Utah's economy is much improved, according to a Utah State Tax Commission report of second-quarter tax collections that shows a key economic indicator has risen faster than the rate of inflation for the first time in three years.

That indicator, taxable sales, showed an increase of 8 percent from April, May and June 1988 over the same quarter in 1987, outpacing the rate of inflation for the first time since the fourth quarter of 1985.The rate of inflation in the United States for the same three months hit about 5 percent, giving Utah a 3 percent edge over the increase in the cost of living.

The $3.2 billion in taxable sales raised $99 million in state sales taxes, $17.8 million in locally assessed sales taxes, $3.6 million in local transit taxes and nearly $1.3 million in room and resort community taxes.

"It's a positive improvement from the '86-87 economy, which was very, very close to a recession," said commission forecaster Doug Macdonald. "It's a good turn-around."

The actual increase for the second quarter of 1988 was nearly 12 percent, but Macdonald said it was adjusted to account for the payment of $113.5 million in disputed sales taxes by a utility.

Taxable sales, which represent as much as two-thirds of the state's economic activity, have been rising since the fourth quarter of 1987. The Tax Commission had forecasted a 6 percent increase for the second quarter of 1988.

If the forecast of a 4.5 percent increase for all of 1988 holds, the state would see its first annual increase in taxable sales since 1985, when taxable sales rose 2.3 percent over 1984. Declines followed in 1986 and 1987.

Another measures of economic health was not as strong. The amount of money withheld from paychecks for state income taxes during July, August and September went up a scant 0.3 percent over the same three months in 1987.

Macdonald said he did not know why payroll taxes did not match the growth in non-farm income throughout the state, which have been rising since the last quarter of 1987 and was up about 5 percent the quarter ending September 30.

Gasoline tax collections were up 9 percent from the second quarter of 1987 to the same period ending June 30 in 1988. That, and an increase of 8 percent in room taxes during the second quarter, point to a strong summer tourist season, according to Macdonald.

The quarterly report also shows that $60.5 million in income tax rebates have been distributed. Lawmakers approved returning $80 million of the state's $110 million surplus to taxpayers during a special session last summer.