Ski resorts in Utah don’t have to pay sales tax on the electricity they buy to operate lifts. Amusement and water parks, however, do.
That’s just one example of how a sales tax exemption can favor one business over another, similar one, as it creates market distortions.
It’s also just one reason why state lawmakers need to make sales tax reform a priority when they begin their annual session later this month. If the state’s 91 sales tax exemptions (the number as of last spring) went away, the state could lower the overall tax rate significantly and still raise the same amount of money.
Gov. Gary Herbert has proposed a reform package that would do some of this while also giving Utahns a $200 million cut in the overall sales tax the state collects — effectively giving back some of the state’s projected $1.3 billion in surplus funds. He would lower the state’s portion of the sales tax from 4.7 percent to somewhere less than 3.9 percent.
Lawmakers might be able to do even better than that. A study last year by the nonpartisan Utah Foundation suggested the state could reduce the effective tax rate to 2.1 percent if it began taxing all personal consumption transactions. This would include parts of the service industry, such as haircuts, that currently are tax-exempt.
This isn’t just a question of good governance. It’s a fairness issue.
Property taxes often affect the poor the most, as the burden gets passed on to renters. Income taxes exempt the poorest earners, but they punish productivity and ambition.
Sales taxes may be the same for rich and poor, but for the most part they are voluntary. People pay them as they choose to purchase items. The state has lowered the tax on food items that are necessities for life, and that practice ought to continue. But reducing the tax while extending it to more transactions would hardly be a burden on consumers.
The report also said Utah has experienced the second-biggest decline in taxable sales as a portion of consumer services over the last 45 years. To put that in perspective, 44 years ago Utahns paid more in sales taxes than for property or income taxes. Now, it is the smallest of the three. In addition, the state now earmarks much of its sales tax revenue to specific programs, further eroding the tax’s effectiveness.
One word of caution — reforming the sales tax will be much easier to talk about than to actually accomplish. Through the years, lawmakers have complained about the need to reduce exemptions, and yet they often fall prey to new arguments that extend the problem.7 comments on this story
Many sales tax exemptions come with strong arguments. Often, a business that employs a lot of people will argue that an exemption is necessary for growth and the overall good of the economy. Each exemption state lawmakers try to remove likely will be met with resistance through robust lobbying.
Utah’s political leaders must keep their focus on the overall picture. The idea is not just to tax more transactions, but to reduce the overall tax rate. This would reduce any harm the tax might do to a business while also strengthening the state’s overall tax structure.