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Special Session Wrap-Up
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State and local taxes will be increasing in Utah due to two bills passed in the recent special session. The legislature passed one bill that will cut individual income taxes by $78 million per year and another bill that will allow counties to raise their sales taxes by about $100 million per year. The result is a net tax increase of $22 million per year if all major counties (Davis, Weber, Salt Lake, Utah and Washington) approved the sales tax hike.
These tax changes follow the $90 million dollar tax cuts in the general session.
Most of this increase will be imposed on businesses because businesses pay about 31% of all sales taxes, or about $31 million in increased sales taxes, but receive none of the individual income tax reduction, although owners of pass-through entities like LLCs and s-corporations will benefit from reductions in individual income taxes.
Of course, businesses ultimately don't pay taxes because businesses naturally pass these taxes on to shareholders, employees, and customers. A small portion of the sales tax increase will be paid by out-of-state tourists.
Most Utah households will receive an income tax cut in the range of $50 to $55 and will experience a sales tax increase of roughly the same amount. Households in the top 5% will receive larger income tax cuts.
Despite the net tax increase, the two bills contain pro-taxpayer items that your Taxpayers Association lobbied very actively for, including expanded tax brackets and automatic annual inflationary increases in individual income tax brackets. Your Taxpayers Association also successfully lobbied for increased spending on corridor preservation and for prioritization of road and transit based on cost effectiveness of reducing rush hour congestion.
Income Tax Reform and Reduction
The income tax bill not only cuts taxes for most Utahns with full-time jobs but also makes a first step in tax reform. Utah taxpayers now have a choice between the traditional system with deductions, exemptions, and tax brackets and a flat tax system with no deductions or exemptions.
Improvements in traditional individual income tax system
Due to an expansion in tax brackets and a reduction in the top marginal tax rate, nearly all Utah taxpayers will receive an income tax cut because now less income will be taxed at the higher rate. As a result of the income tax legislation, the top marginal tax rate of 7.0% is reduced to 6.98% and is applied to taxable income exceeding $11,000 for a married household, up from $8,626. Thresholds are also increased for lower tax rates. For example, the 6% rate now starts at $8,000 for a married couple, up from $6,900.
In addition to the one-time increase in tax brackets, the income tax bill institutes annual inflationary bracket increases. The biggest beneficiaries of this reform are middle and lower income households. The following demonstrates the impact of not adjusting tax brackets for inflation.
The Utah Taxpayers Association has been lobbying for this reform for several years. Please click here to read more about the importance of indexing tax brackets for inflation.
Flat Tax System Established
Taxpayers may now elect to calculate their Utah individual income taxes based on a flat tax rate of 5.35% applied to federal adjusted gross income. No deductions or exemptions will be available under the flat tax option except for state tax refund and deductions required by federal law such as interest on U.S. bonds.
Governor Huntsman along with key legislators like Sen. Curt Bramble and Representatives John Dougall and Wayne Harper have been pushing for flat tax system in order to improve Utah’s competitiveness with other states. Please click here to read a summary of what other states have been doing in recent years with regards to individual income tax rates.
As Governor Huntsman and key legislators have noted, tax reform is not finished and this legislation is just the first step. Your Taxpayers Association advocates for the creation of means-tested credits in the flat tax system. Since the credits would be phased out as household income increases, the benefit would be targeted to middle and lower income households and the impact on state finances would not be significant. While such credits would mean that the flat tax system would not be a pure flat tax, such a system would still have a broader base and a lower rate than the traditional system.
Now is a good time to cut taxes
The state is flush with revenues and rainy day fund balances are at all-time highs. To read more about state government revenue growth, click here
To read more about the record balances in the state rainy day funds, click here.
Sales Tax Increase for Roads and Transit
As originally proposed, the sales tax increase for transportation was riddled with problems from a taxpayer perspective. However, your Taxpayers Association successfully lobbied for some changes, including increased spending on corridor preservation and a prioritization of roads and transit based on cost-effectiveness of congestion reduction.
Corridor preservation
The Legislature approved a 0.25% county-option sales tax. One quarter of this increase must be spent on preservation of transportation corridors. Corridor preservation is definitely one of the most cost-effective uses of tax dollars. In some cases, land acquisition can account for 50% of total highway costs. By purchasing the land many years before residential and commercial development encroaches upon the transportation corridor, the state can save tens of millions of dollars. In the upcoming general session, your Taxpayers Association will be lobbying for issuance of a major bond which will finance preservation of transportation corridors. To read more about this, click here.
Prioritization process
Your Taxpayers Association also lobbied to ensure that the sales tax increase for transportation includes language that requires road and transit projects to be prioritized based on the cost effectiveness of each project to reduce congestion. Surprisingly, this has never been done in Utah or anywhere else.
Of the four proposed mass transit lines, the airport line is clearly an inefficient use of tax dollars. There is no congestion around the airport that needs to be relieved and airport employees arrive and leave the airport during off-peak hours so they are not causing congestion on I-15 or other roads. Some have argued that the airport line would be a good way to promote tourism and reduce pollution. However, at a cost of up to $290 million plus interest, there are definitely more cost effective ways to reduce pollution and promote tourism.
The legislation empowers councils of governments to establish a prioritization process with each county. To ensure that they prioritize the projects accurately , your Taxpayers Association obtained an ammendment to require each county to obtain legislative approval of the county's prioritization process.
Problems with Legislation
The transportation bill has a couple of problems. First, local taxes are being raised to fund projects that should be funded at the state level. Funding for major roads and rail should occur at the state level because these roads and rail lines are part of a statewide transportation system. A failure in the transportation system in one part of the state impacts transportation in other parts of the state.
If taxes absolutely need to be raised, then user fees such as the gas tax and transit fares should be increased, not general taxes like sales taxes. In fact, the best user fee would be congestion pricing. In addition to being a funding mechanism for roads, congestion pricing encourages commuters to carpool, telecommute, and/or live closer to work. In the long run, government will spend less money to acheive congestion reduction if commuters have a financial incentive to reduce usage of state highways during peak congestion time. To read more about congestion pricing, please click here.
If congestion pricing is not implemented soon, growth in vehicle miles traveled will continue to impose burdens on the transportation infrastructure and taxpayers along the Wasatch Front could be paying 8% sales taxes by 2030 or earlier. Unfortunately, legislators are not too concerned about this possibility since they can pass off responsibility for increasing taxes on to local governments.
Email us @ taxwatch@utahtaxpayers.org