Record Tax Cut Will Save Utah Taxpayers $220 Million

Published May 31, 2016

Utah lawmakers have cut personal income taxes more than $100 million, including a drop in the top tax rate from 6.98 to 5 percent, the centerpiece of nearly $220 million in tax cuts to take effect in fiscal year 2009.

Lawmakers in both the House and Senate unanimously passed the tax cut package, the largest in Utah’s history, at the end of February. Gov. Jon Huntsman (R) and key members of the Senate led the effort, and Huntsman signed the bill into law.

Individual income taxes will be cut $109 million. Other cuts include $40 million from sales taxes on food, $41 million in reduced statewide general sales taxes, $5 million in reduced franchise taxes on cable TV, about $22 million in reduced business taxes, and $2 million in miscellaneous taxes.

Follows Earlier Reforms

The omnibus tax bill, S.B. 223, was sponsored by Sen. Wayne Niederhauser (R-Sandy).

Niederhauser said one impetus for the reform was the state’s surging revenues, resulting in a $1.6 billion surplus in a $10 billion budget. Another factor was high volatility in tax receipts under the old multi-bracket income tax system. Utah implemented intermediate changes last year, including an optional flat-rate income tax, which will be replaced by this year’s changes.

“Politically, we never could have gotten a pure flat tax,” Niederhauser said. The compromise was a 5 percent tax rate, with credits that phase out as adjusted gross income rises.

Niederhauser said a budget analysis conducted by the Utah Taxpayers Association shows the new system “will cut the volatility of the old system and our dual system [passed last year with the optional flat tax] in half.

“I think the vote was so overwhelming because both houses got what they wanted, and it was popular with the public,” Neiderhauser said. “A lot of people liked the cut in sales tax on food as well as the income tax reforms. That sales tax cut was something the House was dead set on. Once that was put in, nobody could vote against the package.”

Rates Will Fall

The newest changes to Utah’s individual income tax include:

  • Replacing the top marginal rate of 6.98 percent with a single rate of 5 percent. This will be the first time in recent memory, if ever, that Utah’s individual income tax rate has been lower than the national average (currently 5.3 percent).
  • Offering nonrefundable credits that will be phased out as income increases, thus leaving some progressivity in the system. Because the credits would be completely phased out at high income levels, Utah’s new system will be a 5 percent flat tax for high-income households.
  • Allowing taxpayers to choose a nonrefundable credit based on either 6 percent of the federal standard deduction or 6 percent of federal itemized deductions (excluding Utah income taxes paid).
  • Allowing taxpayers to claim nonrefundable credits for each household member, equal to 4.5 percent of the federal personal exemption.

Process Began in 2003

Utah policymakers started discussing tax reform in late 2003, when then-governor Olene Walker (R) convened a group of tax policy experts to propose comprehensive changes to the state’s tax system.

Recently, Huntsman and legislators focused on reforms that would reduce revenue volatility, make Utah more competitive for investment, and simplify Utah’s tax system.

“This package meets all of those goals,” Senate Majority Leader Curt Bramble (R-Provo) told the Salt Lake Tribune.

The statewide general sales tax rate will be reduced from 4.75 percent to 4.65 percent, and the state sales tax rate on food will be reduced to 1.75 percent.

A tax credit for research and development, a sales tax exemption for mining equipment, and a tax credit for renewable energy investment and production will reduce the amount of corporate income tax companies will have to pay by another $22.5 million, according to budget estimates.

Government Still Grows

Despite the tax rate cuts, credits, and exemptions, Utah state spending continues to grow at a rapid rate as revenues keep increasing. State budget growth from general and education funds will be almost 40 percent over two years. Most of this growth is tied to K-12 education and transportation.

The state budget is expected to remain in balance because of the increasing tax revenues.

“Some policymakers downplay the magnitude of these spending increases because transportation expenditures are just ‘one-time’ expenditures,” said Rep. Greg Hughes (R-Draper), chairman of the House Conservative Caucus. “However, so-called one-time expenditures are still tax dollars, and transportation really cannot be considered a one-time expenditure because Utah anticipates spending hundreds of millions of dollars, eventually billions of dollars, every year for the next several decades in order to expand its transportation infrastructure to keep up with population growth.”

Mike Jerman ([email protected]) is vice president of the Utah Taxpayers Association.