As the 2019 general session concluded, Utah’s Legislature created the Tax Restructuring and Equalization Task Force. Impetus for so doing is the need to address the imbalance in state revenue sources and restrictions on revenue use. Three general challenges underlie these issues: the state’s robust population growth; changes in the nature of our modern economy; and an outdated tax structure. Emphasizing this latter point, members of the task force have consistently expressed that the problem is not about the amount of revenue generated – and thus not about increasing taxes – but about the state’s current tax revenue structure.

Fulfilling their commitment to be “proactive in developing policy that ensures stability and prosperity,” the task force has hosted town hall meetings across the state, created an informational website with a section for citizen comment and feedback, conducted several study-phase sessions, and in their Oct. 22 meeting will discuss components of what eventually will be presented to the full Legislature for consideration and action.

Engaging this important process, Sutherland Institute has submitted to the task force the following recommendations:

1. Free public schools from the state income tax – Sutherland has advocated for such a policy change as far back as 2005, because the constitutional earmark for public education impedes improvement in both tax policy and education policy. This earmark obstructs good income tax policy because of fear of harming public schools and the false sense it creates that public schools get all the funding we can afford to give them. Both problems can and should be corrected by giving policymakers the flexibility to fund education and all other state functions however they deem prudent.

2. Broaden the sales tax base to include more services – Whether this is done incrementally or all at once, tax reform should help stabilize sales tax revenue by expanding the sales tax to more services. A good place to start would be to eliminate sales tax exemptions for for-profit, end-product services that create unequal and unfair sales tax treatment among services of a similar type and nature. Instead of requiring some end-product services to collect sales taxes while exempting similar services from collecting these taxes, similar services should be taxed similarly.

3. Reduce the overall tax burden – Expansion of the sales tax base should be accompanied by a sufficient reduction in the income tax, gas tax, sales tax and/or state property tax rates to create a net tax cut for Utah taxpayers. 

4. Ensure tax reform reaches working families – This can be done by creating an earned income tax credit for low-income families and, if the sales tax on food is increased to the general sales tax rate, a food tax credit for lower-middle-income families who earn too much to qualify for food stamps.

5. Promote corporate responsibility – One approach would be to improve the effectiveness of the safety net – and thereby reduce the demand for taxpayer dollars for welfare programs – by authorizing corporations to direct that a portion of their income taxes (e.g., 50-75%) be channeled toward private charitable efforts. By authorizing the direction of corporate tax dollars toward more effective and cost-efficient private-sector efforts to address poverty, housing affordability, healthcare access, etc., such a policy would alleviate some of the budget pressure that contributes to the current structural imbalance in sales tax revenue supply and demand.

6. Restructure economic development tax incentives – This could be done by revising the state’s economic development tax incentive policy to prioritize job creation and capital investment that will directly reduce the taxpayer burden by easing the demand for taxpayer dollars for core government functions. For example, rather than a business receiving a tax incentive for creating 100 high-paying jobs or investing $10 million of capital in Utah, a business would qualify for that incentive by hiring people who currently receive or recently were receiving unemployment benefits, were in Medicaid, were children raised in intergenerational poverty, or were recently released from prison; or for investing capital in building or upgrading infrastructure that would otherwise fall to state or local government, such as new roads or utility infrastructure.

7. Ensure economic growth from tax reform by supporting families – Families are a primary motivation underlying much economic activity for most Utahns (e.g., getting a better education/job to support a family). Therefore, one of the ways to ensure that tax reform and modernization has long-lasting, positive economic impact is to ensure that it generates tax relief for families. Policies to accomplish this could include creating a state income tax credit for households with children under 18 in which the heads of household are married, or by increasing the recently established state child tax credit to cover the full amount of federal tax increase that large Utah families experienced from the federal Tax Cuts and Jobs Act in 2017.

8. Protect working rainy-day funds and budget reserves – To preserve the integrity and sustainability of Utah’s budget structure, it is critical that tax reforms and tax cuts do not significantly undermine policies that establish a multitude of effective budget reserves that can be tapped during a recession. These policies include the general fund earmark for transportation, the consideration of above-trend revenue as one-time funding, and the existence of non-lapsing balances that can be used as one-time funds during a budget shortfall.

9. Modernize transportation funding – One reason that tax reform is needed is that some revenue sources have become outdated due to technological developments, such as the gas tax to fund transportation in a world of increasing fuel efficiency. This negative budget pressure can be resolved by replacing the gas tax with a mileage-based fee, calculated annually by reading a car’s odometer when its registration is renewed and paid through monthly, quarterly or annual installments.

10. Reduce demand for education funding – A factor that complicates tax reform is the current and projected high demand for more education funding, due to growth in public school enrollment. This pressure can be alleviated somewhat by creating an income tax credit for families who choose to remove their child from public school in favor of home schooling, or by establishing an education flex-spending program that allows families to use a portion of their state education tax dollars to personalize a path that fits their child’s unique academic needs outside of the public school setting, while the remainder of those state funds continue to go to the school district in which the child resides.