Kem C. Gardner Policy Institute: Tax modernization in Utah: Part four

Individual income tax is Utah’s largest and most volatile major tax revenue source, provides ability to
fine tune overall system fairness

Utahns share a common interest in a state and local tax system that provides for our needs, keeps the economy strong, and remains viable over the long term. The Kem C. Gardner Institute today released a visual guide that illustrates key components of Utah’s individual income tax – the state’s fastest growing and most volatile major tax.

“Utah faces relentless growth, changing cost structures, structural economic changes, and funding tradeoffs,”
said Phil Dean, chief economist at the Gardner Institute and lead author of the report. “These changes require
constant adaptation, innovation, and realignment of Utah’s fiscal systems. In Utah’s tax portfolio, the income tax
is notable for strong growth paired with downside volatility, constitutional constraints on use, and the best
ability among major taxes to fine tune the fairness of Utah’s overall tax system.”

Key data points from the visual guide include the following:

  • Defining and Measuring Income – Although seemingly simple, defining and measuring income in practice presents various complications. Different entities use different income definitions for different purposes.
  • Income Tax Base – Utah’s income tax base begins with the federal definition of adjusted gross income (AGI), which includes a broad array of income sources such as wages, interest, dividends, pensions and other retirement income, and capital gains. Some federal deductions enter Utah’s system via tax credits.
  • Income Tax Rates – Utah’s statutory tax rate currently stands at 4.65%. Because of tax credits, Utah’s median 2021 effective tax rate was about 3.3%. Many taxpayers pay higher marginal tax rates.
  • Income Tax Revenues – Utah’s income tax revenue grows strongly overall but is volatile. When income tax revenues drop dramatically, this creates state budgeting challenges, including challenges to consistently fund education over the business cycle.

In addition to key data points, the visual guide offers four public finance opportunities and challenges for policymakers to consider:

  1. Be Mindful of Revenue Growth and Volatility – Utah’s revenue sources grow differently. Over the past 50 years, individual income tax and corporate income tax revenues grew rapidly. But along with that strong growth comes strong volatility. That is, a healthy economy spins off major revenue increases, while a weak economy results in major revenue declines in individual and corporate income tax revenues.
  2. Consider Impacts of Tax Base on Tax Revenue Volatility – Among the three largest revenue sources that make up about 90% of Utah’s state and local revenues, income tax revenues grow the most, even with flat or decreasing income tax rates since 1975. This occurs because Utah’s income tax base paces quite well with the economy.
  3. Plan for Utah’s Changing Age Composition – The composition of Utah’s population has changed dramatically over the past 50 years. While Utah’s average age remains the youngest in the nation, Utah’s population is aging. Projections suggest continued future decline in the youth dependency ratio from current levels.
  4. Address Challenges Facing Utah’s Economically Disadvantaged Students – Although projections suggest flatter or even declining K-12 enrollment in coming years, this does not mean Utah’s education funding systems only have beneficial tailwinds. Rather, Utah faces significant headwinds, particularly with economically disadvantaged students. Fewer than 50% of students in grades 3-8 who are not economically disadvantaged scored proficient in mathematics and English Language Arts in 2021, indicating significant room for improvement in outcomes for all student groups. Utah’s economically disadvantaged students fare even worse, falling far behind their peers.

The full visual guide is now available online.