Utah policymakers to consider sales tax reform to keep up with modern economy

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Utah policymakers might consider imposing sales tax on some previously untaxed services as changing consumer spending habits, technological advances and an aging population eat away at revenue.

The sales tax base is not keeping pace with the state’s growing economy, which hurts government’s ability to meet public needs. Utah currently taxes most goods but few services.

“I think there is a broad understanding that there are structural trends that are impacting sales tax,” said Natalie Gochnour, director of the Kem C. Gardner Policy Institute at the University of Utah.

“There is no question we have been moving to a service economy that’s not taxed like goods are.”

The continued growth of online shopping also affects sales tax revenue, though a recent U.S. Supreme Court ruling paves the way for states to collect on internet sales.

Gov. Gary Herbert recently said the state hasn’t really considered sales tax changes because of the shifting marketplace, “but I think it’s something we ought to talk about now.”

“That’s something we’re going to have to have a debate on as we look at tax reform going forward if we want to have the optimal tax policy that will allow us to have a growing, increasing, dynamic economy,” he said at a November discussion at the policy institute.

Herbert is scheduled to released his 2019-20 state budget proposal next week, including some tax reform recommendations. The Utah Legislature, which controls and approves the budget, will meet in general session starting at the end of January.

The state, he said, should be looking at ways to broaden the tax and lower the rate.

“Frankly, I think there will be opportunities to do that, which we’ll be exploring,” Herbert said. “We may have a tax cut in our future if we play our cards correctly.”

Paul Edwards, Herbert’s deputy chief of staff, said the governor’s budget proposal released next week will address Utah’s reliance on sales tax, though it won’t include lots of specifics because it’s an issue the Legislature has to work out.

“We do need to find a way to have more of the economy contribute to what the state pays for,” he said. “In doing so, it’s our great hope that we can lower the rate and return some of the surplus to the taxpayer.”

The governor’s office, he said, sees the issue as a multiyear discussion.

Edwards said the governor would first look at eliminating sales tax exemptions and then at taxing “luxury” services, such as elective cosmetic surgery and use of limousines.

Services used to account for less than half of personal spending but now make up more than two-thirds. As consumer preferences continue to change, services will represent an even larger share of spending, according to a Gardner Policy Institute report released in November.

Utah now taxes 64 of 176 major services, putting it about in the middle of all states. It taxes amusement park admissions and hotel rooms, for example, but does not tax health care, prescription drugs, medical devices, haircuts, lawn care or legal services.

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