‘Historic tax cuts’ mean money not spent elsewhere in Utah

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Legislative leaders have promised a massive tax cut this year. In December, they set aside $400 million of a projected $2 billion surplus revenue for tax reduction, showing they intend to make good on that promise.

This will be the third straight year of tax cuts. In 2021, they passed a $100 million package that included expanded exemptions for dependent children and reduced taxes for retired military members and Social Security dependents.

In 2022, lawmakers wasted no time, ramming through a nearly $200 million tax cut package before the session was even half over. That included $160 million to drop the state’s flat income tax rate for individuals and corporations from 4.95% to 4.85%. The bill added about $15 million for an Earned Income Tax Credit to benefit low-income Utahns and $16 million to expand the state’s Social Security tax credit.

This year, the push toward tax cuts is moving much more slowly. House Speaker Brad Wilson, R-Layton, promised “historic tax cuts” during his speech on opening day. He predicted the final tax reduction package would likely include a combination of income taxes, social security tax reductions and other measures. Wilson says all the tax cut proposals are on hold as House and Senate Republicans negotiate behind the scenes.

“I’d like to see a larger cut than what we’ve set aside money for. We’ll work that out as we get budget numbers later this session,” Wilson later told members of the press.

Those tax cuts do come with a cost. Revenue not collected or sent back to Utahns is money not spent on state programs or Utah’s historically low per-pupil education funding.

Rep. Nelson Abbott, R-Orem, wants to take a big swing at tax cuts this year. His House Bill 240 aims to drop the state’s income tax rate from 4.85% to 4.65%, which doubles last year’s tax cut and carries a price tag of more than $379 million annually.

“We gave a tax cut last year and even the year before. I think the appetite is there for a bigger cut,” Abbott said in an interview with The Salt Lake Tribune.

Abbott’s bill isn’t the only idea being bandied around during the 2023 session. Gov. Spencer Cox floated giving every taxpayer a one-time rebate check ranging between $100 and $1,345 depending on income level, though there does not seem to be much enthusiasm from lawmakers to move forward on that.

Whatever plan lawmakers eventually settle on, they’ll have to pay for it by reducing the future revenue flowing into state coffers. Abbot’s 0.2% reduction in the income tax rate would result in a drop of $379.5 million in income tax revenue, annually.

Most of Utah’s current surplus revenue results from higher-than-expected income tax collections. For the first six months of the current fiscal year, income tax revenues are 25.3% higher than the previous year, meaning an extra $616 million in revenue. Corporate income tax collections have dropped by $22.7 million over the same period, a 6.4% drop.

Utah’s Constitution puts restrictions on how lawmakers set the budget. Income taxes can only pay for public and higher education and some social services for disabled residents. Other tax collections, like sales and gas taxes, pay for everything else.

Because of that constitutional requirement, lawmakers have two buckets of money they use when making decisions about the budget - the Income Tax Fund, which pays for education and special services, and the General Fund, which pays for everything else. The Income Tax Fund was previously called the Education Fund, but lawmakers changed that last year.

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Any income tax cut will be at the expense of future funding that could go to Utah’s schools.

Utah is perennially at or near the bottom of all 50 states in per-pupil funding. The $191 million income tax reduction lawmakers approved last year could have increased per-pupil funding by approximately 5%. The $379.5 million cost of Abbott’s 0.2% income tax decrease could increase the state’s per-pupil funding by more than 10%.

While the momentum this year is squarely behind a sizeable income tax cut, another tax relief proposal does not divert any funds away from education. HB101 from Rep. Judy Weeks Rohner, R-West Valley City, eliminates Utah’s 1.75% sales tax on groceries. The price tag of Rohner’s bill is $155.3 million annually, with the money coming from the General Fund. Rohner sponsored similar legislation last year, but the bill died without so much as a committee hearing.

Lawmakers won’t know for sure how much extra revenue they’ll have to spend until they get new consensus revenue estimates sometime next month.