As promised in an earlier post, here are some additional thoughts on the removal of sales tax on food -- this time from the municipal perspective:
Tax Cuts or Revenue Substitution
The impact on government revenues will be determined by whether the policy decision is to simply cut taxes or whether there would be an attempt to mitigate the loss by imposing an offsetting tax burden. The impact on local governments is different than the impact on the state because of the individual economic factors of individual cities and towns.
Municipal Impacts
The term “revenue neutral” is rather casually employed when discussing revenue offsets. The most-commonly discussed means of achieving “revenue neutrality” is to increase the tax rate on non-food items sufficiently to achieve the same revenue as existed with food in the tax base. In truth, this objective may be achievable in the aggregate (overall city sales tax revenues). However, on an individual city basis the revenue neutral goal is much more problematic. Critical to the determination is the fact that food represents a different component in each municipality’s tax base. Furthermore, some communities have the capacity to export more of their tax obligations than other cities.
Simply put, an increase in the tax rate will result in a tax windfall for some communities and would likely result in a shortfall for others. It would be possible to create some type of “hold harmless” mechanism that would share the additional revenue from the increase from the winners and losers. However, hold harmless efforts are not look upon favorably by the legislature. I think that it is fair to say that any type of “hold harmless” would be relatively short-term and purely transitional.
Of course it is mathematically possible to increase the sales tax sufficiently to ensure that there would be no losers. Such an outcome is not likely from a political standpoint, however. I would summarize the likely impact on cities and towns as follows.
1. Any change in the 1% local option would politically require some revenue offset. The most likely approach is a rate increase in non-food items. Last year’s proposals as an increase from 1% to 1.1%.
2. There would be winners and losers with such an approach. The losers’ situation could be mitigated by a transitional hold harmless proposal.
3. Municipalities that have a relatively large number of grocery stores or other food sale outlets would in the long-term see a reduction in sales tax revenues from what they would have been if food had remained in the base. Conversely, cities that receive sales tax from a more diverse retail base would benefit.
There should be some mention about the unique nature of some Utah communities that have a high degree of export potential in their tax base – namely tourists. In general these cities and towns rely more heavily on the sales tax than most other communities. In some cases, Utah law has authorized a specific sales tax levy, the resort community tax for example, to reflect the unique nature of their situation. A rate offset would likely need to be significantly higher for these communities than for most other locales.
Lastly, in some cases communities may have incurred bonded indebtedness associated with their sales tax revenue. Because of the sensitivity raised by this issue last session I want to emphasize that the existence of this indebtedness does not mean that the legislature may not ever change the tax base. However, the removal of food from the tax base is not a small change and its impact is not the same across all communities. Therefore, the impact of eliminating food from the base and replacing it with a rate increase offset may not cover the indebtedness in every situation.
Simply put, Utah cities and towns have used the sales tax as a significant revenue source for nearly 50 years. Reliance on the sales tax has increased significantly in the past 15-20 years. The result is today sales tax represents the major revenue source for most Utah municipalities. Removal of the sales tax on food would represent the single largest adjustment to the sales tax base in recent memory and merits careful understanding of both the policies and impacts.
Have any thoughts on the issues -- We would love to hear about them please feel free to comment.
Now on to other legislative items. Here are the agenda items for early next week. We hope to see many of our local officials on the hill for some of these important items.
Until next time...Enjoy
