Fresh off passing a $193 million tax cut earlier this year, Utah lawmakers are making noise about an even larger tax cut next year, maybe the biggest ever. Those ambitions could be thwarted by inflationary worries and a possible economic slowdown.
Like last year, Utah’s coffers look flush with cash, making cutting taxes a tantalizing option for legislative leaders. Preliminary numbers for the just-ended 2021-2022 fiscal year show total tax collections for the state increased by more than $2 billion, a 14.7% year-over-year increase. Income tax collections increased by $659 million, while sales taxes jumped by nearly $640 million.
Those income and corporate taxes are higher than lawmakers had projected. Legislative budget analysts expected income tax revenue to drop 5% and corporate tax collections to fall nearly 3%. Instead, they increased by 10.8 and 26.4%, respectively. In absolute numbers, income tax collections were $1.2 billion higher than lawmakers expected.
The primary reason for that expansive growth is wage inflation. Utah’s unemployment rate is a paltry 2%, so employers must pay more to attract workers. Higher wages mean more income tax collections.
“There’s been so much wage growth, and here we are again with record gains in income taxes,” Sen. Dan McCay, R-Riverton, said. “Hopefully, that shows the strength and resiliency of Utah’s economy.”
McCay sponsored last year’s legislation that dropped the state’s income tax rate from 4.95% to 4.85%. He’s already opened a bill file for another income tax reduction for next year. While there will be a robust push for another cut, McCay says lawmakers are wary of persistent inflation and a possible economic downturn.
“What goes up might come down,” McCay said.
Some of the effects of inflation are visible in the increase in corporate income taxes. It stands to reason that higher prices mean more profits, which increases tax revenue. But, if higher prices persist, it will eventually lead to people cutting back on spending.
Raiding the education fund
Income tax cuts may go into taxpayers’ pockets, but they come out of education funding. Utah’s constitution requires that all income taxes fund public and higher education and some social services for disabled residents.
The tax reduction package approved by lawmakers earlier this year carries a $192 million annual price tag, which is paid out of future money in Utah’s education fund. That same amount could boost Utah’s per-pupil funding by about 5%. Utah is near the bottom of all 50 states for per-pupil funding. Only Idaho spends less per student.
Utah lawmakers know the precarious politics of taking money away from schools to cut taxes. Earlier this year, they made the Orwellian move to change the name of Utah’s “Education Fund” to the “Income Tax Fund.” Paying for a tax cut out of the renamed “Income Tax Fund” will be much easier to sell to voters, even though the budgetary mechanics remain the same.
Even if lawmakers decide to cut taxes, Utah’s schools are in line for a hefty increase in funding even before the 2023 session starts. Lawmakers are obligated to fund enrollment growth in Utah’s public schools and cover inflationary increases under a change to the way schools are funded made in 2019. That resulted in a $263 million increase in the public education base budget for the current fiscal year. Lawmakers anticipate an even larger boost to the base budget for next year. The amount left over from that increase will set the parameters for any income tax cut discussions.
In addition to a possible income tax reduction, there will again be an effort to eliminate Utah’s 1.75% sales tax on groceries. Like last year, Rep. Judy Weeks Rohner, R-West Valley City, will be behind that effort.
In a recent Salt Lake Tribune editorial, Rohner argued cutting the state portion of the sales tax on groceries will benefit more Utahns than a cut in income taxes.
“Any income tax cut overwhelming benefits wealthy Utahns and corporations,” Rohner wrote. “On the other hand, eliminating the state sales tax on groceries benefits average Utah families more than an income tax does.”
This year’s 0.1% decrease in the income tax rate translates to about $100 in annual savings for the average Utah family earning $72,000 per year, or about $8 per month. On the other hand, Rohner says eliminating the state portion of the sales tax on food means families spending $300 on groceries per week would see more than $250 in annual savings.
Rohner’s proposal carries an annual price tag of $170 million, while Utah’s sales tax revenue increased by more than $600 million this year. While it seems like removing sales tax is an easily affordable proposition, McCay urges caution.
“There are still a lot of questions about how much of the additional sales tax revenue is related to the pandemic stimulus money that came into the state,” McCay says. “We just don’t know if that increase is as permanent as the wage growth.”