A modern economy has left Utah’s tax code behind and, with it, the flexibility to make strategic decisions about our state’s future. We must implement an updated, balanced approach to tax policy that can provide a strong path forward for our state’s economic vitality. After years of effort to understand the various policy options to modernizing our tax code, it’s time to act. Now is the time to broaden the base and lower rates so that the changes are revenue neutral.
Facts About Utah's Tax Code and a Changing Economy
The Need for a Balanced Approach
Our economy and population have changed dramatically since the 1980s, but our tax system has not. Utah’s budget is comprised of three main revenue sources: property tax, income tax and sales tax. Sales tax, the most flexible revenue source to meet our state’s changing needs, currently accounts for 88 cents of every dollar in Utah’s general fund. However, with taxable sales as a percent of the economy shrinking, critical budget decisions will be an increasing challenge. Actions to create balance between revenue sources will provide a stable foundation for our economy to thrive.
The Economy has Changed
Over the last several decades, the number of businesses in the service sector of our economy has grown at an incredible rate. Whether it is the subscription app on your phone, the rideshare you take around town or the haircut you get, services today make up a larger share of Utahns purchases than ever before, creating an erosion of the state’s sales tax base. Over time, a declining tax base creates a complex and inefficient budgeting process that dismantles the state’s fiscal stability. If we continue to delay tax reform, this imbalance will eventually compromise state and local governments’ ability to meet public needs.
Our Tax Base is Shrinking
Over the past several decades, Utah’s sales tax has been eroded due to changing purchasing patterns, the digitization of goods, legislated exemptions and remote sales. Since 1980, Utah’s sales tax base has shrunk relative to the economy by nearly 30%.
As Utah’s service economy continues to grow, broadening the base and lowering income and sales tax to create a revenue neutral tax system that is fair and efficient will be essential to maintain Utah’s economic competitiveness. Expanding the sales tax base to services and removing previously-passed exemptions would improve stability and level the playing field, while also allowing for flexibility for business-to-business transactions.
Utah taxes a little over a third, 64, of the 176 major services tracked by the Federal Tax Administrators. Twenty-two states tax more of these services, 27 states tax less. The number of services Utah taxes is at or above the median for most service categories; Utah taxes less than the median number of services in utilities, business services and computer services.
Why Broaden the Base
Fair – It creates a more even playing field for all commodities, i.e. goods and services.
Efficient – It allows policymakers to lower rates and create the same amount of revenue.
Characteristics of a Great Tax System
Source: Kem C. Gardner Policy Institute
Simple – Make compliance and enforcement as easy as possible. The resources devoted to tax compliance are a form of deadweight loss.
Efficient – Tax system ought not interfere with the efficient allocation of resources.
Flexibility/Revenue Sufficient – Taxes ought to be adequate to fund the desired level of services, flexible to meet increasing or decreasing needs and stable to help with planning.
Transparent/Political Responsibility – The tax system should be transparent and accountable to taxpayers.
Equitable – Taxes ought to be fair. Assessments about equity require normative judgments.
Keeping up with Growth is Expensive
As a high-growth state, Utah must provide Utah’s workforce with the skills of the 21st century, and constantly maintain and invest in infrastructure. Keeping up with your kids and grandkids requires real investment to stay in front of the cost curve. Relying on the same old tax code and fiscal constraints to invest in our future won’t cut it.
Maintaining Utah’s Competitiveness
Utah businesses need a more competitive tax code in today’s marketplace. Other states are catching up to our state’s economic vibrancy. Utah trails many of its competitors in creating the economic environment necessary to attract headquarters and advanced manufacturing. That means we need to make the necessary changes to keep Utah’s tax climate among the best in the nation.
According to the Tax Foundation, Utah is ranked #8 in the 2018 state business tax climate, however when looking at strategic economic development opportunities such as Corporate Headquarters (#26) or Capital-Intensive Manufacturing (#16) our rankings significantly drop.
Raising the Sales Tax Rate is Not the Answer
While raising the sales tax rate may appear to address Utah’s imbalanced tax structure, it is not the right solution for our long-term economic stability. Raising rates without widening the tax base, will diminish Utah’s economic competitiveness, disproportionately impact low-income earners and negatively impact our quality of life.