howardnlby Howard Stephenson
Federal income taxes paid by the typical Utah family are now lower than that family’s Utah income taxes, according to a new study by the Utah Taxpayers Association. This has resulted from a combination of recent federal tax cuts and Utah’s refusal to index income tax brackets for inflation. To make matters worse, State Representatives Steve Mascaro and Pat Jones are proposing legislation to increase Utah income taxes by reducing and eliminating dependent exemptions for families.

The typical Utah family paid 27% of its income in federal, state, and local taxes in tax year 2002, a slight decrease from 28% in tax year 2001, according to the Utah Taxpayers Association . A significant reduction in federal income taxes was responsible for the overall reduction in tax burden from 2001 to 2002. As a consequence of federal tax law changes, the statistical Utah family now pays more state income tax than federal income tax.

The Utah Taxpayers Association annually calculates the tax burden of a statistically typical Utah family. The study is based on a two-parent, three-child family living in a median priced home and earning the median Utah wage for a family of five. In tax year 2002, the study was based on adjusted gross income of $55,043, which excludes $1,702 paid into a tax-deferred 401(k) account by the employee and employer.

When determining tax burden as a percent of total income, the association’s study includes 401(k) contributions as well as the employer’s contribution to Social Security, Medicare, Workers Compensation, and Unemployment Insurance as part of the family’s total income.

Specific Taxes as a Percent of Total Income and Total Taxes

The typical Utah family pays numerous taxes and fees, which can be categorized into seven major groups. The following table shows the breakdown of major taxes as a percent of total taxes and total income.

Tax Category %of Total Income % of Total Taxes
Employment Taxes 7.8% 29.1%
Social Security/Medicare 6.8% 25.5%
State Income Tax 3.3% 12.2%
Sales and Excise Taxes 2.9% 10.8%
Federal Income Tax 2.8% 10.4%
Property Tax 1.7% 6.2%
Auto Taxes 1.4% 5.2%
Excise Taxes 0.2% 0.6%
Total 26.8% 100.0%

Federal Income Taxes

Taxpayers in all income groups received a benefit when President Bush and Congress approved the creation of a new tax bracket that imposes a 10% tax rate on taxable income up to $12,000 for married couples filing jointly. Previously, all taxable income up to $45,200 was taxed at 15%. This change reduced taxes for all household with taxable income over $12,000 by $600. Additionally, federal income tax brackets were adjusted upward for inflation. Adjusting the top end of the 15% bracket from $45,200 to $46,700 avoided a $188 increase in federal income taxes.

State Income Taxes

State income tax burden as a percent of AGI increased very slightly from 2001 to 2002 for two reasons. First, since 50% of federal income taxes paid can be deducted from Utah state taxable income, the typical Utah family’s state income taxes increased by $21 due to a reduction in federal income taxes caused by the creation of the 10% tax bracket. Second, since Utah refuses to adjust state income tax brackets for inflation, 100% of the increase in the family’s taxable income, mainly an inflationary increase, was taxed at the top rate of 7%. By taxing all inflationary income increases at the top rate of 7%, the effective tax rate increases every year. Although this increase is very small from one year to the next, $7 per year in the first couple years and then increasing to $8 and higher per year in later years, these increases are cumulative. The State Tax Commission estimates that indexing state income tax brackets for inflation would save taxpayers $4 million in the first year of implementation and $8 million in the second year.

Employment Taxes

Employment or payroll taxes, the largest single group of taxes, are those paid directly by the employer that are tied to employee wages. These taxes include workers compensation, unemployment insurance as well as the employers’ share of Social Security and Medicare.

Social Security and Medicare

Employees are required to pay 6.2% of wages towards Social Security and 1.45% of wages towards Medicare. This amount is matched by employers and is included in the employment taxes category. The employee-paid portion of Social Security and Medicare comprised one-quarter (25.5%) of all taxes and 6.8% of total income.

State and Local Sales Taxes

State and local sales and excise taxes comprise slightly more than one-tenth (10.8%) of all taxes paid and 2.9% of total income. These taxes consist of the statewide general sales tax of 4.75% on all taxable purchases, a county option tax of 0.25%, city option tax of 1.0%, a 1.0% tax on prepared meals (which are also subject to the state, city, and county general sales tax), a utility franchise tax of up to 6.0% on electric, gas, and telecommunications, and excise taxes on beer, liquor, and tobacco. The state general sales tax rate on electric and gas utilities is reduced from 4.75% to 2.0%.

The state general sales tax accounted for 62.1% of the total state and local sales and excise taxes. County and municipal general sales taxes amounted to 21.0%, and utility franchise taxes accounted for 10.1%. Restaurant and excise taxes accounted for the remaining 6.8%.

Auto Taxes

The typical Utah family paid 1.4% of total income towards auto taxes, and 71% of this amount was state and federal gas taxes. Age-based fees-in-lieu of taxes accounted for 22% of the total auto tax.