A new Utah Foundation report reveals the results of changes to the state’s income tax resulting from the 2018 legislative session.
It also explores the potential impacts of future changes to the income tax, which is dedicated entirely to public schools and higher education.
The report, The Education Tax: Income Taxation in Utah, is the second in a series of Utah Foundation reports on the state’s current tax structure.
Key findings include:
The highest-earning 20% of income tax filers produce two-thirds of Utah’s income tax revenue. They earn 60% of the income in the state.
The lower-earning half of income tax filers generate only 7% of Utah’s income tax revenue and earn 12% of the income.
The Legislature’s decision to drop Utah’s top marginal income tax rate from 5% to 4.95% meant Utah’s ranking dropped from 30th to 34th nationally. However, based on the most recent data, Utah’s income tax burden per $1,000 of personal income ranks 16th nationally.
Among Utah’s six neighboring states, only Idaho’s top tax rate is higher. Two neighboring states, Nevada and Wyoming collect no income tax.
Utah’s largest income tax credit, the Taxpayer Tax Credit, reduced state revenue by about $1.2 billion in 2016.
While the nominal 5% tax rate applies to all income earners, the Taxpayer Tax Credit reduces the median effective rate (the rate people actually end up paying) to 3%.
Cutting income taxes is not a silver bullet for economic growth. While income tax rates matter, there are an array of other factors that come into play as well.
Utah is set to receive a windfall in income tax revenues as a result of the 2017 federal tax reform. The Utah Legislature’s recent .05% reduction in income tax rates will decrease this windfall but will not result in a significant tax cut for households.
The federal income tax changes mean that lower- and moderate-income households benefiting from the Utah Taxpayer Tax Credit will pay more in Utah state income taxes. While the Legislature acted to reduce the windfall from the federal tax change by reducing the tax rate, the combined changes will disproportionately benefit the highest income earners.
“Utah has a relatively low income tax rate,” said Utah Foundation Research Analyst Christopher Collard, the primary author of the report. “But Utahns’ income tax ‘burden’ has been relatively high, 16th in the country. And recent changes in federal law mean some of Utah’s larger households will actually pay more in state income taxes.”