Our legislators have shown courage by stepping into the mine-field of tax reform.
Americans have always been conflicted about taxes. In 1776, we fought against “taxation without representation.” But after gaining independence, some opposed even “taxation with representation.”
Six years after the Constitution was ratified and a representative government established, Pennsylvania distillers threatened violence against a federal tax on whiskey. President George Washington knew from bitter war experience that America needed sufficient revenue to protect its people and promote the general welfare. So he led 13,000 militiamen to impose order, and the tax rebels ran away.
Even 231 years later, the mere mention of taxes unhinges a few. Most of us understand that taxes have to be handled carefully, but we agree with George Washington that our government needs sufficient revenue to protect us and promote the general welfare.
Our legislators claim they want to do Utah tax reform right, and have listed several principles, including these: taxes should be competitive, sufficient, sustainable, stable, fair and transparent.
Competitive: This implies that our taxes should not be higher than what others pay. Nationally, our total tax burden is a much smaller fraction of our output — GNP — than in other developed countries. Our U.S. tax burden ranks us in the lightest six of the 37 countries in the Organization for Economic Cooperation and Development.
Compared to other states, WalletHub ranks Utah’s tax burden at a moderate 27th, and the University of Utah’s Gardner Policy Institute ranks us about average compared to surrounding states.
Our property tax is the 11th lightest in the U.S. and deserves consideration as a possible source of more revenue.
Sales taxes should be competitive to entice buyers to shop here rather than elsewhere. Our sales tax is higher than it is in Idaho and Wyoming, but much less than in Nevada, Arizona, New Mexico and Colorado.
Sufficient: Here is where people can easily disagree, because they have differing priorities. If you value education, we clearly do not have sufficient revenues. Despite our high economic ranking and assigning all of our income tax revenue to education, we have the lowest per-pupil educational investment in America.
Thanks to our educators and parents, Utah students do much better than one might expect from that miserable ranking, but achievement of our K-12 students is mediocre. According to U.S. News, our pupils rank 22nd in the nation, and Forbes rates our school system 30th. That mediocre student achievement is even more worrisome when we consider how poorly U.S. students rank compared to those in other OECD countries — average in reading and science, but near the bottom in math.
Of course many other important priorities exist, such as health care, infrastructure, preschool programs and addiction therapy, so this will require plenty of discussion.
Sustainable: Here is a major problem, which our legislators recognize. Our sales tax only affects goods, not services, although services constitute an increasing fraction of our economy. So our present sales tax — limited to goods — is simply not sustainable and has declined from 67% of our purchases in 1980 to 42% today. One proposal is to tax some services like legal work and accounting. But other services like elder care are done by low-income people, so this has to be handled sensitively.
Another problem is the gas tax, which is supposed to fund transportation. However, it is about $7 billion short of covering our transportation needs. It is about average among states, and raising it might increase revenue as well as encourage Utahns to buy vehicles that pollute less.
Stable: This refers to the reliability of revenue produced by a given tax. Property tax revenues are extremely stable, while income and sales tax revenues vary greatly with the strength of the economy. Sales taxes would be more stable if broadened to include services.
Fair: Our dominant religions all teach fairness, and the International Monetary Fund has succinctly warned that, “Inequality is associated with instability.” So, our taxes should encourage a hand up for the indigent and be sufficient to fund essential services as mentioned above. Furthermore, we should tax luxuries and harmful substances — cigarettes, alcohol, pollutants — much higher than essential and healthful products, such as groceries.
Transparent: Over the years Utah has added dozens of exemptions to sales tax, including amusement devices, hay and the Heber Valley Railroad. The 2018 Volcker Alliance Report complimented Utah for most of its financial practices, but criticized its failure to sufficiently disclose its exemptions, tax credits and deductions. The report also called out Utah’s failure to disclose the high cost of procrastination in repairing bridges and roads.
Our legislators have a huge task ahead to get tax reform right. They will need informed citizen support for that.