In a year with more than $1 billion in new state revenue, Gov. Gary Herbert is proposing a $200 million sales tax cut to help Utahns keep more money in their pockets.
But there’s a catch.
With it, the governor is also proposing the state “broaden” its tax base possibly by imposing sales tax on some previously untaxed services — such as limo rentals, liposuction, pest extermination or haircuts, depending on what the Utah Legislature has an appetite for.
Options could also include new user fees for roads and water or taxing e-cigarettes like other tobacco products, according to his proposal. In addition, the governor recommended nearly $70 million of state sales tax earmarks for water be shifted to a statewide user fee.
The aim is to “modernize” the state’s tax base, which has been eroding thanks to what tax experts say is a shift from a goods-based economy to a services-based economy, Herbert said.
“We have the ability now to give money back to the consumer,” Herbert told the Deseret News and KSL editorial boards the day before his budget proposal was released. “The debate’s going to be how to do it and what’s the mechanism.”
Many services in Utah have been granted tax exemptions over the years, leaving the state with a “narrowing” tax base, Kristen Cox, director of the Governor’s Office of Management and Budget, told reporters in a meeting Wednesday.
Since the 1980s, about 70 percent of Utah’s economic transactions were taxed, but that percentage has declined over the years, Cox said. As a result, the state’s tax base is suffering, and if Utah doesn’t see tax reform now, it could lose its flexibility to balance sales tax and income tax within two to five years, she said.
So, the governor is recommending bringing the state’s tax base in line with a changing economy, while also reducing the tax burden on Utah families. A sales tax cut would particularly help middle- and low-income residents, who pay a higher percentage of their incomes in state and local taxes than high-income households, he said.
There’s “example after example after example” of “backward” service tax “loopholes,” Herbert said, such as the “limo loophole” that allows limousine companies to go without charging taxes, and yet Utahns have to pay taxes to service their family cars.