Tax Reform White Paper

TAX REFORM WHITE PAPER SALT LAKE CHAMBER AUGUST 2019

Introduction

Utah is consistently recognized as one of the nation’s most diverse and highest-performing economies. This is due in part to a tax structure that has allowed business to thrive. As the legislature considers comprehensive tax reform, Utah’s business community emphasizes the importance of a tax policy that supports and enables our continued economic prosperity and population growth. Modernizing our tax structure should never compromise Utah’s strong business climate. Achieving such a policy requires an intensive process incorporating solutions that take into account both the state’s revenue and taxation as well as ongoing and one-time expenditures.

Sales tax which currently accounts for 88 cents of every dollar in Utah’s general fund, is also the most obviously flexible source of revenue. With taxable sales as a percent of the economy shrinking, critical budget decisions will be an increasing challenge as the imbalance between revenue sources grows.

Without changes to Utah’s tax structure, the pressure will increase to raise rates on either a narrow sales tax base or the income tax. The results of an income tax increase would negatively affect business and our state’s economic competitiveness.

Beyond looking at taxation and revenues, Utah leaders should also evaluate state spending to accomplish meaningful tax reform. A holistic approach to tax policy includes a full evaluation of current spending levels and an honest assessment of the revenue sufficiency needed for state government. Greater transparency in state budgeting decisions and processes leads to government efficiency and a heightened awareness of the utilization of taxpayer dollars.

Comprehensive tax reform is possible as legislators and stakeholders work to take a broad-based approach that examines all aspects of the state’s budget.

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The Chamber’s Process and General Consensus

Changes to the tax structure will directly impact our economy and in turn, every business across the state. As such, the business community welcomes the opportunity to contribute to the discussion and provide constructive ideas to the Legislature.

On April 17, the Salt Lake Chamber invited representatives from the legislative and executive branch to meet with over 100 members of the business community during a tax reform informational session. Over the subsequent two weeks, the Chamber convened eight industry working groups to consider more specific ideas and solutions. The remainder of this paper outlines the specific considerations these working groups discussed as well as consensus recommendations for moving forward. The groups included over 300 participants and organized into the following industries: • • • • • • • •

Construction/Building Education Financial Services Health Care Information Technology Legal Manufacturing Small Business

Three overarching themes emerged from the 16 hours of working group meetings: first, the need for a better, clearer understanding of the problem the Legislature is seeking to solve and improved communication of that problem. A clear and concise message should be established and broadly communicated, including a common set of data points that can be drawn upon and disseminated widely. Second, establishing a clear definition of what constitutes a ‘business input’ is paramount.

As sales tax is designed to be a tax on final consumption, business to business services should generally be excluded to ensure we do not hinder our competitiveness and potentially drive business out of state. Third, any reforms should include a robust evaluation of current spending levels. True tax reform cannot be accomplished without looking at both expenditures and revenues.

Suggested Considerations

Businesses feel strongly that everything tax-related should be part of the tax reform discussions including but not limited to: • Taxing Services • The legislature’s review of taxing services should focus where final consumption is not currently captured and carefully avoid tax pyramiding (double taxation or a tax on a tax) and exclude business to business inputs. A clear definition of what or what not constitutes a valid “business input” should be established.

• State Budget Procedures • A rigorous review of current expenditures, including social services, entitlement programs and earmarks will provide greater transparency and efficiency.

• Wayfair and Marketplace Fairness • On June 21, 2018, the Supreme Court allowed states to impose a sales tax collection on remote sellers. Following this decision in a special session, the Utah Legislature passed S.B. 2001, Online Sales Tax Amendments, which allowed the state to start collecting sales tax from marketplace retailers. With revenue now being collected on internet sales, reliable projections and data should be compiled addressing the impact these policies have on the state budget.

• Income Tax Constitutional Requirement • Utah is the only state that constitutionally earmarks 100% of personal and corporate income tax to higher and public education. A robust discussion with education stakeholders on how to give lawmakers the flexibility to make budget decisions is needed while ensuring education funding is protected.

• True User-Fees • Over time, the use of technology should help achieve a true user fee for water and transportation investments.

• Excise Tax • Excise taxes should be considered on discretionary items while avoiding disruption to economic growth.

• Sales Tax on Food • In 2006, the state reduced the percentage of sales tax for non-processed food. Lawmakers should consider a full rate restoration, along with an earned income tax credit (EITC).

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These considerations are consistent with recently released national reports which can provide additional context on the subject of tax reform and the impact of sales tax on business inputs, specifically the Tax Foundation report and the COST/STRI/EY report.

Conclusion/Summary

Utah is consistently recognized as one of the nation’s most diverse and highest performing economies. For Utah to remain strong during this period of growth, the state needs a balanced and fair tax policy that honors Utah’s business climate as the foundation of our prosperity. The Tax Restructuring and Equalization Task Force and the Legislature as a whole should focus on the following guiding principles while updating Utah’s tax structure: • • • • •

Simplicity Efficiency Flexibility Transparency Stability

The business community understands that a deliberative process for comprehensive tax reform – including understanding and clearly communicating the problem to be solved, examining a full business to business exemption on services and addressing both taxation and government spending – will take longer than a few months to formulate and will not be successful without the involvement of industry experts. The Salt Lake Chamber is putting together a group of industry experts that stand ready, willing and able to provide input to legislators and task force members throughout the process. We invite the legislature to call upon this group to find solutions that best support Utah’s continued economic prosperity.

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Enclosed: Supplemental Information • Industry working group consolidated meeting notes • Full list of participants for each working group • Provided as a resource for follow up with any industry leaders or to solicit more feedback from a specific group

SUPPLEMENTAL INFORMATION TAX REFORM WORKING GROUPS

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CONSTRUCTION

Tax Reform Industry Working Group Meeting OPTIONS AND DISCUSSION

Income Tax

• The problem comes from the earmarking of funds. As the economy evolves and changes, we should let the legislature fund in a way the reflects our current economic needs • Concerned about how education will be guaranteed funding without the constitutional amendment. How do we guarantee how education gets what it needs?

• Suggestion to put some social services into income tax like was done with higher education • Have a “trial period” for the passed law where industry can share analysis of impacts with the state

Restoring the Sales Tax on Food

• Adding the full rate back onto food will not help with the stability question because we are already taxing it • Wondering if this option even needs to take place because we don’t yet know the effects of the Wayfair decision • Suggestion to tax all final consumer sales items, but having a grocery sales tax refund

Taxing Services

• Concerned about tax pyramiding • Need to bifurcate personal services from professional services • Would need to define new construction from remodel from rehab, etc.

Other Thoughts

• 1. Look at the spending and what is the role of government. 2. Impose full food tax with carve outs for those that need it. 3. Look at where we can be more efficient • Removing the earmarks on income tax would solve the problem without completely restructuring the state’s economic development • Identify consumptions that are similar to the services that we do tax (i.e. ski resorts) and eliminate similar exemptions while including user fees and taxing the entire base of consumer consumption • Look at payroll fraud in the construction industry

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EDUCATION

Tax Reform Industry Working Group Meeting OPTIONS AND DISCUSSION

Constitutional Earmark for Education - Should the Discussion be on the Table?

• Constitutional amendment is a huge battle - if there is another way to get there we should pursue it. What is the hesitation?

• It’s a matter of trusting the rate that is set • Budget gimmicks - an amendment could actually make it more transparent so we know where the funds for education are coming from • Sales job is incredibly difficult to change this • Transparency piece is important • What is the appetite for a guarantee?

• Establishing a floor with a percentage - must be a reasonable figure • “Earmark” needs to be better defined - If we are looking at this education earmark - we should look at all the other earmarks too • Most of education funding does go through the appropriation process • There is an equalization issue when we talk about education funding - differences among districts • If this is on the ballot there needs to be consensus - must be ensured that K-12 funding will not be undermined • Consider setting a percent of funding to go to public education • Must understand education system as P-20 not just K-12 - that’s why higher education has to be part of the discussion • Structure for state and local funds is stable for education - value in the stability and predictability • Education is a business investment • Students are leaving after Utahns have subsidized the cost of their education • It would help to know what the 5-year expectations are: • What are the realistic growth rates for public and higher education • All campuses are talking about major enrollment increases • Who is going to pay for the growth?

• Burden on the state in terms of funding - is there going to be revenue?

• Currently the guarantee may be tied to the wrong thing in the constitution. Income tax is variable - maybe if we tied funding to a percentage of the state budget so it could be taken into all of the taxes in the state not just income tax • What is the downside of moving to a percentage of the budget?

• Changing the constitutional guarantee should not be the only solution to our issue - we don’t want to just push everything down the road more

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FINANCE

Tax Reform Industry Working Group Meeting OPTIONS AND DISCUSSION

Income Tax

• Consider creating a sales tax equivalency that uses the same system as the income tax. Any tax measured by income has to go to education. (Won’t work under current state law) • Create something similar to Idaho’s building fund which is a $10 flat fee that is a credit against the income tax that goes into the general fund and is tax neutral • Some believe that putting the purse strings in the hands of elected officials is a good idea while others believe the constitutional amendment was put into place because of the lack of trust towards legislators • Should outline a percentage of the overall budget to go to education if the constitution is amended

Sales Tax Back on Food?

• No direct impact to the financial services industry • Extend the tax on electricity and natural gas if we tax food • Could give a voucher or exemption to those on WIC or food stamps or even lower income earners so they would not have to pay the sales tax on food • If we put the sales tax back on food, we should decrease income tax rate

Property Tax

• The majority of property tax goes to local governments • There is a statewide rate, but the funds initially go to the locals • If we raise property taxes and decrease income taxes we will create winners and losers

Services We Aren’t Taxing But Should?

• What goods do we use that have now been replaced by a service?

• There are exemptions that should be put in such as delivery/installation points, point of sale services that we aren’t charging, remote sellers now have to collect and remit tax, marketplace seller facilitator fee

If Business to Business Transactions are Not Exempt

• Customers will go to someone else • Finance is not always business to business • We can not collect a top line tax because it turns into big bottom line tax • Financial advisors are federally regulated entities and would have to renegotiate contracts with clients to collect taxes

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HEATH CARE

Tax Reform Industry Working Group Meeting OPTIONS AND DISCUSSION

Income Tax

• Finding a way to get the general population to support a constitutional amendment is a challenge but it is possible • Find some rebalancing within the existing structure without a constitutional amendment • 30.4% of the state budget goes to K-12 education • Wayfair decision - can we wait and see what happens with the data in another 18 months • Tax reform task force in 2008 - have we looked at it and looked at what the recommendations were?

Anything we can use without having to recreate the wheel?

• Flat fee on the income tax return that is a credit to your income tax - not measured by income, would move money from the education to the general fund right away • Hold harmless the local levy to keep the same revenue

Restoration of Sales Tax on Food?

• • • •

Everything should be an option - concern about the regressive nature of the food tax Set up an EITC Food security is a social determinant of health - must be a robust exemption for low income people A look at the rainy day fund: • Could it be given to education and then rebuilt to plug a short term hole?

Property Taxes

• Currently statewide levy that’s a pass through back to school districts • Concept would be instead of going back to education it would just go back into the general fund (this is not limited by the constitution) • 12% of the education fund is funded by the statewide basic levy property tax

Other Thoughts

• Low rate on electricity and gas for corporate and residential (2%) should it be raised?

• It is perceived that health care doesn’t pay a lot of taxes - it would be helpful to build what types of taxes the health industry pays, we are paying our share • Multiple levels of insured products - if the proposal continues to have premium tax as part of the solution - it would be worth coming back together to better understand the legal consequences and the different levels of products

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INFORMATION TECHNOLOGY

Tax Reform Industry Working Group Meeting OPTIONS AND DISCUSSION

Income Tax

• Put a floor on education funding don’t tie it to a specific revenue source instead just say legislature must fund education at a certain percentage of the overall budget • Idaho flat fee model - could be done without a constitutional amendment • If the earmark was taking care of education then we wouldn’t be last in the country for education spending • Education is funded more at a state level than a local level - something fairly unique to Utah • What is our funding in higher education compared to other states of similar sizes? - how does that compare proportionally to states of similar size?

• If we are going to face opposition from the education community it’s worth looking at how the money is being spent today • Earmarks - exactly how much higher ed is wading into the general fund vs. income tax?

Sales Tax

• Principle #1: We should start with a full business to business exemption. Professional services are a different animal and should be treated as such • “Services” needs to be better defined • Look at statutorily designated earmarks from sales tax revenues • General fund: earmark to transportation $660 million - should be funded gas tax and user fees, e-tolling to make it so it’s not coming out of the general fund

Full Sales Tax Back on Food?

• • • •

This is one of the reasons sales tax (general fund) revenues have fluctuated A Sales tax you can partially export of “non-residents” Could look at upping the rate on residential gas and electricity Would this alone fix the overall problem? - full tax rate on food would generate $227 million • What is the problem? What is the target # amount? Number, time frame we are working toward would be helpful.

Property Tax

• Flat basic levy - instead of going to education would go to the general fund - bad idea • Data centers and telecomm are the main property in I.T.

True User Fees & Other Ideas

• Other taxes we could tweak: gas tax and utility fees • Utah is 10th highest in the country for wireless taxes • We don’t need a sales tax rate reduction, we won’t need an offset if we implement some of the ideas discussed

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LEGAL

Tax Reform Industry Working Group Meeting OPTIONS AND DISCUSSION

Income Tax

• If the structural problem is that we have abundant income tax, we need to change the constitutional amendment • This is an essential conversation to have, but the education community must be on board • Could say education gets X% of total state budget • This is not the full fix to the problem - just part of the fix • Two perceived problems: • Allocation issue • Keeping consumption taxes consistent with the economy

Sales Tax

There are some products that have shifted to services that we still don’t tax • Huge compliance problem with the “shared economy” • Remote sellers should collect and remit - more of a compliance problem 4 options to stabilize the sales tax base: 1. Restore the full sales tax rate on food 2. Wayfair marketplace facilitator legislation to kick in and see how its operating (it will be 18 months to see the effect) 3. We have earmarks and exemptions in the sales tax to various projects - look at those and cut down 4. There are probably items that were taxed as tangible personal property that because of technology are not taxed that we could now pick up

General Principles/Ideas

• Do not expand it to professional services as capital will flee if we don’t create a good business environment • Must have a full business to business exclusion, it must be about final consumption • Hard to decide point of sale with professional services. Not necessarily about lawyers leaving - it’s that they will take their law firms or lawyer services to another state • Economic development impact will be felt without business to business exemption • Concern with looking at added complexity of the solutions: • Compliance • Messaging and perception will drive behavior • Must take into account the practical implications • Minimize complexity - factors to look for when evaluating solutions • For us to come with good solutions, we really must understand what the goal is

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Restoring the Full Rate on Food

• It would generate $227 million if we restore the full rate with no exemptions (WIC and Food Stamps don’t pay sales tax per federal law) • This would be the best way to solve the problem because people will always need food • Still ways that we can help the poor - EITC or medicaid expansion • A tax that we can partially “export” to non-residents and visitors

Other User Fees

• Should we shift sales tax from transportation? Shifting to road user charge • Electronic tolling - the users of the road should help pay for the road • Car registration fees - we are at the high end • Should be a combination of gas tax, user fees, tolling, registration fees • If we are going to talk about the income tax earmark, all earmarks should be on the table • Sales tax rate at residential natural gas and electricity - at 2% and haven’t been changed • If we are trying to stabilize our tax base, why wouldn’t we look at restoring that to the full rate - would generate $37 million

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MANUFACTURING

Tax Reform Industry Working Group Meeting OPTIONS AND DISCUSSION

Income Tax

• Flat fee on income tax that’s a credit against income and goes into general fund like is done in Idaho.

• We are funding differently and doing a poor job, so maybe we should change to be like the other states • Still confusion over why we have a surplus but aren’t paying it into education if it’s supposedly locked into education

Property Tax

• Changes to property tax is a non-starter for manufacturing industry • Concerned for municipalities • We need stability and predictability • Constitutional lane for funding is the most complicated, property tax is not constitutionally defined which means it could move over to the other funds more easily (i.e. statewide levy being used for general fund instead of local school districts)

Other Discussion

• Really need to define the problem better • Surplus not clarified between one-time vs. ongoing • Need to understand the problem in order to offer solutions • There are some items that we don’t currently tax at the full rate that should be looked at such as electricity and food • True user fee over gas tax

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SMALL BUSINESS

Tax Reform Industry Working Group Meeting OPTIONS AND DISCUSSION

Income Tax Constitutional Earmark Change?

• How do we best fund higher ed vs. K-12?

• Worried education will feel robbed with a constitutional amendment, but maybe an amendment that puts X percentage of the budget into education so the legislature can play with income tax money might make more sense • Wayfair - we need to wait and see what happens here • Idaho building fee concept - flat fee that is a credit against your income tax - this could be allocated to education

Full Rate of Sales Tax on Food?

• If you put the full rate back on food it would generate about $227 million • Decreasing the rate on food has aggravated the problem • We need to make sure people can feed their families, but people on food stamps & WIC don’t pay sales tax anyway. We could set a threshold • We can “export” this tax - people driving in the state of utah, visitors can pay for this - missing out on this revenue

Options to Stabilize the Sales Tax Base

• Restore the full amount on food • See how the Wayfair decision legislation turns out - what increases in the sales tax revenues we receive, marketplace fairness, etc.

• Look at the earmarks of sales tax funds that are currently in the code that pull from the general fund revenues • Transportation (24% of the general fund is earmarked), some water earmarks as well • User fees • Road user charge over gas tax • Tolling • Increasing the fees on what we already have - when you buy a car, registration fees, etc. could be a way to offset • Starting point - identify what is a good that has transformed into a service that we don’t tax? Opportunity to look at the base that was once taxed that is not currently and target those areas to put a sales tax on (i.e. tangible personal property) • Tourism taxes or the lottery

Property Taxes

• Statewide property tax rate or shifting the statewide rate of property tax that goes to the locals from education back to the general fund?

• Property tax options should be considered Tax Reform White Paper | Salt Lake Chamber

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