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Utah’s Governor Seeks Sales Tax Reform

Utah Governor Gary Herbert can claim many accolades. He boasts a 70 percent approval rating, higher than any major officeholder in the state. He is only the third Utah governor to serve more than eight years in office, another testament to the regard people have for him. And, if current trends continue until June 2019, he will lead Utah during its longest economic expansion on record (121 consecutive months).

These are impressive credentials, but I want to salute him for something equally impressive: a rare political trait called courage. Gov. Herbert, who has said he will not seek re-election, has proposed to modernize Utah’s sales tax system and this act of political valor deserves our support and praise.

Think of it this way: Gov. Herbert could coast through the next two years enjoying the second floor of the State Capitol, the mansion on South Temple, his fleet of black SUVs, and a long list of ceremonial appearances. Instead, the governor is putting the state’s interests above his own. He has chosen to finish strong by pursuing one of the most vexing political challenges: making changes to what people pay for the benefits of citizenship.

After working in the Utah state budget office for 16 years, among the many lessons I learned is that tax reform is not for the faint of heart. When you reform taxes you change the rules and force some people to pay more and some people to pay less, all for the good of the whole. The people who pay more don’t take the change lying down, they come after you and make life difficult.

For example, Governor Norman Bangerter, who governed during a challenging economic time when both Geneva Steel and Kennecott Copper closed, raised taxes. He nearly lost re-election.

Governor Michael Leavitt, who governed during a period of prosperity, lowered taxes but also eliminated many sales tax exemptions (a tax increase) to help with school equalization. These exemptions were eventually restored, making the reforms short lived.

Governor Jon Huntsman, who governed during a boom and bust, introduced a flat income tax rate. This was a tax reduction, not tax reform because everybody’s tax liability dropped. It’s important not to confuse a tax cut with true reform.

Gov. Herbert came into office during the worst economic conditions in modern history has helped to engineer an impressive economic recovery. Now, he has chosen to use this prosperous time to address a structural problem in Utah’s sales tax. He knows that if we act now, we can avoid making even more difficult decisions during hard economic times. It’s time for a tax reform.

So, what’s the case for reforming Utah’s sales tax? In a dramatic shift, the sales tax base has declined from 67 percent of personal income in 1980 to 42 percent today.  If this trend continues, analysts project the sales tax base will decline to 35 percent of the economy over the next decade.

A variety of structural trends are eating away at Utah’s sales tax base. Two of the largest are an aging population that spends a greater share of income on health care, which is not taxed, and a growing service economy, which in many instances is not subject to the sales tax. If these and other trends are left unaddressed, policymakers will continue to face a growing gap between available revenues and the needs of a growing population and economy. This challenge will intensify with the next economic downturn as well as over time.

Policymakers face a difficult challenge, they must levy taxes that are sufficient, but not excessive. Taxes interfere with the market and impact our state’s competitiveness. At the same time, successful states must invest wisely in education, infrastructure, public safety, and other public needs.

Gov. Herbert has proposed an elegant policy solution, capturing the tax policy triple-play of fairness, efficiency, and long-term sustainability. He wants to lower the sales tax rate (efficient) and broaden the base (fair). Even more, he proposes a $200 million tax cut, which rewards hardworking Utahns for their contributions to the current revenue surplus.

A French finance minister once said: “The art of taxation consists of plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.” I commend Gov. Herbert for plucking the goose and making this well-informed, data-driven tax reform policy a part of his public service.

 

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