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Scott G Winterton, Deseret News
FILE - Utah Senate President Stuart Adams, R-Layton talks during an interview at the Capitol in Salt Lake City on Monday, Jan. 14, 2019. Projections of a $1.3 billion budget surplus turned out to be "too good to be true," Senate President Stuart Adams said Friday, shortly before new revenues estimates were scheduled to be announced.

SALT LAKE CITY — Projections of a $1.3 billion budget surplus turned out to be "too good to be true," Senate President Stuart Adams said Friday, shortly before new revenues estimates were announced.

Adams, R-Layton, tried to be upbeat about what is now about $200 million less in money unspent in the current budget year and anticipated revenue growth in the next.

"The economy is still growing. We're still doing good. (It's) a little adjustment," the Senate leader said. "I think we knew the numbers seemed too good to be true and they were."

House Budget Chairman Brad Last, R-Hurricane, said on the House floor later Friday that there is now $529 million in one-time money and $570 million in ongoing revenues projected.

Laura Seitz, Deseret News
FILE - Gov. Gary Herbert reveals his budget recommendations for fiscal year 2020 at Silicon Slopes headquarters in Lehi on Thursday, Dec. 6, 2018.

Last said lawmakers had been aware since the $1.3 billion estimate released in December that "there was some risk in the numbers" stemming from the effects of federal tax changes on state income tax collections.

He also stressed that Utah's economic indicators, including total wages, are still good.

"So the economy seems strong, there was just this little hiccup that we had with the federal tax changes and strategies that Utah taxpayers were using,” Last said, noting this is still "the best year we've had since the Great Recession" a decade ago.

Gov. Gary Herbert said in a statement that Utah is the "most fiscally responsible state" in the country.

“Adapting wisely to revenue estimates is all part of the process, and I trust our legislators will continue to make prudent decisions when it comes to investing these funds on behalf of all Utahns,” the governor said.

In December, the revenue projections produced by the Legislature's fiscal analysts and Herbert's budget office showed the state could expect $646 million in one-time funds and $675 million in ongoing revenue growth.

"That's when the initial celebrations started and when we started talking about the $1.3 billion surplus," Last said.

But lawmakers also made decisions then setting aside some of that money in anticipation of an economic downturn, including planning to pay cash for about $350 million in prison construction rather than bonding.

Senate Budget Chairman Jerry Stevenson said Friday's new numbers mean there "are a lot of requests that are either going to be cut drastically or they're not going to be funded at all" as lawmakers finalize the state budget.

Stevenson, R-Layton, had predicted around a $300 million reduction in revenue projections because income tax collections have been lower than anticipated, with a 10 percent drop in December and a 7.7 percent decline in January.

He said what are traditionally the final revenue estimates for the session that ends in mid-March assume those income tax payments are still coming into state coffers — just later than expected.

The decline in additional revenues is likely to have a big impact on the Legislature's efforts to enact tax reform this session, following the governor's call to expand the shrinking sales tax base by taxing services and lowering the rate.

Herbert said in his State of the State speech the state's current 4.7 percent sales tax rate could be slashed to 1.75 percent. House Majority Whip Mike Schultz, R-Hooper, said this week that getting the rate to 3 percent would be a "lofty goal."

Rick Bowmer, Associated Press
In this Monday, Jan. 22, 2018 photo, Republican Sen. Lincoln Fillmore looks on from the Senate floor at the Utah State Capitol, in Salt Lake City.

Sen. Lincoln Fillmore, R-South Jordan, said it's too soon to say what effect the new numbers will have.

"The revenue neutral reforms, I think, are still on track, at least as much as they always have been," Fillmore said. "But paired with that was going to be some sort of tax reduction, and that is clearly going to be impacted by the revenue numbers."

Fillmore, who is leading the Senate's efforts on what will be a House bill, is referring to a proportional reduction in the rate to reflect new taxes coming in as the base is broadened.

Lawmakers had hoped to also include a $225 million tax cut in the reform plan, to both lower the sales tax rate further as well as make some reductions in state income taxes.

Stevenson, who described the original surplus number as having "evaporated into fiction" when announcing the updated estimate on the Senate floor, was not optimistic about a tax cut this session.

"These numbers will probably make it more difficult to do," the Senate budget chairman said. "You could paint yourself in a corner really fast. … I think we need to be very deliberative and not get ahead of ourselves."

But House Speaker Brad Wilson, R-Kaysville, isn't counting out a $225 million tax cut this session. The speaker came up with the goal in his opening day address, up from the $200 million in the governor's proposed budget.

"No, not necessarily. I wouldn't say that," Wilson said when asked if at least the size of the tax cut would have to be scaled back now that revenues have fallen. "We still have a billion dollars of new money."

Steve Griffin, Deseret News
FILE - House Speaker Brad Wilson, R-Kaysville listens to a motion at the start of the 2019 Legislature at the State Capitol in Salt Lake City on Monday, Jan. 28, 2019.

There does, however, need to be a recognition that not everyone will get what they're asking for this session, he said.

"I think we’ve had very unrealistic expectations on the spending side and people should be curbing their expectations," Wilson said. "When we get tax reform done, then we’ll figure out where to cut taxes and how much."

That could mean the tax reform package will be handled separately from any tax cut, the speaker said.

The tax reform plan has been worked on behind the scenes throughout the session and is not expected to be unveiled until next week in a bill sponsored by Rep. Tim Quinn, R-Heber City.

Few details have surfaced, but Fillmore said Friday there will be a 1 percent excise tax on health insurance policies rather than any sales taxes on medical services, one of the most controversial areas considered.

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He had previously told the Deseret News that prescribed medical services, tuition, and buying a house or paying rent were considered off the table, although cosmetic surgery and other real estate transactions could be subject to sales taxes.

The reason for an excise tax on health insurance policies is to ensure lawmakers are "not picking favorites among sick or healthy people," Fillmore said.

"If the tax comes on the transaction, then what you're doing is making sick people pay more, right?" he asked. "We just want to make sure as all the sectors are involved, that it is simple to administer, that it applies equally to everyone."

Contributing: Katie McKellar