With the opening of the Utah Legislature looming and tax-preparation season underway, there’s still considerable uncertainty about what the $1.5 trillion tax reform bill passed by Congress late last year will mean for individual Utahns’ pocketbooks and overall state revenues.
“We’re all scrambling to figure out what it all means,” said Juliette Tennert, chief economist at the University of Utah’s Kem C. Gardner Policy Institute. She was one of three tax experts the institute brought together Wednesday to talk about the federal tax-reform package, joined by Bruce Johnson, former state tax commission chairman, and Jonathan Ball, the state legislative fiscal analyst.
Tennert said the bill contains 10 key provisions. Five impact individuals by:
- Reducing the amount taxed on the largest incomes, known as the highest individual marginalized tax rate, from 39.6 percent to 37 percent.
- Capping the state and local tax deduction at $10,000.
- Reducing the mortgage interest-deduction cap from $1 million to $750,000.Capping the state and local tax deduction at $10,000.
- Doubling the standard deduction from $12,700 to $24,000.Reducing the mortgage interest-deduction cap from $1 million to $750,000.Capping the state and local tax deduction at $10,000.
- Repealing the $4,050 personal exemption.Doubling the standard deduction from $12,700 to $24,000.Reducing the mortgage interest-deduction cap from $1 million to $750,000.
Five more impact businesses. They:
- Reduce the top corporate income tax rate from 35 percent to 21 percent.
- Reduce the rate for corporate repatriation of money stashed overseas.
- Repeal the corporate alternative minimum tax.
- Allow businesses to deduct depreciable assets in one year.
- Allow for a 20 percent deduction for business pass-through income.Allow businesses to deduct depreciable assets in one year.Repeal the corporate alternative minimum tax.
The tax reform package did little to accomplish President Donald Trump’s goal of simplifying the process, the speakers said. Their predictions for other areas were mixed:
Utah’s economic growth
The state has been one of the country’s top economic performers in recent years, but its job-growth rate has been moderating, slipping from 3.8 percent in 2015 to 3.5 percent in 2016 and to about 3 percent last year. The 2018 forecast is for 2.8 percent.
Tennert said she is doubtful the tax bill’s repercussions “will have enough of an impact to bump this number up,” but she added that “we’re seeing a deceleration and we think that the injection of economic activity spurred by the tax plan will keep us moving along.”
Ball doesn’t see the lowered corporate tax rate putting a substantial dent in the state’s revenue outlook, noting that business taxes account for less than 10 percent of Utah’s $4.5 billion revenue stream.
Who benefits, who doesn’t?
To Johnson, multinational corporations and other large companies will gain the most from the reduced tax rate and the opportunity for “repatriation” — returning earnings that have been banked overseas to the U.S., where they could be invested in job-creating endeavors.
“To think it will spur investment in the U.S. is questionable,” he said, instead expecting steadily rising interest rates rates to magnify a deficit expanded by the tax reform package. “We’ll get to the point where the only room in the budget is for entitlement programs and debt payments. So the real losers could be our children and our grandchildren.”
One Utah beneficiary, Tennert said, is likely to be the Utah Educational Savings Plan, which has a solid track record in offering 529 college savings plans. It will be well positioned to attract more investments from around the country, she said, since the tax bill will allow people to set aside money for expenses related to children’s education before college.
What about the middle class?
“Proponents would argue the repatriation of money [will] create a pool of capital that companies will invest in the U.S. That should increase opportunities for the middle class. I’m skeptical,” Johnson said. “The bill was clearly designed for businesses, not so much for wage earners — just enough for proponents to keep a straight face” when they say it will help lower-income people, too.
Tennert concurred, saying large businesses and high-income earners will prosper, and to the extent that their windfalls trickle down through the economy, “wage earners will get some [benefit], but not a large amount.”
This is a real mixed bag for Utahns, with the gift of a higher standard deduction offset by the repeal of personal exemptions and the establishment of a cap on writing off state and local taxes.
“If you have four kids, you’ll lose more than you gain from the [higher] standard deduction,” Johnson observed.
Ball expects to see more companies take advantage of the pass-through deduction. It allows limited liability partnerships to send along portions of their earnings to individual partners, who can then claim the deductions on their individual income taxes.
The deduction portions of the bill already have stimulated activity, he added. Many people paid property taxes or made charitable contributions before the end of 2017 to avoid losing incentives taken away by the reform package.