce, we have outgrown a tax system that was designed for a manufacturing- and goods-based economy. As the economy continues to change and the state’s population grows, our outdated tax system is expected to bring in significantly lower levels of revenue, jeopardizing critical funding priorities like public education and transportation.

This reform will level the playing field across economic sectors and industries and produce critical revenue to fund future growth in the state. Additionally, as new services and industries come into existence through entrepreneurial innovation, HB 441 is drafted in such a way as to capture future sales tax revenue without needing to repeatedly amend the tax code in the future to incorporate these sources.

As revenue decreases, costs rise, and our state continues to grow, a modernized tax system that fits our economy is vital. HB 441 is an example of the legislature’s desire to take the long view, plan for the future, and craft responsible public policy that improves the quality of life for Utah families.HB 441 aims to resolve this issue. At full implementation, the bill expands the sales tax base to include services, while also resulting in significant savings to the majority of Utah families through income tax and sales tax cuts. As the bill currently stands, the typical Utah family earning $65,000 annually should see a tax savings of $634 per year once fully implemented.

Tax Structure Website

Many believe that tax reform is the most critical issue facing the Legislature and must be addressed now.

Tax Modernization Video

Learn more about Utah’s pressing need for tax structural changes. 

HB 441 Bill Summary

Learn more specifics about HB 441 by reading the bill summary prepared by the Office of Legislative Research and General Counsel.

Why Now?

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.

Read the Bill

Read the bill language of HB 441, in detail, on the Utah Legislature’s website, le.utah.gov.

Education Funding and HB 441

Learn more about how HB 441 will affect education funding by clicking the link below.

Education Funding Comparison Example: 2019 Base Budget

The tables above compare the 2019 base budget for education. The first table considers the budget before HB  441. The second provides what the budget would be after passage of HB 441.

Frequently Asked Questions

What does HB 441 do?

HB 441 does the following:

– Implements a new tax structure based on a 21st Century economy to ensure Utah has resources to invest in maintaining the vibrant economy and quality of life we currently experience.
Upon full implementation generates no new state revenue but fixes a tax system imbalance that has pulled over 1.0 billion annually from education funding.
– Cuts the state income tax from 4.95% to 4.75%.
– At full implementation, cuts the state sales tax from 4.7% to 3.10%.
– Restores the full Personal Exemptions for the majority of Utah Households.
– Expands the sales tax base to include all services, with limited exceptions.
– Provides a targeted earned income tax credit for low income Utahns experiencing intergenerational poverty.
– Increases the amount of social security income that is not subject to state income tax.

While any change in tax policy can vary in effect based on individual circumstances, a typical family earning $65,000/year should see a benefit (tax reduction) of $634/year under the proposal when fully implemented in 2020.

Do we really have a problem? What is it?

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.

Is there adequate time to pass such sweeping tax changes at the end of the legislative session?
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.
How does HB 441 affect education funding?

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.

Why are some industries exempted while others are not? How did the legislature decide which industries/sectors would be exempted and which would not?

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. 

Won’t this new tax structure put some businesses at a disadvantage against out-of-state competitors?

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.

What resources will the state provide to business owners and residents to help them with compliance?

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.

How will small business owners be impacted by HB 441?

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.

What about tax pyramiding? Are there businesses that are being taxed in multiple ways?
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.
By broadening the base are we creating an incentive for future legislatures to raise taxes?
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.
Will consumers see increased costs from service providers?

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.

How does HB 441 affect local government and municipalities?

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

Why does HB 441 need to move forward now?

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.

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