Over the last three years, the most common two words in popular vocabulary have been “pandemic” and “inflation”. While the pandemic is set to officially end in May, inflation is certainly here to stay. Many of the consequences of inflation are out of the control of states, but states can certainly implement responses to inflation in their tax policy. It is worth evaluating what these responses in Utah – and their impacts – might be.
Tax Rebates
Tax rebates – giving checks to residents from surplus funds – are often purported as a way to return inflated revenues. While the sentiment is noble, it is not an appropriate inflation response. Tax rebate checks are cash in residents’ wallets which they inevitably spend. This causes more buying, and therefore more inflation. It is different to other methods of returning revenue to taxpayers because there is no labor incentive; generally, all residents receive the rebate regardless of whether they worked or paid taxes at all. Also, this is a one-time cash influx and is therefore cannot be relied upon or planned for. Consequently, it is spent frivolously rather than as part of a wider saving, investing or purchasing plan. The idea of tax rebates was suggested by Governor Cox in his budget released late 2022, but ultimately was rejected by legislators in the 2023 session who instead offered tax relief through an ongoing tax cut.
Inflation Indexing
Inflation indexing is the practice of adjusting tax brackets for inflation. Wages generally rise as a response to inflation to keep purchasing power fairly uniform; tax brackets similarly need to rise to ensure that they reflect purchasing power rather than dollar amounts. This concept is less relevant in Utah with its flat income tax rate – and is a strong reason to support the flat income tax rate. However, several bills during the 2023 session did address inflation indexing for the eligibility of certain exemptions and deferrals, such as the adjustments made to the Social Security income tax credit in 4 Sub HB 54. This is an appropriate response to inflation. However, it is worth noting that the 0.2% income tax rate cut – while important for taxpayers – did not compensate for the loss of purchasing power caused by an average 3% inflation rate over the last year. Consider the calculation below of an individual who did not receive an inflation adjustment to their salary and who had a taxable income of $50,000.
|
|
Hypothetical |
||
|
Year |
2022 |
2023 |
2023 |
|
Tax Rate |
4.85% |
4.65% |
4.85% |
|
Taxable Income |
$50,000 |
$50,000 |
$50,000 |
|
Taxes Paid |
$2,425 |
$2,325 |
$2,425 |
|
Money Remaining |
$47,575 |
$47,675 |
$47,575 |
|
Inflation |
– |
3% |
3% |
|
Purchasing Power |
$47,575 |
$46,244 |
$46,147 |
Since the tax cut was so much less than the inflation rate, Utahns will be left with less purchasing power in 2023 than in 2022 despite the cut. While it is impossible to lower taxes in line with inflation, there is still a valid argument for future income tax rate cuts.
Property Taxes
The value of residential properties has increased by around 25-40% across the nation over the last several years as a result of inflation. Consequently, in many states, property taxes have increased by a similar amount even though the cost – or the services – of government has not increased to this degree. Happily, in Utah, as a result of Truth in Taxation, government budgets do not grow simply because of inflation. Any budget increases must be proposed by the local entity and disclosed through Truth in Taxation notices and hearings. While many Utah property owners did see an increase in the property taxes that they paid over the last few years, unless the value of their property increased more than other properties in their area, the rate actually floated down. Truth in Taxation remains a core tenet of Utah tax policy and is model legislation for other states around the country.
Full Expensing
Decoupling from the federal government’s current policy on full expensing is one tool Utah can use to promote economic growth and stem the effects of inflation within the state. Until the end of 2022, the federal government, and Utah as a conforming state, allowed 100% of the depreciation of business capital investments to be expensed over a number of years. This provision expired at the end of 2022, and now allows only 80% of the depreciation to be expensed. Over the next decade, this will gradually decrease to 0%. This equates to a very significant tax hike for businesses. Were Utah to decouple from the federal government’s policy and allow full expensing again, it would give the state competitive advantage over other states who currently conform, promote economic growth, and stem the effects of inflation within the state. Your Utah Taxpayers Association will work to promote this legislation over the next year in anticipation of the 2024 session.
Inflation promises to continue to disrupt the economy over the next several years; however, Utah is better-equipped than most states to handle it. Our flat tax rate and reasonable tax cuts, adjusting eligibility in response to inflation and our national-standard Truth in Taxation process all protect Utahns from some of the effects of inflation.