States often fail at tax reform. But few efforts flop as spectacularly as Utah’s did.
Utah passed sweeping tax reform legislation in December 2019. Utah repealed it a month later.
“I commend the legislature for their courage and forward thinking,” said Republican Governor Gary Herbert after the legislation passed. “[Tax reform] will improve the future of our state and its people.”
“My belief would be it’s probably not only push the reset button but maybe the pause,” Herbert said just a few weeks later when he announced his support for repeal.
The doomed law included both tax hikes and tax cuts. It would have expanded the state’s general sales tax base to cover a few new services such as landscapers, limousines, and yoga studios, and levied the sales tax on purchases of motor fuel (in addition to the state’s motor fuels excise tax). It also would have increased the state’s sales tax rate on groceries from a preferential 1.75 percent to the full 4.85 percent that applies to other goods.
The legislation also would have cut the state’s flat corporate and individual income tax rates, and created both a refundable earned income tax credit (EITC) and refundable grocery credit (phased out for higher earners). The net effect: a $160 million tax cut in its first year with much of the benefit delivered to higher-income filers.
State tax reform—especially because of balanced budget rules—requires policymakers to honestly grapple with tradeoffs and to clearly articulate the goals they are trying to achieve. Utah’s policymakers failed at both.
Herbert kicked off the effort in January 2019 with a solid tax policy message in his state of the state address. His focus was the sales tax, his goal was long-term revenue stability, and his tradeoff was taxing more purchases but at a lower rate. “Good tax policy,” he said, “requires broadening the base so that everyone pays their fair share and good tax policy also requires lowering the rate so that everyone pays less.”
In the speech, the governor did tax policy wonks proud by discussing how the sales tax mostly applies to goods but that increasingly consumers are purchasing services—his example was a taxable buggy whip and a tax-free Lyft ride.
But then Herbert made an all too common mistake. He announced the popular part (his sales tax rate cut from 4.85 percent to 1.75 percent) but not the hard part (how he’d broaden the sales tax base).
Getting the rate that low via base broadening was never feasible. States often exempt necessities, such as medical expenses and education. States also typically exempt business-to-business transactions because they know firms will pass on those taxes to customers. And most states exempt professional services such as lawyers and doctors, both because they fear residents will buy them across state lines (Hawaii is the illustrative outlier) and because many service providers have powerful lobbies.
In February, Republican legislators released an outline of a bill that followed the governor’s reform pitch. The proposed bill got the state’s sales tax rate down to 3.1 percent by taxing health insurance premiums, legal services, real estate deals, and a host of other services. Its authors said the legislation was revenue neutral and would slightly shift the state’s tax burden to higher earners (who purchase more services).
The bill quickly died after the business community pushed back.
But Utah didn’t give up. Instead, the governor and legislature created a task force to gather public testimony, study all the issues, and recommend reforms.
The task force’s recommendations, plus a higher-than-expected fall revenue forecast, turned a revenue-neutral, cut-the-rate and broaden-the-base plan into the revenue-losing, sweeping tax plan that hiked the groceries tax and cut income taxes.
The legislature quickly passed this version during a special session in December. Voter pushback was immediate and focused squarely on the grocery tax hike.
There’s an argument for taxing groceries and offsetting the burden with credits—and the bill deserved praise for makings its grocery tax credit refundable. But it is a tough political sell. There’s a reason only 12 states tax groceries, of which six (including Utah) do so at a lower rate than applied to other goods.
Yet, Utah legislators thought taxing groceries was an easy way to pay for income tax cuts. But that was very different from Herbert’s original goal of modernizing the state’s tax code. The new goals and tradeoffs were never fully explained to Utahans. And it backfired.
Opponents immediately began collecting signatures for a repeal referendum—often at grocery stores. As soon as it appeared opponents had enough signatures to make November’s ballot, the legislature repealed the law itself with a nearly unanimous vote.
There was a lot of good in Utah’s abandoned tax reform. Taxing more services is good. A refundable EITC is good. But it quickly got lost in a grocery tax debate that policymakers did not prepare for.
In his 2020 state of the state address, Herbert said he’ll try again: “Tax modernization is still needed in order to have sustainable funding for public education, Medicaid, and other critical, core government services.”
That’s an admirable goal. I hope he has better luck next time.
