State Lawmakers Backtrack on a Tax Code Revamp

The Utah state Capitol building in Salt Lake City.

The Utah state Capitol building in Salt Lake City. Shutterstock

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Utah officials say they plan to scrap a law they passed just last month after it attracted widespread public opposition, in part because of a tax hike on groceries.

Utah lawmakers will repeal major changes to the state’s tax code they pushed through just last month, Gov. Gary Herbert and legislative leaders said on Thursday.

The reversal comes amid signs of public opposition to the tax code revamp. The legislation reduced income taxes, but also raised taxes on grocery sales and gasoline and expanded the sales tax to cover certain services. It was approved along party lines, backed by Republicans.

Supporters of a voter referendum to roll back the newly adopted tax law said in recent days that they’d gathered upwards of 150,000 signatures from supporters, more than enough to qualify the veto measure for the upcoming November ballot.

Herbert, Senate President J. Stuart Adams and House Speaker Brad Wilson, all Republicans, issued a joint statement on Thursday in which they took note of the referendum effort and acknowledged that “many people have strong concerns” about the tax policy changes.

When the 2020 general legislative session begins on Monday, they said, lawmakers will introduce a bill to repeal the new statute, which was passed during a December special session. The goal is to get the repeal bill to the governor’s desk within a week’s time, they added.

Herbert and other proponents of the tax overhaul have previously made a case that while Utah’s income tax collections are fairly healthy, sales tax growth has lagged, and that these two streams of revenue need to be rebalanced. 

Adding a layer to the debate is that Utah’s constitution requires income tax revenue to go toward education spending, whereas sales tax dollars are more flexible.

Fred Cox, a former state representative in Utah, was among those who spearheaded the referendum effort in opposition to the new tax law. He told The Salt Lake Tribune last month that the tax on food sales was a main reason he was opposed to it.

“Individuals who are not doing really well—but are making it without any government help—are basically getting thrown off the bus," Cox said. “And that whole attitude bugs me.”

The law that state officials now want to repeal calls for lowering the individual and corporate income tax rate to 4.66% from 4.95% and taxing groceries at the full sales tax rate, instead of a reduced rate. It would also apply the standard sales tax to gasoline transactions at the distributor level, and impose a new excise tax on diesel.

An income tax exemption based on the number of dependents in a household was expanded under the bill. It also created new tax credits, including a refundable “grocery tax credit” that was targeted toward low- to middle-income earners.

Additionally, the law expanded the sales tax to cover services such as pet boarding, towing, parking lots, dating referral services, streaming media and identity theft protection. Adjusting the sales tax to cover more services has been a key concern for some Utah lawmakers. 

The governor’s office has said that in 1960 goods accounted for about 53% of consumer spending in the state, but today make up just 31% of consumer spending, while nearly 70% goes to largely untaxed services.

Herbert had characterized the December bill as an initial step towards taxing more services. Lawmakers considered taxing a wider array of services as part of an earlier tax overhaul effort last year that was ultimately abandoned.

As of late last month, all but one of Utah's declared gubernatorial candidates had backed the referendum aimed at canceling the recently enacted tax law. Herbert is not seeking reelection.

Generally speaking, Utah’s finances are in good shape compared to other states around the U.S. The state has run budget surpluses in recent years, is known for employing prudent financial management practices and enjoys sterling credit ratings.

In their joint statement issued Thursday, the state leaders indicated that they would make future attempts to rework the tax code. “The original challenge we worked to address lies before us still,” they said. “Crafting the right policy is critical to our state’s long-term success.”

Bill Lucia is a Senior Reporter for Route Fifty and is based in Olympia, Washington.

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