After many months of deliberation and public meetings, the Utah Legislature passed Senate Bill 2001 – Tax Restructuring Revisions (Hillyard) in a special session on December 12th.
The refinement that has taken place over the last nine months has produced legislation that will deliver a significant ongoing tax cut to taxpayers. It ensures that Utah maintains and improves its position as the best state in the nation in which to live and do business.
The Utah Taxpayers Association has been involved in a countless number of meetings over the last year on the bill with House and Senate leadership, legislators, legislative staff and the executive branch. We commend the members of the Tax Restructuring and Equalization Task Force for their innumerable hours and effort traveling the state, taking input from the public and the many stakeholders.
There has been much misinformation and misunderstanding in the public debate and as Utah’s Tax Watchdog it is our mandate to set the record straight. First, SB 2001 (2019) provides a significant tax cut to Utah taxpayers. It delivers a $348 million income tax cut by lowering the rate from 4.95% to 4.66% that will go into effect early in 2020. This alone is critical in keeping Utah ahead of other states that are nipping at our economic heels as the best place to live and do business.
Second, it gives back $132 million to taxpayers who were hurt (yes – hurt) by Utah’s link to federal tax reform in 2017 which caused the unintentional elimination of personal exemptions on Utah’s income tax. This bill corrects the very problem that many Utah families experienced when they saw their state income taxes increase in 2018. The Legislature should be commended for this overdue update. There is an additional one time rebate of $60 million to Utah taxpayers related to the exemption that will be distributed early in 2020.
Third, it provides benefits for those with low and fixed incomes. It slashes $18 million in taxes on social security for senior citizens. For many low income senior citizens, it could entirely eliminate the state income tax on their social security income. In addition, the bill enacts an earned income tax credit for those undergoing intergenerational poverty, providing an additional $6 million to these families.
Fourth, the bill restores the statewide portion of the sales tax on unprepared groceries raising an estimated $250 million annually and ensuring revenue stability to fund essential services. Taxpayers most strongly impacted by the effects of this change are likely to see an increase in their take-home pay to offset the food sales tax once the tax withholding tables have been changed to reflect the income tax rate cut and the higher dependent deduction amount. This is essentially a pay raise for Utahns which would far outweigh the increase in sales tax they will pay on groceries. That is before the effects of the newly created refundable grocery tax credit, which is an additional $135 million tax cut handed directly back to low and middle income taxpayers. That alone will put an additional $500 ($125 per person) in the pocket of a family of four. Any family larger than that will receive an additional $50 per person for this newly-created credit.
Fifth, this bill starts the process of correcting the major problem we have in transportation by removing the sales tax exemption on motor fuel, to be collected at the wholesale level, raising $170 million annually. Currently, gas tax revenue provides less than half of what is needed to maintain and build roads. More than $600 million per year is taken from sales tax revenue to plug that hole. Although the taxes on fuel will likely only be a reliable revenue source in the medium term, the rise of electric vehicles, and more efficient gas-powered vehicles creates a funding problem. The best “user fee” for transportation that we have currently is moving to a road usage charge (RUC). We would hope that this model eventually becomes the primary funding source for transportation.
Sixth, the bill placed sales tax on certain services, including pet grooming, ride-sharing services, and streaming music and video, raising an estimated $43 million annually. Much of this is to create equity between old-economy and new-economy retailers based on the principle that tax policy should not treat retailers of the same product differently depending on how they deliver that product or service.
There are a couple of small issues that your Taxpayers Association would still like to fix, which were included in the bill. Specifically, sales tax will be charged on electricity to ski lifts which is clearly a business input and constitutes tax pyramiding. In addition, the bill raised the State Motor Vehicle Rental tax from 2.5% to 4%, bringing the total state and local tax a car rental customer will pay upwards of 19%. We don’t feel that hiking the tax on already over-taxed rental car customers is aligned with the overall goal of broadening the base.
Adding It All Up
All of the tax cuts in the bill add up to a total cut of nearly two-thirds of a billion dollars at $639 million. That not only offsets the additional $478 million in taxes on fuel, groceries and some services that may be collected under the bill, but goes even further and delivers a net tax cut of $160 million dollars. After factoring in the exporting of a portion of the sales tax on fuel and the additional sales tax on food to out-of-state visitors purchasing these items, the actual ongoing tax cut to Utahns is upwards of $200 million.
The Utah Taxpayers Association congratulates legislative leadership, members of the House and Senate and Governor Herbert on making Utah stronger and keeping it the #1 state in the nation to live in and do business.
There are many other aspects to this bill which we did not cover here. To read the full summary of what the Legislature passed on December 12, click here.