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Utah is on track to earn at least $3 billion more in tax revenues in the 2020-2021 fiscal year than it did in the year prior.
Most of that increase is fueled by a nearly 60% rise in personal income tax collections and an eye-popping 94% jump in corporate taxes. The personal income taxes alone account for more than a $2 billion increase.
Income tax collections are nearly 20% ahead of where they were projected to be at this point, as the fiscal year comes to a close on June 30. Overall tax revenue for Utah is more than 12% ahead of projections.
Last May, as the pandemic was taking hold of the economy, Utah’s tax collections were $9.76 billion. For May 2021, the total was $12.8 billion, when there was still one month left in the fiscal year. Lawmakers were already expecting about $1.4 billion in excess revenue this year. These new numbers point to an even bigger surplus that could be as much as another $1 billion.
Why the increase
Utah’s economy is rapidly recovering from the COVID-19 pandemic.
A year ago, Utah’s unemployment rate was 7.6%. Today, it’s 2.7%, and more people working means more income tax collections. The same can be said for corporate income tax as pandemic restrictions ease and people return to spending money.
Sales tax collections are up as well, jumping more than $400 million over last year, an increase of nearly 15%.
Such robust tax numbers usually have lawmakers thinking about a tax cut, especially with an election year on the horizon. In 2018, they dropped Utah’s income tax rate from 5% to 4.95%, which was the last time the state saw a cut.
But Sen. Jerry Stevenson, R-Layton, says he’s worried about how rising inflation could cool down Utah’s red hot economy. Stevenson is the co-chair of the Legislature’s top budgeting committee.
“We need to be a little careful,” Stevenson said.
Prices have risen nationwide by 5% over the past 12 months. In the West, prices are up 4.7% over the past year. While Stevenson doesn’t think it’s time to panic, he is watching conditions closely.
“Our concern is that inflation number may come into our system really quick,” Stevenson said.
Earlier this year, the Republican-controlled Legislature cut taxes by $100 million. With all that extra cash, it’s going to be hard to tamp down talk of another cut next year, especially when many lawmakers will face voters in the midterm election.
“We may see some pressure from my colleagues and maybe the public for a tax cut. I’m kind of a wait-and-see person. I don’t want to have egg on my face,” Stevenson said.
The public pressure has already started. Rusty Cannon, president of the Utah Taxpayers Association, says with these big revenue surpluses, there’s no reason for lawmakers to not cut taxes. His group plans to push for a straight cut in Utah’s tax rate from 4.95% to 4.7%, which they estimate would cost about $300 million dollars.
“Given the revenue surplus they’re clearly going to have, our call for a $300 million cut might be too small,” he said.
Cannon says Utah should follow Arizona’s example. Just last week, lawmakers there passed a $1.9 billion tax cut.
“Arizona is flush with cash just like Utah. If they can pass a $1.9 billion reduction, there’s no reason we can’t approve a $300 million cut,” said Cannon.
There’s a school of thought among legislative leaders that a lot of the surplus revenue is due to federal COVID-19 relief. Direct payments to Utahns gave the economy a boost, and there’s another $1.6 billion on the way to state and local governments. There’s a fear in Utah’s Capitol that all of that federal cash is artificially boosting the economy.
Cannon doesn’t buy it.
“We absolutely disagree with that argument. The economy is opening back up and Utah continues to grow strongly,” he said.
While he is wary, Stevenson says the income tax numbers are encouraging. He suggested Utah is attracting more high-paying jobs.
“There are a lot more six-figure jobs in Utah than we used to have,” Stevenson said.
By law, personal and corporate income taxes pay for public K-12 and higher education in Utah. This year, lawmakers boosted public education spending by more than $400 million, which included a one-time bonus for Utah’s school teachers. If the robust tax collections continue, legislators may be able to make another significant investment in education.
Any cut in the income tax rate must come from the same pool of money that funds public schools.
Lawmakers cut more than $1 billion from the budget at the beginning of the pandemic, anticipating a severe economic downturn. As the state’s budget picture improved rapidly ahead of the 2021 session, legislative leaders knew they were going to have a lot of extra money to spend. They feared much of the billion-dollar surplus was a mirage, so they treated a large chunk of it, about $500 million, as one-time money.
With another billion-dollar amount of excess funds possible, expect lawmakers to make a similar move ahead of next year.
“We need to see if this money is real,” Stevenson said. “There’s a fear this is so inflated, that we don’t want to fund ongoing programs with funds that might not be there in the future.”
Cannon argues that shifting that cash from ongoing to one-time funds just gives lawmakers an easy excuse to not cut taxes.
“They keep saying they can’t trust the numbers. When are we ever going to trust the numbers?” he asked.
If lawmakers do shift a big part of that surplus to one-time money, you can expect another big push to fund long-neglected projects around the state. Earlier this year, lawmakers approved a $1.23 billion transportation funding package. Last month, they directed more than $500 million in pandemic relief funds toward a number of infrastructure projects across Utah.
“There is a lot of places for that money, but our job is to give value to the taxpayers,” Stevenson said.