It is time the Utah legislature takes a serious look at Utah’s individual income tax rate and examine how it compares to the rest of the nation. Individual income tax is a large part of state government revenue, generating an average of 37% of total state tax collections nationwide, according to the Washington, D.C. based Tax Foundation.
Forty three states levy an individual income tax, with nine states, including Utah having a single rate. Top marginal tax rates vary from the highest rate in California at 13.3% (yet another reason Californians are fleeing to states like Utah) and the lowest rate being in North Dakota at 2.9%.
Since moving to a single flat rate of 5% for all levels of income more than a decade ago, Utah has seen the benefits of that wise tax policy as income tax collections have ballooned from $2.5 billion in 2007 to over $4.4 billion in fiscal year 2019.
The income tax rate, however, has essentially remained the same at 5.0% until recently being lowered to 4.95% in 2018. The recent tax reform bill passed in December of 2019 lowered the rate to 4.66% generating a $348 million dollar cut, however the rate remains at 4.95% since the bill was repealed.
Utah is unique through a Constitutional requirement that both individual and corporate income taxes be used for education purposes. No other state dedicates its income tax in such a way.
During the 2020 Legislative Session the Utah Legislature passed SJR 9 that will place a question on November’s ballot to amend the Utah Constitution to allow income tax dollars to also be used for services for children and those with disabilities. If voters pass it, Utah will have a much easier time meeting its budget needs without additional sales taxes or other unpopular ideas.
Your Taxpayers Association strongly supported SJR 9 during the 2020 Session and encourage Utahns to vote for the amendment in November.
It is interesting to note that Utah has a higher rate than all of its neighboring states with the exception of Idaho, which has a fairly high rate of 6.95%. Two states that border Utah have a rate of zero (Nevada and Wyoming) while Arizona sits at 4.50%.
In 2019, Arizona took meaningful steps to cut the state income tax burden for taxpayers by giving back a $155 million dollar tax hike the state received due to changes in the federal tax code in 2017 (a step that the Utah Legislature made through SB 2001 which was repealed by the legislature when a referendum to repeal the bill qualified for the ballot) by formulating a new state child tax credit. In addition, Arizona provided a new, higher standard deduction and reduced their tax rate in each income bracket and reduced the number of brackets from five to four. Overall, their bill (HB 2757) reduced taxes on their taxpayers by an average of 27% with the largest benefit going to low income individuals.
It is interesting to note that even some states with very different political leanings than Utah have rates at or below Utah’s. Massachusetts, for example, has been lowering its income rate with revenue triggers over the last decade and now sits right where Utah is at with a 5% flat rate.
In addition to that, while Utah has held the #1 position for twelve years in a row in the annual ALEC “Rich States, Poor States” rankings for best economic outlook, the states that are nipping at Utah’s heels now have rates at our level or well below it. North Carolina is now at 5.25% and Indiana now sits at a flat rate of 3.23%. Leading the charge for best inflow of capital growing tax bases are two of the states with individual income tax rates of zero- Florida and Texas.
While Utah has enjoyed the fruits of having a single flat income tax rate with over a decade of strong job growth (pre-pandemic) and robust growth in its tax collections, the Beehive State needs to lower income tax rates in order to remain competitive and attractive to businesses and individuals. That will ensure we continue to have the jobs we need for our families and the tax revenues we need to support the programs so many depend on.