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Last month the Wall Street Journal editorial board penned a scathing critique of Connecticut’s gamble with state tax reform. Here's what this means for Utah

Utah’s Tax Roulette

Last month the Wall Street Journal editorial board penned a scathing critique of Connecticut’s gamble with state tax reform.

Democrat Gov. Ned Lamont proposed a massive tax package which included a hefty lift in the capital gains tax. More shocking, however, was Gov. Lamont’s proposal to levy a series of new taxes on services, including on Netflix, legal services, ride-sharing, haircuts, and much more. These new taxes were masqueraded as a necessity to keep up with the new service economy (an increasingly common refrain that’s more transparently restated as “innovation must be taxed!”).

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In a state becoming more hostile to business, much of Gov. Lamont’s proposal was embraced and rubber-stamped, including an increase in capital gains tax. However, not even the ultra-liberal Connecticut legislature could stomach burdening services in the state with sweeping new tax reform. Wisely, the legislature stripped out the new service taxes from the governor’s proposal, sparing Connecticut’s economy from even more severely depressed growth, at least for now.

Sound familiar?

Over 2,000 miles to the west, Utah citizens and businesses are gasping in disbelief as the same saga plays out — this time at the behest of a Republican governor who professes to be “business-friendly” (an increasingly empty term given the actual and proposed burdens he imposes on Utah businesses).

FIRST THINGS FIRST

Let’s first remember that Utah is enjoying a revenue surplus in excess of $1.2 billion. And yet Gov. Herbert and the Legislature demand more revenue. What’s up with that?

The answer, as many leaders have pointed out, is they’re trying to solve the wrong problem. There is a real problem in our state, and it is well worth addressing. But any honest observer must admit that Utah does not currently have a tax revenue problem. No, it has a tax allocation problem. Why is this?

A Depression-era amendment to the Utah Constitution mandates that all state income tax revenue be earmarked for public education (and since 1996, also for higher education). This archaic amendment handcuffs the Legislature from accessing the billion-dollar revenue surplus for non-education expenses. Many parts of Utah’s budget are left high and dry — even as untouchable income tax revenues continue to grow. And so Gov. Herbert and friends push to levy a new tax on tech and services to meet these perceived shortfalls.

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Instead of these massive tax overhaul proposals, which will jeopardize our thriving tech-based economy currently driving Utah’s unprecedented growth, our Legislature and citizens should address the root problem. Specifically, let’s amend the Utah Constitution to free up income tax revenue for general use at the discretion of the Legislature. After all, we elect the Legislature to allocate tax revenue. We should let it do its job.

GATHER ALL THE INFORMATION

Once we’ve amended the Constitution, and before hastily pursuing additional tax reform, we should gather all data necessary to forecast the effects that a Connecticut-like policy would have on Utah’s future economy and on individual Utahns and businesses.

The Supreme Court recently upended historical sales tax precedent in South Dakota vs. Wayfair. As a result, Utah’s sales tax revenues are projected to increase dramatically as sales tax is extended to e-commerce transactions. At the very least, Utah should adopt a wait-and-see policy for the next 3-4 years while this seismic shift in national sales tax policy plays out. It is very possible that — paired with the constitutional amendment — this change will solve our tax allocation issue.

Put simply, the leaders of our state should operate with the same prudence that the leaders of Silicon Slopes use to build their companies. As my own company, Neighbor.com, looks to expand our footprint nationwide, we’ve performed extensive analyses of new markets for the better part of a year. On the other hand, no one has performed or published a credible economic impact study for the Governor’s proposed tax overhaul. Would it be too much to ask our state leaders to commission an independent, multi-year impact study before upending decades of historical tax precedent? Such a study should show the impact on varied businesses, individuals, and counties across the state.

THE CURRENT TAX REFORM SITUATION

Many state leaders, including legislators, have privately expressed support for a constitutional amendment in lieu of a tax increase. Some, especially those not beholden to the education lobby, have begun laying out elegant frameworks for a path forward to a constitutional amendment.

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Nevertheless, other legislators feel pressured by leadership to swallow a poor solution instead of pursuing the right one. Rather than fixing the tax allocation problem, they and Gov. Herbert seem fixated on the Connecticut nuclear option. Indeed, a “dream team” of 10 lawmakers was just assembled, and some would like to revive H.B. 441 in special session. That would be a big mistake.

Similarly, after the firestorm and backlash from H.B. 441, there is now talk of selectively applying the proposed service tax by NAICS code — in true Gosplan fashion — to only those services with little political clout (e.g., hair salons, landscaping services, piano teachers, and consumer startups), carefully avoiding industries with the money and influence to cause a fuss a second time. However, selective picking and choosing winners and losers through tax policy is bad lawmaking and will almost certainly result in the weakest industries being damaged the most.

WHAT CAN YOU DO?

It’s easy to cast blame at what Sen. Ben Sasse concisely calls “them.” The reality is that we are fortunate to live in one of the most prosperous states in America. Most of our leaders are dedicated and sincere in their efforts to make Utah thrive. And they get many things right.

But that doesn’t mean we should cede control or credit. At the recent Utah Economic Summit, I was asked what I perceive is driving the rapid growth in Utah’s economy. This was my response:

Utah is outpacing every other economy in the United States because of its people. You can’t find a more concentrated group of highly talented, hardworking, and industrious people anywhere else in America.

Yet politicians are quick to grab photo ops in the glimmering new office complexes of Utah’s successful technology companies and proclaim that their policies drive Silicon Slopes’ success. Sometimes we need to offer our politicians a gentle reminder just how difficult it really is to build and operate a business. We need to let them know that every incremental regulation and tax takes life from new enterprises — like your businesses and mine.

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On the heels of a legislative session that set a historic record for new laws (574 enacted bills, with only one full veto mustered by the Governor), now is the time. Call your legislators and ask them to support a constitutional amendment that will fix the tax allocation problem. Ask them to oppose selective imposition of new taxes on small companies and service providers. Encourage leaders to gather the necessary impact data before upending years of tax precedent. Donate to and support gubernatorial and other candidates willing to push forward a constitutional amendment. And boldly denounce the service tax increases for what they are.

The leaders of this state are good people. They will listen to our sincerely held beliefs and ideas. We can work together to fix the real problems of tax reform. As long as the government doesn’t throw up roadblocks, nothing can stop Silicon Slopes. Let’s urge our political leaders to join the leaders of Silicon Slopes in solving the right problems in simple and innovative ways.

By Joseph Woodbury,| Founder/CEO|Neighbor.com

Utah’s Tax Roulette was originally published on Silicon Slopes