Tax and Budget

Tax Restructuring Process Picks Up Speed 

Last week (October 22, 2019) the Tax Restructuring and Equalization Task Force (TRETF) adopted its co-chairs’ proposal as its working document, passing a motion to produce draft legislation based on it for consideration at the Task Force’s next meeting on November 7th.    

The chairs’ proposal is a mixed bag. When viewed through the lens of our tax reform position paper, we can say that it offers the potential to make Utah’s tax structure less regressive for most low-income Utahns, which would be welcome, but it also reduces overall public revenues by $79 million through an income tax rate cut that awards most of the total tax reduction to the wealthiest Utahns.

Utah’s current overall tax structure is regressive, in the sense that low- and middle-income Utahns pay 7.5%-8.8% of their incomes in state and local taxes, while the highest income Utahns pay just 6.7%. Under the Task Force co-chairs’ proposal, the tax rate for the lowest income Utahns would be reduced from 7.5% to 7%, at least on paper, but that estimate of a 0.5-percent-of-income reduction for the poor assumes that everyone who is eligible will file for the proposed new grocery tax credit that is intended to offset the regressive impact of the proposed increase in the state sales tax on groceries from 1.75% to 4.85%. We know from real-life experience that a considerable share of low-income Utahns will not file for the credit, mostly because they won’t know about it and because many low-income Utahns are not in the habit of filing tax forms every year because they are not required to do so, since their incomes are below the minimum threshold for mandatory filing. 

The key to making this new proposed grocery tax credit a meaningful offset is to publicize it effectively to lower-income Utahns so that they will know about it and file for it. Right now, unfortunately, Utah gets a failing grade for our meager efforts to publicize the federal Earned Income Tax Credit (EITC), the closest analog to the proposed new grocery tax credit. The state budget included just $130,000 this year to help lower-income Utahns file for the EITC, which helps explain why our participation rate is estimated by the IRS at only 75% of eligible households, well below the national average of 80%.

Thus, Voices for Utah Children testified before the TRETF last week that Utah needs to increase our investment in publicizing low-income tax credits from a six-figure line item to a seven-figure item. Fortunately, this would be an expenditure with the potential to pay for itself because it will mean more Utahns will file not just for the new proposed grocery tax credit and IGP EITC included in the co-chairs’ proposal (thanks to an amendment offered by Rep. Robert Spendlove), but also for the federal EITC. If Utah were to reach the national average of 80% EITC participation among eligible households, that could result in an additional $30 million of consumer spending by lower-income households, most of which would likely be subject to the state sales tax, the increased revenue from which could well exceed the amount budgeted to publicize the new tax credits.

Voices for Utah Children will continue to press for the TRETF proposal to add a line item setting aside at least $1 million to publicize the new tax credits. Doing so would position Utah to have the most effective grocery tax credit among the handful of states that employ such a credit to try to shield low-income residents from the regressive effects of the sales tax on food. 

Regarding the co-chairs’ proposal’s impact on overall Utah revenues, Voices for Utah Children participated in a coalition letter released last month in which 27 nonprofits serving lower-income Utahns documented a long list of urgent unmet needs that the state has not been able to address due to our chronic shortage of public revenues resulting from decades of tax cutting. Unfortunately, the co-chairs’ proposal makes use of a temporary state budget surplus to justify yet another permanent revenue reduction of $79 million annually. It must also be noted that this $79 million net revenue loss is almost exactly equal to the amount of the net tax cut going to the top 5% of Utahns, those earning over $238,000.

Therefore Voices for Utah Children will continue to advocate for removing from the proposal the part that reduces the statutory income tax rate from 4.95% to 4.59%, since about 60% of any income tax rate reduction goes to the highest income 20% of Utah households. This results from the fact that about 3/5 of all Utah income is earned by the top 1/5 of Utah households, and the state income tax matches the state's income distribution in this regard.

It is hard to avoid noticing the irony that this sector of top-earning Utahns that is benefitting the most from this proposed $79 million overall revenue reduction includes most of the leaders of the Our Schools Now proposal that just two years ago proposed to raise the income tax rate so that high-earning Utahns could contribute more to Utah’s education system. This certainly seemed to indicate at that time that upper-income Utahns were ready, willing, and able to invest more, not less, in Utah’s education system, where enhanced investment in Utah’s children would help lay the foundation for our state’s future prosperity and success. Voices for Utah Children hopes that many of these leading Utahns will speak up in the coming weeks to express their views on this proposed windfall for them that would accomplish the opposite of the goals of Our Schools Now. 

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The Tax Reform Task Force legislatively mandated during the 2019 general session by HB495 has been created. Meetings have not been scheduled but we expect to hear something soon. In the meantime, House Democrats are holding town hall meetings on tax reform.

Draft tax reform legislation is expected to include a statewide EITC. Other proposals include increasing the sales tax on food and using a state EITC as the offset. Advocate worry about families obtaining immediate savings on food vs waiting for a refund. Concerns have been raised about the 25% to 30% tax filers who don’t file taxes and their ability to obtain both a federal EITC and state EITC.

Voices has prepared a tax reform position paper and will monitor tax reform discussions, especially around broadening the base and lowering the rate to mitigate the shift of the tax burden on the lower and middle income families.

pdfVoices for Utah Children 2019 Tax Reform Position

 

 

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Utah Taxes: Tax Day Resources 2019

Voices for Utah Children works to make Utah a place where all children thrive. In furtherance of this mission, our fiscal policy research and advocacy program seeks to advance two priorities: 

      • Revenue Sufficiency: Ensuring that public revenues are sufficient to make the critical investments today in Utah’s children – especially those at risk of not achieving their full potential – so as to ensure the success and prosperity of our state tomorrow. 
      • Tax Fairness: Our system of generating public revenues – taxes – should seek to avoid driving low-income families into -- or deeper into – poverty. 

As Utah and the nation mark Tax Day 2019 on Monday, April 15, Voices for Utah Children offers the resources below from our recent publications and those of other organizations that shed light on how well Utah is doing in addressing the two challenges above. Especially at a time when policymakers are considering significant changes to Utah’s system of taxation, we hope these resources may help point the way toward a prosperous and successful future for all Utahns and all of Utah’s children. 

Revenue Sufficiency Resources

  • The new Utah Children’s Budget Report 2019 released earlier this year documents that Utah’s K-12 education budget (including both state and local revenues) fell last year in real terms both overall for the first time in seven years (by $41 million) and on a per-student basis by 1.9%, leaving it 1.3% below its pre-recession peak, even after nine years of economic expansion.p17EdChart

 

  • recent report found that Utah could generate an additional $103 million of Education Fund revenue by closing a state tax loophole that allows major international corporations doing business here – many in direct competition with local Utah businesses – to hide their profits in offshore tax havens like the Cayman Islands. 

UT ASimpleFix

Tax Fairness Resources

  • Utah’s overall system of state and local taxation is regressive. Low- and middle-income Utahns pay an overall effective tax rate that is higher than the rate paid by upper-income Utahns. For additional details, visit www.itep.org/whopays/utah

 ITEP Who Pays Utah summary chart

  • Thanks to legislative champions including Rep. Robert Spendlove and Sen. Evan Vickers, the sponsors of HB 103 in the 2019 legislative session, as well as Rep. Tim Quinn, who included that proposal in his own HB 441Utah may be on the verge of creating our own state version of the federal Earned Income Tax Credit (EITC). The bill proposes to offset $7 million of the $25 million of state and local taxes paid by the lowest-income Utahns every year. To learn more about this legislative proposal and how it would help promote independence and self-sufficiency for Utahns seeking to work their way out of poverty, download the fact sheet at http://www.utahfamilytaxcredits.org/learn-more/.
  • Speaking of the EITC, only about 75% of eligible working Utahns file for this very valuable tax credit every year. This means tens of thousands of Utah households are losing the opportunity to receive an average refundable tax credit of over $2,000 -- up to a maximum of $6,400, depending on income and number of children. Utahns earning up to $54,000 can get free help with filing from certified volunteers at any VITA location – visit www.UtahTaxHelp.org for details!
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 The Utah Legislature’s Tax Overhaul Plan – 3/5/19 Update

 HB441 Tax Equalization and Reduction Act, sponsored by Representative Tim Quinn

The bill is an attempt to modernize Utah’s tax structure to keep pace with Utah’s changing economy. It had its first hearing on 3/1/19, in House Revenue and Taxation Standing Committee.

The bill passed out of committee by a vote of 12 to 2 and was placed on the 3rd Reading Calendar. It will get a hearing on the floor of the House on 3/5/19, at 6pm.

A summary of Rep. Quinn’s presentation follows:

 tax1

 

IMPLEMENTATION

Implementation structure that phases-in the reduced sales tax rate to ensure assumptions are validated

  • Jan. 1, 2020 – state sales and use tax rate reduced from 4.7% to 3.9%
  • Oct. 1, 2020 – if sales and use tax revenue collections meet or exceed revenue estimates, state rate reduced from 3.9% to 3.1%
  • Fiscal Year 2020-2021 – any revenues collected in excess of revenue estimates put in restricted account to be used to lower sales and use tax rates


Yesterday (2/26/19) the Utah Legislature revealed its tax overhaul plan.

The plan marks the beginning of the Governor’s and Legislature’s attempt to modernize Utah’s tax structure to keep pace with a changing economy.

For detailed information about the Governor’s proposals click here.

For news reports which detail the Legislature’s plan click here and here.

We focus our attention on:

  • Reduction of sales tax rate from 4.7% to 3.1%
    • elimination of sales tax exemptions for businesses and services that are currently not required to pay sales tax.
  • Reduction of income tax rate from 4.95% to 4.75%
    • expand personal exemptions for low to middle income earners
    • implement a targeted state earned income tax credit (EITC)

WHAT WE LIKE

We are encouraged to see light shined on businesses that are exempt from sales tax. Eliminating those tax exemptions expands responsibility for raising revenue to fund vital government services and infrastructure.

We are pleased the legislature included a targeted EITC for families experiencing intergenerational poverty. These working families earn less than $13,000 annually on average. The federal EITC ups their income by over $3000. A state EITC will provide another $300 on average and up to $650 depending on income and number of kids.  For many, this income boost will be the push needed to get their children out of poverty.

ROOM FOR IMPROVEMENT

We are concerned about using this year’s temporary surplus to permanently lower the income tax rate from 4.95% to 4.75%. While a 0.2% reduction may seem minor, the decrease will harm Utah’s chronically underfunded schools.

Utah’s education system is predominately funded by state income tax revenue. Estimates show that for every 0.1 percent reduction in income tax rates, education funding will be reduced by $100 million. Last week’s Children’s Budget Report found that Utah’s education budget has been falling and remains below where it was a decade ago, before the Great Recession, so it can hardly afford to take another $200 million reduction.

Adding to our concern is Utah’s income tax is regressive at the top end, meaning that low to middle income families will continue paying a higher percent of their income to fund education than higher earning families.

CONCLUSION

As the bill goes through the public hearing process in the final weeks of the legislative session, Voices will monitor and provide input to ensure that Utah’s tax system is equitable and a shared responsibility among citizens and businesses alike.

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