State officials knew all along that proposed sales tax changes, including removing the sales tax on food, would have an impact on local governments and transit spending -- but a new analysis says that the changes could be illegal and unconstitutional.

Two bond law firms spelled out the scenario in a letter that reached Gov. Jon Huntsman Jr. and state lawmakers last week, and the conclusions have thrown a monkey wrench into plans to enact substantial sales tax reforms.

At issue are bonds issued by cities, counties and other local entities that rely on sales tax revenue to pay back the money.

Substantially changing the sales tax could violate sections of state law and the state Constitution that prevent the state from changing an existing contract except in certain, narrow circumstances.

Violating those provisions could hurt the state's bond rating, making it more expensive to borrow money in the future. Bondholders also could call for the money to be repaid immediately, which could wreak havoc with public finances.

There are about $1 billion in bonds issued by 28 cities, eight counties and the Utah Transit Authority that are backed by sales tax revenues. The analysis was prepared by Ballard Spahr Andrews and Ingersoll, and Chapman and Cutler, both Salt Lake City bond firms.

The bonds are an important financing tool for all local governments, said Lincoln Shurtz, legislative analyst for the Utah League of Cities and Towns -- one they can ill afford to jeopardize.

"I think there's a solution out there. We just have to find it," he said.

One bill pending in the state House of Representatives would remove the sales tax on unprepared food. The legislation affects communities in different ways, with some entities receiving less revenue and some receiving more.

The differences are small, however, and that legislation isn't of much concern because it contains an offset provision to keep local governments and other entities from being harmed from the removal, said Chris Bleak, chief of staff for House Speaker Greg Curtis, R-Sandy.

Bleak said that bill will be heard on the floor of the House "shortly."

Removing the sales tax on food is a legislative priority for Huntsman and House Republicans. The Legislature also is considering sales tax breaks for many industries this session -- and that's where concern emerges, Bleak said.

"Have the state's hands been tied relative to other sales tax changesfi That's the question," he said.

Legislation enacting a moratorium on new sales tax revenue bonds has been endorsed by Huntsman, Curtis and Senate President John Valentine, R-Orem.

"We don't want to have this particular funding mechanism generating our tax policy," Valentine said.

Senate Republicans aren't as enamored of removing the direct sales tax on food, and Valentine on Monday used the bond analysis as an example of why it would be better to institute a per-person income tax credit to reimburse people for the tax they pay on food.

That method wouldn't cause the same problems with sales tax revenue as removing the tax at the register, Valentine said: "This, again, illustrates why it's a more elegant solution."

This story appeared in The Daily Herald on page A1.