Just hours after the state’s long-anticipated tax overhaul plan was posted online, a formidable line of industry representatives were already arrayed to pick it apart.
Attorneys — whose legal services could be newly taxed — began accusing the Legislature of trying to impose a “misery tax” on people seeking counsel during some of life’s worst moments. Medical insurers, who face a new, 1-percent health premiums tax, said that cost will be passed right along to their customers. General contractors are worried about “stackable taxes” that would build up during each step of a construction project, making the end product that much more expensive.
“We tried to piss everybody off equally, so that we weren’t picking winners and losers,” the bill’s sponsor, Rep. Tim Quinn, told a group of business representatives Wednesday evening. “And it is working.”
Legislative leaders and executive branch representatives have spent weeks working behind the scenes to craft a plan for updating a sales tax policy designed for a different era. In the past, more than half of consumer spending was directed toward goods generally covered by the sales tax. But over time, the economy has become less about merchandise and more about service transactions, which are largely outside the umbrella of the sales tax.
That would change, under the 257-page bill released Wednesday night.
To describe the sweeping sales tax expansion laid out in HB441, Quinn has explained, it’s quicker to list the services that would be excluded from taxation than the ones lumped in. Tuition, rent payments and most medical services would remain untaxed, he said. Almost everything else would be fair game.
Meaning accountants, lawyers, barbers, landscapers, construction contractors, architects, plumbers, plastic surgeons, Uber drivers and others could see the sales tax coming for their industries.
(Christopher Cherrington | The Salt Lake Tribune)
Still, the bill isn’t written to create a windfall for the state.
While broadening the sales tax, the legislation would lower the tax rate from 4.7 percent to 3.1 percent. It would also cut the income tax rate from 4.95 percent to 4.75 percent and provide some additional tax credits.
Lawmakers involved in writing the bill have stressed that they don't want to let anyone off the hook. To that end, they've suggested imposing a 1-percent tax on health insurance premiums, rather than taxing medical services. They're also looking to levy a .075-percent transfer tax on property sales, including homes and commercial real estate.
When all is said and done, the changes are intended to be revenue-neutral overall, meaning the state would not collect any more or less money.
Gov. Gary Herbert and House Speaker Brad Wilson had made it their stated goal to achieve a $225 million tax reduction this session. A smaller-than-anticipated budget surplus might have compromised those plans, but Quinn, R-Heber City, has said lawmakers hope to push the income tax rate even lower than 4.75 percent before the bill is passed to yield an overall tax cut.
Though the tax package isn’t what he proposed in his State of the State address, Herbert has signaled support for it as a solution to a sales tax system that is losing steam.
“Is the bill perfect? No. But then, most bills that are passed aren’t,” Herbert said Thursday during his monthly news conference at KUED. “But this is certainly a step in the right direction, I think, for us to help our stability and fairness in the system and put us on the road to continued prosperity.”
State officials have acknowledged passing broad tax reforms is no easy undertaking. But during a Wednesday evening meeting with business leaders on the measure, Wilson said he believes the political will exists to get it done this year.
“There’s a high degree of commitment from the House, the Senate, as well as the governor to do something about this this session. We will leave here with something,” the Kaysville Republican told the group gathered in the State Office Building auditorium.
On Thursday, the Salt Lake Chamber came out in support of Quinn’s bill.
In a prepared statement, Derek Miller, the chamber’s president and CEO, said tax reform will provide a stable source of money for government services, and lowering tax rates will create an environment that “allows business to flourish.”
Only Hawaii, New Mexico and South Dakota impose a broad tax on services, and those states have always done so, said Liz Malm, senior director of strategic government relations and an economist for MultiState Associates, a trade group that tracks state taxes.
And efforts to expand taxes to services have run aground in states such as Florida, which repealed its law after only six months amid an outcry from various business interests, according to the Tampa Bay Times. Just last year, voters in Arizona passed a ballot initiative banning new taxes on services.
"There's been some selective expansion to specific services here and there over the years, but no successful broad expansion like in the Utah bill. And these have been on personal, rather than professional services," Malm wrote in an email.
Already in Utah, many professional groups are raising objections about the proposal.
The Utah State Bar, for instance, says clients should not be taxed for hiring a lawyer to guide them through a divorce, domestic violence situation, bankruptcy or personal injury case.
"While we want to constructively contribute to a dialogue concerning good public policy, we do not believe that when people and businesses reach out to lawyers for vital legal help at critical times they should be burdened by a sales tax," H. Dickson Burton, president of the Utah State Bar, said in a prepared statement. "We believe that this tax would create an undue additional burden to the access to justice for Utah citizens and would truly be a 'misery tax' for many who are seeking counsel when in crisis."
The size of the bill and its broad definition of a "service" mean it will take time to digest and understand how it could affect different businesses, said Susan Speirs, CEO of the Utah Association of Certified Public Accountants. With only two weeks left in session, in-depth analysis will be challenging, she said.
“There are a lot of questions in this bill. More questions than we have answers, at this point,” she said Thursday. “This is something that’s a two- to three-year proposition. Not a 10-day proposition.”
Richard Thorn, president and CEO of the Associated General Contractors of Utah, warns of the potential for a tax “layering effect” in construction and other industries; in other words, taxing each type of work performed along a production chain could lead to snowballing costs, with the consumer paying the price at the end, he said.
The bill’s authors have said they’ve gone out of their way to avoid this effect by excluding certain services from the sales tax, but Thorn says industry members deserve the chance to study the potential implications of such a seismic tax policy shift.
“These are going to be potentially huge changes over what our business community has been dealing with for many years,” Thorn said. “It makes us a little bit nervous because we believe we’re in an industry that could potentially be paying multiple times for the same project.”
Thorn said he’d prefer that state leaders form a working group that could design a tax reform plan over the interim.
“None of us like disruption," Wilson, the House speaker, told business representatives.
“This is going to be very disruptive for me in what I do for a day job,” said Wilson, who like Senate President Stuart Adams and a number of others in the Legislature, is a developer. “But the bigger picture for me is I like owning a business and growing a business in Utah.”
The state’s healthy economy will be in jeopardy, he warned, if the government is starved of revenue because of the shrinking sales tax base and lacks the wherewithal to invest in roads, air quality, social services and “all the things we need.”
The proposed tax on insurance premiums, projected to generate $66 million in yearly revenue, is causing heartburn to Kelly Atkinson, executive director of the Utah Health Insurance Association. Insurance companies in Utah operate on razor-thin profit margins, and they couldn’t afford to absorb the proposed tax themselves, he said.
“I can assure you that if the state of Utah passes a premium tax ... that tax will simply be passed on in the way of higher premiums,” he said. “You don’t have to be a rocket scientist to figure this out.”
— Tribune reporter Lee Davidson contributed to this article
