Tax and Budget

The story of tax policy in the 2022 Legislative session is a tale of two tax cuts:

    • A large, top-heavy cut to the income tax rate from 4.95% to 4.85%. How large? $164 million. How top-heavy? 63% of it goes to the top 20% of taxpayers. all of whom have six-figure incomes. 
    • The creation of a small ($16 million, just one-tenth the size of the income tax rate cut) state-level Earned Income Tax Credit. The EITC is widely considered to be the nation's most effective anti-poverty program, since it reduces poverty by promoting work and self-sufficiency. Special recognition goes to Rep. Mike Winder, who, in his final legislative session, leaped at the opportunity to sponsor HB 307 and persuade his colleagues that 2022 was the year to make Utah the 31st state with our own EITC, something that advocates for reducing poverty have sought for decades.

The new Earned Income Tax Credit is non-refundable, which means it will not reach the lowest-income fifth of Utah workers who need it the most, including those struggling to work their way out of intergenerational poverty. About 80% of the value of the federal EITC is the refundable portion, which offsets other federal taxes paid by the lowest income workers. Most state level EITCs are also refundable, allowing them to offset the sales, gas, and property taxes paid by low-income workers to state and local governments. In Utah, the lowest income workers pay, on average, 7.5% of their incomes in those taxes, which is a higher share of their incomes than that paid in all state and local taxes by the highest income Utahns. The new nonrefundable EITC will help moderate income Utahns (the second fifth of the income distribution), primarily those earning between $30,000 and $55,000. Moderate income Utah families certainly need the help, so the creation of a Utah EITC is a great step in the direction of better tax policy. We hope that Utah will soon follow in the footsteps of other states that began with a non-refundable EITC and then decided to make it refundable.  

The income tax rate reduction continues an unfortunate pattern in recent decades of tax breaks for those who need them the least -- tax breaks that both increase inequality and starve Utah's schools of the resources they need to succeed. In 2007 we cut the top income tax rate from 7% to 5%, then in 2018 to 4.95%, now this year to 4.85%.  The income tax is the only non-regressive tax Utah has, the only one that actually lines up with Utah's income distribution. Ironically, as income inequality worsens, it is also Utah's fastest growing source of revenue, which offered Utah our best hope for seeing our education system benefit from Utah's rapid economic growth -- until we began targeting that rapidly growing revenue source for tax cuts.  

Here is a summary chart of this year's tax cuts and how they impact Utahns in each fifth of Utah's income distribution:

SB59 summary chartSource: Utah Legislative Fiscal Analyst (excluding the $15 million corporate portion of the income tax rate cut) 

Another way to think about the income tax rate reduction from 4.95% to 4.85% is to consider how it impacts a median income family of four. According to the Legislative Fiscal Analyst, such a family receives a tax cut of $98. But when you divide the $164 million price tag of the income tax rate reduction by Utah’s K-12 student population of about 675,000, then multiply by the two kids that the median income family of four has in school, you see that that average family that is gaining $98 in a tax break is giving up $485 that is now not going to be spent on their kids’ education every year. Not going to be spent on smaller class sizes or more experienced teachers or more up-to-date technology. Not going to be spent on closing the gaps in our education system between majority and minority groups and between haves and have-nots, gaps which are larger than nationally. 

The choice made by UtLeg fo the Utah middle class family of 4png

It's also important to see this year's income tax rate cut in the context of decades of top-heavy tax breaks passed by the Legislature. According to the Utah State Tax Commission, Utah has been passing, on average, $100 million a year of new tax breaks for over 35 years. This now adds up to over $3.5 billion not available every year to invest in Utah's children -- their education, health care, and basic economic security. In fact, the Invest in Utah's Future Coalition has identified over $5 billion of unmet needs in a wide range of areas of public responsibility. 

For a full summary of this year's legislative actions on taxes, you can....

 

 

 

 

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Voices for Utah Children Statement on the News that the Legislature Is Considering a Constitutional Amendment to End the Education Earmark of Income Tax Revenue:

A Constitutional Amendment Won’t Help If Utah Keeps Cutting Taxes

It is understandable that Utah legislators would want greater flexibility in how they can use public revenues. But there is a much larger problem that increased flexibility would do nothing about and would even delay solving: the chronic public revenue shortages that afflict our state following decades of tax cutting.

Utah has been cutting taxes by an average of $100 million annually for at least the last 35 years. According to Tax Commission data (see slide #8), this now adds up to about $3.5 billion in revenue not available for Utah’s annual state budget every year. As a result, public revenues are now lower than they've been in half a century relative to Utahns' incomes. The decisions in recent decades by Utah's Governors and Legislatures to give in to the tax cut temptation are at the root of Utah’s chronic revenue shortages in nearly every imaginable area of public responsibility, as documented by the Invest in Utah’s Future Coalition.

This year’s decision to pass a $164 million cut in the income tax rate from 4.95% to 4.85% (SB59 1st sub fiscal note) is an unfortunate example of this impulse toward thinking about short-term gain rather than the long-term needs of our state. This change gives a middle-class family of four a $98 tax cut, but it also means that $485 will now not be invested in that family’s two children in school. ($164 million divided by 675,000 children in Utah’s K-12 education system multiplied by two kids)

Every Utah family with children should ask the Governor and Legislative leaders, “Will you use this increased flexibility to enact even more tax cuts that deprive our children of the education that they need and deserve?” If our leaders are not prepared to answer that question unequivocally, then Utahns should know that such an amendment would just enhance budget writers' ability to "rob Peter to pay Paul" and not address the root cause of Utah’s problem.

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Voices for Utah Children Calls on Governor Cox to Veto Three Tax Cut Bills Due To New Federal Law

 Salt Lake City -- Voices for Utah Children, the state's leading child research and advocacy organization, issued a call today (Friday, March 12, 2021) for Governor Spencer Cox to veto three recently passed tax cut bills, HB 86, SB 11, and SB 153. The organization cited this week's enactment of new federal legislation, H.R. 1319, The American Rescue Plan Act, signed yesterday by President Biden, which cuts federal COVID relief aid to states by $1 for each $1 of tax cuts enacted on or after March 3, 2021. The three tax cut bills in question have yet to be signed by Governor Cox. 

 Voices for Utah Children's Fiscal Policy Director Matthew Weinstein said, "The three bills in question are tax cuts that almost completely exclude the lowest income 30-40% of Utah taxpayers and mostly benefit the highest-income 30-40% of filers. They permanently reduce by $100 million annually our ability to invest in our urgent unmet needs such as education, public health, poverty prevention, closing majority-minority gaps, infrastructure, clean air, and so on. Now we learned this week that their price has just doubled. Because the new federal COVID relief law penalizes states for tax cuts on a dollar-for-dollar basis, they will actually cost Utah $200 million of revenue next year, not just $100 million."

 Voices for Utah Children CEO Moe Hickey said, "This year we've launched our new #InvestInUtahKids campaign to raise awareness of the urgency of making investments today that will bear fruit for our children tomorrow. We applaud the Legislature for adding funds this year for pre-K and Optional Enhanced Kindergarten. At the same time, tremendous unmet needs remain and we cannot lose Federal Funds at this time. We urge Gov. Cox to consider whether it may be best to save these tax cuts for future consideration now that their price tag has doubled." 

 The federal legislation reads as follows: 

A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.

COVERED PERIOD.—The term ‘covered period’ means, with respect to a State, territory, or Tribal government, the period that— (A) begins on March 3, 2021; and (B) ends on the last day of the fiscal year of such State, territory, or Tribal government in which all funds received by the State, territory, or Tribal government from a payment made under this section or a transfer made under section 603(c)(4) have been expended or returned to, or recovered by, the Secretary.

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