Why Utah should reform the state sales tax system

Originally published in the Deseret News.

Former Utah Gov. Mike Leavitt served during the state’s longest economic expansion. He once told me, “Decisions more than circumstances really shape our lives and our communities.” It’s a profound statement. We become our actions, not our inheritance. Utah policymakers would do well to keep this aphorism in mind as they grapple with tax reform this legislative session.

Utah faces a structural sales tax challenge. Taxable sales as a percent of the economy are shrinking, declining from 67 percent in 1980 to 42 percent today. That’s a dangerous trend even in good economic times, but in a downturn could compromise the state’s long-term prosperity and life quality.

To their credit, Gov. Gary Herbert and lawmakers are asking two important questions: Can we use this prosperous time to address the structural problem in Utah’s sales tax? If we act now, can we avoid making even more difficult decisions during hard economic times?

There’s a public policy rule that applies here. When you kick cans down the road, they pile up. The federal government is doing that with entitlement reform. Congress knows we need to reform Social Security, Medicare and Medicaid, but nobody exerts the political will to rein in spending. The problem gets worse and solutions get harder the longer policymakers wait. Look no further than our nation’s $16.1 trillion of debt owned by the public.

Utah leaders are different. They don’t let the cans pile up. Throughout Utah’s history, governors and legislators have made tax and expenditure decisions with an eye to the future. These past decisions propel our current prosperity.

During the 1980s a significant and lasting surge in school-age population and a recession impacted state finances. Utah’s two largest employers — Kennecott Copper and Geneva Steel — shut down. State policymakers made the difficult decision to raise sales and income taxes to address the needs of public education. It worked and helped kick off a sustained economic expansion.

During the 1990s the governor and Legislature leveraged revenue surpluses from a booming economy into substantial investments in water, highway and transportation infrastructure. The state even advanced funding, which was eventually repaid, for Olympic venues before winning the bid. Policymakers also funded the preservation of the State Capitol Complex. They did all this and also cut the state sales tax rate twice. Decisions determine destiny.

During the 2000s the Legislature and governor made sizable sales, personal income and corporate income tax cuts and reduced the sales tax rate on food while significantly expanding the personal income tax base. They allocated funds to major transportation projects like the I-15 expansion and Legacy Parkway. When state revenue dropped severely during the Great Recession, lawmakers mitigated the impacts because they had already reformed public pensions, set aside surplus funds for public education, and cash-funded infrastructure to preserve debt capacity. Choices matter.

Since 2010 the Utah Legislature has addressed revenue volatility and stocked up the state rainy day funds, which have more than doubled since 2011. We stand ready for a change in the economic winds.

But there’s another important decision. The powerful structural trends of aging, growth in the service economy, remote (internet) sales, and rising health care costs are eating away at Utah’s sales tax base. Policymakers face a growing gap between available revenues and the needs of a growing population and economy. This challenge will intensify with the next economic downtown.2c

I’m proud to live in a state where we think long term and practice fiscal responsibility. Modernizing Utah’s sales tax structure will require deft policymaking. Lawmakers will need to find the right policy mix. Some people will have to accept new taxes, as the tax system overall becomes more fair, efficient and revenue-sufficient. As they do so, they’d do well to remember another mantra, frequently quoted by former Gov. Leavitt: Utah can fight change and lose, accept change and survive, or lead change and prosper.

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