In the past two years, Gov. Huntsman and the Utah Legislature have dramatically changed Utah’s tax structure. Many people have wondered how the combined effects of income tax changes and multiple sales tax changes will affect them. Utah Taxpayers Association Vice President Mike Jerman has developed the following summary of the tax effects of these tax changes on a Utah family of four.
Impact on a Utah family of four
The accompanying chart illustrates the financial impact on a family of four of the tax changes of the 2006 and 2007 legislative sessions.
- Based on percent of income, low income families receive the largest tax cuts
- Based on total dollars, high income families receive the largest tax cuts. However of the households experiencing a tax increase, most are high income.
- For high income families, most of the tax relief comes from reductions in individual income taxes.
- For low income families, tax relief comes from reductions in sales taxes, particularly the reduction in sales tax on food.
- While most tax changes result in reduced taxes, two change changes result in increased taxes: increasing the existing mass transit/roads sales tax from 0.50% to 0.55% and adding an additional transit/roads tax of 0.25%.
Income tax changes
In 2006, the Legislature reduced individual income taxes by $66 million for FY2007. This year the Legislature reduced individual income taxes by an additional $109 million for FY2009. The following summarizes the major changes to Utah’s individual income tax system.
- Utah ’s previous top marginal rate of 7% (reduced to 6.98% for one year) will be replaced by a single rate of 5%. This will be the first time in recent memory, if ever, that Utah’s individual income tax rate has been lower than the national average (currently 5.3%, non-weighted). However, a broader tax base will ensure that Utah’s individual income tax burden as a percent of personal income will remain above the national average.
- The new system will not have tax brackets.
- Moderate progressivity will be maintained by offering non-refundable credits that are phased out as income increases.
- Credits are phased out at a rate of 1.3 cents per dollar of adjusted gross income in excess of $24,000 for married households and $12,000 for singles. Since the credits are completely phased out at high income levels, Utah’s new system will be a 5% flat tax for high income households.
- Taxpayers will be able to choose a non-refundable credit based on either 6% of the federal standard deduction (approximately $10,900 in TY2008) or 6% of federal itemized deductions (excluding Utah income taxes paid).
- Taxpayers will be able to claim non-refundable credits for each household member equal to 4.5% of the federal personal exemption (or 6% of 75% of the federal personal exemption). The federal personal exemption will be about $3,500 in TY2008.
- Existing credits such as historic preservation, renewable energy, and several others that appear on the TC-40S form and are reported on lines 20 and 30 of the TC-40 will not be impacted by these changes.
Here’s an example of how the new system will work based on TY2008 assumptions.
- Modified adjusted gross income: $60,000
- itemized deductions excluding state income tax: $14,400
- family size: 4
Step #1: Calculate tax before credits
Taxpayer multiplies modified adjusted gross income by 5%.
$60,000 x 5% = $3,000.
Step #2: Calculate credits prior to phase out
Taxpayer selects greater of itemized deductions (excluding state income tax) or standard deduction and multiplies by 6%. In this example, since the itemized deductions ($14,400) exceed the standard deduction (about $10,900 in 2008), the taxpayer uses itemized deductions.
Itemized/standard credit = $14,400 x 6% = $864
The taxpayer multiplies the number of household members by the federal standard exemption (about $3,500 in 2008) and them multiplies that by 4.5%.
Personal credit = $3,500 x 4 x 4.5% = $630
Total credit prior to phase-out is calculated by adding the two above credits together
Total credit prior to phase out = $864 + $630 = $1,494
Step #3: Calculate credit phase out
Credits are phased out at the rate of 1.3 cents per dollar of income above a certain threshold ($24,000 for a married couple).
Credit phase-out = ($60,000 – $24,000) x 0.013 = $468
Step #4: Calculate credit
Taxpayer subtracts credit phase out in step #3 from credit in step #2 to get final credit.
Credit after phase out = $1,494 – $468 = $1,026
Step #5: Calculate tax
Taxpayer subtracts credit after phase out in step #4 from tax before credits in step #1.
Tax = $3,000 – $1,026 = $1,974
Under the old system (prior to changes in the 2006 special session), this household would have paid $2,159 in taxes for tax year 2008. The new system reduces individual income taxes by $185 per year for this household.
Sales tax changes
During the past two general sessions, the Legislature has made several changes to sales taxes
- State sales tax on food will be lowered from 4.75% in 2006 to 2.75% in 2007 to 1.75% in 2008.
- General state sales tax (excluding food) will be reduced from 4.75% to 4.65%
- Salt Lake County transit/roads sales tax (excluding food) will be increased from 0.50% to 0.80%. This occurs in two parts: the original 0.50% will be increased to 0.55% and then the 0.25% approved last November by Salt Lake County voters will be added to that. The total sales tax rate in Salt Lake County, including state, city, county, and boutique sales taxes will be 6.90%.
- Food will be exempt from “boutique” sales taxes such as transit, ZAP, resort community, and other taxes. In Salt Lake County, the boutique sales tax reduction on food is 0.60% (The new “third quarter” Salt Lake County sales tax for roads and rails will also be exempt)
In the past two years, Gov. Huntsman and the Utah Legislature have made significant improvements to Utah’s tax system. Many groups and individuals played a major role in this process which was started by Gov. Olene Walker more than three years ago.