During the 2023 General Session, various bills were proposed to provide an individual tax credit to certain groups. With few exceptions, your Utah Taxpayers Association opposed each of these credits. Although tax credits appear to be beneficial to taxpayers, there are several reasons for which it is important to restrict their use.
Carves Out the Tax Base
A central tenet of sound tax policy is “broad base, low rate”; in other words, as many people as possible should be taxed, but the tax should be as low as possible. Tax credits artificially lower the tax rate for select individuals, which may benefit them in the short run, but ultimately will necessitate a general tax rate hike when overall revenues drop too low. It is also worth noting that most tax credits are nonrefundable, generally up to a certain dollar amount, meaning they only lower tax liability. Consequently, the power of tax credits to significantly benefit even a small portion of the tax base is very limited.
Tax credits are collectively expensive. During the 2023 General Session, the combined fiscal notes for proposed tax credit bills amounted to more than $110m. By comparison, a 0.01% decrease in the income tax rate cost around $19m. Although not all of the proposed tax credits were approved, if they had been, it would have been equivalent to a (further) 0.05% cut to the income tax rate in terms of revenue, while only benefiting a fraction of taxpayers. This is costly on the one hand, but also fundamentally unfair since it shifts the tax burden from one group to another.
Tool for Political Points
Tax credits are often used as a tool for political points. Proposing a tax credit for veterans, teachers, or adoptive parents is a popular move. However, it is also disingenuous; it is spending some taxpayers’ money to benefit others rather than reducing how much money the government takes from taxpayers. While tax credits for certain groups appear to be generous they are not sound tax policy and are not intended to be: they are almost always just virtue signaling in an effort to score political points. The tax base should not be used like a Christmas tree to hand out gifts to what is politically popular.
Difficult to Administer
Many tax credits go unused and therefore never help the group they were intended to help. Especially at the state level, many individuals are unaware of the tax credits they might be eligible for, or do not have the appropriate paperwork to quantify their potential credit, and so are unable to take advantage of a tax credit intended to help them. A simple, low rate of tax is far more accessible to taxpayers and provides wider, deeper tax relief than tax credits do.
The lone exception to this are any attempts to remove sales tax from any items related to the production or manufacturing of any goods, also known as business inputs. There is global consensus from tax policy experts that this is the best policy for preventing destructive “tax pyramiding” that only raises end costs for consumers. Utah has been working along these lines for many decades and this is one of the key reasons Utah’s economy, job growth and business climate is so strong.
Although it is popular to propose tax credits, and deeply unpopular to oppose them, your Utah Taxpayers Association will continue to advocate for broad tax cuts that benefit all taxpayers rather than limited, superficial tax credits. By doing so, taxpayers in Utah can continue to enjoy a low rate of tax and fairness in their tax burdens.