Utah’s sales tax was born in 1933, two years after the introduction of the income tax. These taxes were enacted to offset property tax losses due to the Great Depression. Beginning at a rate of 0.75 percent, the sales tax was originally set to expire after two years. However, the Utah State Legislature decided to repeal the sunset date and raise the rate to 2.0 percent. Sales tax used to be the largest source of public revenue in Utah, but has recently taken a backseat to income and property tax revenues in terms of importance the non-partisan, Salt Lake City-based think tank Utah Foundation reported Monday as part of its examination of Utah’s sales tax.
The Everyday Tax: Sales Taxation in Utah is the third report in a series looking at Utah’s main sources of tax revenue. The report compares sales tax in Utah to taxes in other states and looks at the factors affecting growth. It also takes a gander at exemptions and earmarks, as well as options for broadening the sales tax base.
The report found that Utah has seen the nation’s second-biggest decline in taxable sales as a proportion of consumer expenditures during the past 45 years. In 1975, Utah’s sales tax imposed a larger tax burden than income or property taxes. During the past 20 years, it has trended downward to reach the tiniest of the three. Utah basically had the same real per capita sales tax revenue in 1978 as in 2016. In short, as costs climb, the state is losing purchasing power from this revenue source. Utah has the lowest sales tax burden in the nine western continental states that collect sales taxes. The report also found that if Utah broadened the sales tax base to include all personal consumption transactions, the state could drop the effective rate to 2.1 percent (from 6.2 percent currently) and generate the same amount of revenue.
“To address these changes, Utah has several choices. It can find ways to do more with less, scale back state-provided services, look to other revenue sources, repeal exemptions, raise the tax rate, or include more in the tax base. If the state chooses to include more services in the tax base, it should recognize the change as a tax increase or lower the sales tax rate to produce the same amount of revenue,” said the report. “In the short term, keeping exemptions in check and looking for opportunities to reduce them might be the most manageable approach to shoring up the sales tax base. While arguments can be made for any exemption, the more they expand, the more upward pressure will come to bear on sales tax rates. Broadening the base, on the other hand, opens the possibility for governments to reduce the tax rate. This offers potential competitive benefits for Utah as a whole, but it is a matter of particular interest for lower-earning households, since they tend to spend a greater proportion of their income on taxable goods.”