Faced with an influx of cash from a booming economy and federal tax changes, Utah politicians are having a debate over how they’ll spend about half a billion dollars.
Much of that money will pay for existing or expanded government services and education. But a bill in Congress that cut federal taxes will actually boost state tax collections by about $80 million, some of which lawmakers may give back in what could have the appearance of an election-year tax cut.
Republicans appear committed to giving back some of the windfall. The debate between now and the March 8 end-of-session deadline is over how lawmakers will divide up the extra money between individuals, businesses and schools.
“I’m in favor, and many members of the House ... seem to be in favor, of us trying to keep the status quo and not have a windfall from federal reform,” said Senate President Wayne Niederhauser, R-Sandy. “That would allow us to lower the rate.”
Since Utah created a single, 5 percent personal and corporate income tax a decade ago, some lawmakers have yearned to lower the rate a bit more. Having $80 million raised from caps on various exemptions under the new federal tax law gives legislators a chance to lower the rate to about 4.95 percent for corporations and individuals with some more to spend, Niederhauser said.
Lowering the rate to 4.95 percent would cut the state’s federal tax reform windfall by about $55 million, he said.
Democrats have questioned why, when Utah has long ranked at or near the bottom in per-pupil spending, lawmakers would spend the federal windfall on anything but education. There is also a ballot measure that seeks to hike income and sales taxes to send more money to schools.
Legislators also are considering freezing the statewide property tax rate for five years, which would raise up to $125.6 million by 2022 for education. Ordinarily, the state property tax is adjusted downward when property values rise with natural economic growth to prevent tax hikes.
“That’s easy right?” Speaker Greg Hughes joked in a recent interview, “cut taxes, reform the ones you have and give more money to education than you’ve ever done before.”
The debate lawmakers will have includes whether to cut the rate across the board or target lower- and middle-income families that are expected to see their state taxes rise most next year.
The state tax liability for a family of six that makes between $29,000 and $39,000 is expected to climb by 217 percent as a result of the federal tax change, according to draft estimates from nonpartisan tax experts. A family of six making over $132,000 would see an 8 percent increase in state taxes, according to the data. Families across the board will see a net tax decrease when combining state and federal taxes under the changes, according to the Utah State Tax Commission.
Some lawmakers are hoping to target those income groups that will see the biggest state tax hike for cuts, rather than lowering the rate for everyone.
“Where it belongs is [with] those who are going to be paying it,” said Rep. Tim Quinn, R-Heber City, who filed a bill he hopes would lower the tax hike for lower- and middle-income Utahns. “When we lower the rate ... that would mean instead of a 217 percent increase, they might have a 195 percent increase.”
Some are wary about lowering taxes at all, saying the state could head into a recession and regret its decision not to put its windfall into the rainy day fund.
“I’ve been here when we’ve reduced taxes and three or four years later we have another downturn and we wished we hadn’t given that break,” said Rep. Gage Froerer, R-Huntsville.
But others are pushing for a business tax cut they say would improve the state’s attractiveness for locating large companies.
The tax change, known as single sales factor, would change the assets that national and international businesses located in Utah pay taxes on, and would cost about $29 million a year. Its proponents note that 30 states have enacted the tax policy. Lowering the rate to 4.95 percent would leave about $25 million to spend on a business tax cut.