Jared Walczak and Rusty Cannon: Utah shouldn’t allow its neighbors to outcompete it on tax cuts

Utah is finding that its reputation for low taxes is being threatened by cuts in other states.

(Jeremy Harmon | The Salt Lake Tribune) Utah's individual income tax return form.

Tax competition is accelerating, and suddenly states like Utah have rivals nipping at their heels. Utah can maintain its status as one of America’s most competitive states, but only if policymakers are willing to step up to the plate and embrace a changing economy.

During the pandemic, American workers and businesses alike saw the economy shift. For many, we are now living in what can only be described as a highly mobile economy. A graphic designer employed by a nonprofit in Washington, D.C., can live in Salt Lake City. A marketing manager working for a firm in Pittsburgh can call Provo home.

Someday the pandemic will end. The changes it accelerated in how we live, and work are here to stay.

Over the past year, 16 states enacted or implemented tax cuts. It’s telling that many of these same states also saw an increase in workers moving there and that they have emerged as standouts for economic growth.

This is just the beginning of the state tax cuts nationwide to come. Already, eight states have begun serious dialogues about cutting their personal income tax rates in 2022.

Utah was nowhere to be found in either of these groups. That shouldn’t be the case, especially as Utah’s 4.95 percent rate, once considered low, is now just a hair better than the national average. In 2022, 5.3 percent is both the median and average top rate nationwide. Once all the reforms adopted in 2021 are phased in, the median will be 5.0 percent — or quite possibly lower.

The Beehive State has long been the envy of its peers for its pro-growth tax policy. The state’s population grew during the pandemic as taxpayers left higher-cost, higher-tax locales. The state enjoys a spot among the top 10 most competitive in the Tax Foundation’s State Business Tax Climate Index. But unless state lawmakers act soon, Utah will be edged out by more proactive states.

And what a shame that would be. Utah today is associated with competition; it’s known for being a suitable place to work and live. The word “average” is not in its vernacular. Policymakers must not take that for granted.

Even more to the point, Utah tax revenues are growing — fast. That is a good problem to have, but in a state which has prided itself on fiscal restraint, it is still a problem to solve. Many states are returning a substantial share of their future revenue growth to taxpayers in the form of meaningful rate reductions. In Utah, however, the discussion has largely been limited to shaving a tenth of a percentage point off the state rate, reserving the lion’s share of revenue growth for state government.

This is Utah. Shouldn’t it be the other way around? Particularly given what regional competitors are doing?

Arizona lawmakers adopted a $1.9 billion tax cut package that may eventually yield a 2.5% flat individual income tax. Colorado implemented rate cuts last year and will have another round of cuts on the ballot this year, to bring the state’s rate to 4.4%.

Utah could probably match that if policymakers prioritized giving the additional money back to taxpayers. At a minimum, they can certainly do better than a 0.1 percentage point trim, or nothing at all.

After everything people have gone through these past few years, if government is collecting more money than it needs, it shouldn’t hold onto it, but return it to taxpayers. Utah is in position to meaningfully lower its income tax rate in a way that truly looks out for taxpayers and keeps its enviable position as a national economic leader.

Jared Walczak is vice president of state projects at the Tax Foundation, a nonpartisan think tank in Washington, D.C.

Rusty Cannon is president of the Utah Taxpayers Association.