SALT LAKE CITY — A proposal to change the way municipal sales tax is collected and distributed has been under preliminary review in the state Legislature. But the proposal is controversial because a new formula would mean some cities and towns would get more money at the expense of others.
Currently, municipalities have the ability to impose up to a 1 percent sales tax on retail purchases. Of the revenue collected, half is distributed in the locale where the purchase was made — called point of sale. The other half is put into a fund that is distributed statewide to each of the 245 Utah cities and towns based on population, explained Royce Van Tassell, vice president of the Utah Taxpayers Association.
The current formula has resulted in many cities targeting retail development as a way to increase their portion of the overall sales tax revenue. Cities that provide retailers with tax subsidies tend to get more development, Van Tassell said.
"They steal them from one city so that they get a greater share of that 50 percent that is based on where the transaction occurs," he said.
Citing the examples of Jordan Landing and The District, both of which were financed with taxpayer subsidies, Van Tassell said large retail projects have primarily been developed in areas that use incentives, leaving municipalities that do not offer tax breaks "languishing."
"Those subsidies don't really get you anything," he said. "Providing a subsidy to a retailer doesn't mean you are going to have more retail transactions. … It does not grow the size of the overall economic pie. It just gets the city a bigger slice of the existing pie."
Van Tassell said the Utah Taxpayers Association supports a change that would split sales tax revenue into thirds, rather than the current 50-50 division. Under the new proposal, one-third would be based on point of sale, one-third on population and one-third on the total payroll in that city.
He said the new system would be more equitable because it would remove the incentive for cities to try to get "a bigger piece of the pie" and instead "increase the size of the pie."
The hope would be to attract companies that would bring higher-paying, career-type jobs into cities, rather than lower-paying retail positions, Van Tassell said.
"Bringing in retail, where the only employees are effectively a few people making $8 an hour isn't going to change your city's payroll profile," he said. "But if you bring in a (manufacturing) plant, where you've got 1,000 new employees who are making 125 percent of the county average (income), that's going to change your employee profile."
That kind of development would grow the overall size of the economic pie, he said.
The issue has been discussed for several years, but has yet to gain traction within the state Legislature.
"It's hard to change the distribution formula without some negative consequences … (resulting in) winners and losers," Sen. Ben McAdams, D-Salt Lake City, said.
However, McAdams said there should be some recognition that attracting high-paying jobs to a city should have some kind of tax incentive.
"Cities should be compensated so that they can provide the services for those businesses, which they are not right now," he said.
Adding wages into the sales tax distribution formula has some merit, McAdams said, but the challenge is that city budgets are "built upon the currently agreed upon 50-50 balance."
He said figuring out how to redistribute the current pie would take time. And currently, there is no timetable for implementing such a plan.
"It needs to be phased in over time," McAdams said. "We need to respect those communities that have made long-term decisions based on the current distribution formula."
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