Utah Cuts Income Tax, Offers Flat Tax Option to All

Published December 1, 2006

The Utah Legislature passed a bill in the fall special session cutting 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, Salt Lake, Utah, Washington, and Weber) approve the sales tax hike.

The two special-session bills include expanded income tax brackets, automatic adjustments to the brackets based on the rate of inflation, and an optional flat tax.

At press time Utah Gov. Jon Huntsman Jr. (R) had not yet signed the bill but was expected to do so.

The tax changes follow $90 million in tax cuts passed in the general session, which means the legislature reduced taxes in 2006 by a net $68 million.

“Finally, we have closure on the business of the last session,” said Huntsman, a proponent of lower taxes and tax reform, at the end of the fall session. “This will provide the tools to improve the state’s long-term economic competitiveness and our transportation infrastructure.”

Tax Reform, Reduction

Nearly all Utah taxpayers will receive an income tax cut, because less income will be taxed and marginal rates will drop. The typical household is expected to receive an income tax drop of $50 to $55.

The tax bracket changes are estimated to reduce taxes by $42 million, and implementation of the optional flat tax is estimated to reduce taxes by an additional $36 million. About 95 percent of the state’s taxpayers are expected to choose the traditional system, with the rest, most of them high-income earners, choosing the flat tax.

The top marginal tax rate of 7 percent will drop slightly, to 6.98 percent, and will be applied to taxable income exceeding $11,000 for married couples, up from $8,626. Thresholds are also being increased for lower tax rates. For example, the 6 percent rate now starts at $8,000 for a married couple, up from $6,900.

Instituting annual tax bracket adjustments based on inflation should benefit middle- and lower-income households the most.

5.35 Percent Flat Tax Taxpayers will have a choice between the traditional income tax system with deductions, exemptions, and tax brackets, and a flat tax with no deductions or exemptions.

Taxpayers will be allowed to calculate their Utah individual income taxes based on a flat tax rate of 5.35 percent applied to federal adjusted gross income. No deductions or exemptions will be available under the flat tax option, except for state tax refunds and deductions required by federal law, such as interest on U.S. bonds.

Huntsman and key Republican legislators, including state Sen. Curt Bramble (R-Provo) and state Reps. John Dougall (R-Highland) and Wayne Harper (R-West Jordan), pushed for a flat tax system to improve Utah’s competitiveness with other states.

Continuing Efforts

Huntsman and other key legislators said they are not finished with tax reform.

“It’s true that changes to the current system are targeted more to tax relief than tax reform, but incorporating a flat tax option into our tax system is significant reform, despite what the skeptics say,” said Dougall, one of the architects of the optional flat tax system.

Bramble, a certified public accountant, wrote in the Utah Senate Republican blog before the end of the special session, “The proposal legislators will consider [during the special session] doesn’t take reform as far as many of us would like, but injecting a flat tax computation into the system is a very significant step in the right direction.”

Harper told the Salt Lake Tribune for a September 1 article, “It was apparent to me that the legislature was not ready to throw out the old system and do a complete reform.”

Big Revenue Increase

Utah is in a strong position to cut taxes and enact tax reform. State general tax revenues increased 18 percent in fiscal year 2006, which followed a 12 percent increase in fiscal year 2005.

Over the past 10 years, state general revenues have outpaced inflation and population growth by about 10 percent.

Additionally, the state’s rainy day funds are at all-time highs and the state budget relies heavily on ongoing cash flows instead of bonding for capital projects such as roads and buildings.

Sales Tax Hike

The legislature approved a 0.25 percent county-option sales tax. One quarter of the increase must be spent on preservation of transportation corridors. Land acquisition in some cases can account for 50 percent of the total cost of a highway. By purchasing the land many years before residential and commercial development encroaches on the transportation corridor, the state can save tens of millions of dollars.

The legislation allowing a county sales tax increase for transportation requires road and transit projects to be prioritized based on the cost effectiveness of each project to reduce congestion. Such prioritization has never been done in Utah.

The legislation empowers councils of governments, which include county governments and cities, to establish a prioritization process within each county. To ensure that councils of governments prioritize the projects accurately, each county must receive legislative approval of its prioritization process. Prioritization will be for projects within the county.

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