Taxsplainer: How the Utah Legislature Is Raising Taxes By Doing Nothing

The Salt Lake Tribune is reporting that the Utah legislature has just enacted a large tax increase on many Utah families, in spite of its putative 0.05 percentage-point tax cut. How can that be?

It’s the result of something called “federal conformity.” Federal conformity basically means that the state income tax uses the Internal Revenue Code as a jumping-off point, and then makes adjustments where it feels adjustments are necessary. Why federal conformity? I’d imagine for a couple reasons. For one thing, writing tax laws is complicated, time-consuming, and hard. If a state starts with the federal income tax, it outsources most of that work to the federal government. For another, it makes it easier for a state resident, who has to calculate her taxes for both federal and state purposes, to use a single set of calculations.

Of course, outsourcing that work means that, when they federal government makes changes to the tax law, those changes potentially affect the state’s revenue, too. As a result, some states employ “static conformity,” meaning they’ve adopted the Internal Revenue Code the way it looked in 2008 or 2011 or 2016 or some other specific year. To the extent the federal income tax changes, the state legislature has to look at the changes and decide whether to accept them for state income tax purposes.

Other states (including Utah) employ “rolling conformity.” That means Utah’s tax law changes when the federal income tax changes.

And therein lies the problem.

So What’s Up With This Utah Tax Increase?

Two things. Utah bases its state taxable income on federal adjusted gross income. It allows certain adjustments to adjusted gross income, though. Two significant adjustments are credits for the standard deduction or itemized deductions and for personal exemptions. In short, it I take the standard deduction for federal income tax purposes, I get a tax credit against my Utah state income tax of 6% of my standard deduction. Similarly, I get a tax credit for 6% of my personal exemptions.[fn1]

Now, if you’ve been reading my posts regularly (and who hasn’t?), you may remember something about this new bill: it doubled the standard deduction and eliminated the deduction for personal exemptions. And because Utah has rolling conformity, that means these two changes factor into the state income tax. What does that mean, numerically? Let’s imagine you have a family of six. Before the tax bill was passed, the standard deduction for a married couple filing jointly would have been $13,000, and the personal exemption would have been $4,150 per individual. Combined, they would have reduced this family’s state income tax bill by $2,274.

But under the tax law as it now stands, the couple will have a standard deduction of $24,000 and personal exemptions of $0. Combined, the family’s state income tax is reduced by $1,440.[fn2]

The federal income tax partially and temporarily makes up for the loss of personal exemptions by basically doubling the child tax credit.[fn3] But that doesn’t work for Utah taxes, because Utah expressly disallows the use of federal tax credits in calculating state income tax.

Could the Utah Legislature Have Done Anything About This?

Of course they could have. States decouple their tax law from the federal income tax all the time. Sometimes that decoupling is broad; sometimes it’s only one or two provisions.

Moreover, the legislature did enact tax changes. Specifically, it cut the tax rate from 5% to 4.95%. Legislators can claim they cut taxes. And they did cut some individuals’ taxes. If you’re unmarried and don’t have kids, or if your income is high enough that the Utah tax credits I mentioned above have phased out, your taxes have been cut. But for our family of six, assuming they have state taxable income of $66,000 (roughly Utah’s median household income), that tax cut reduces their tax bill by $330. On net, then, the legislature’s inaction on the personal exemption and its tax reduction have increased the family’s state income tax by $504.

Now frankly, raising taxes is not necessarily the wrong thing to do. But it should be done transparently, rather than with the plausible deniability of a putative tax cut that turns out, in fact, to be a tax increase. And that’s what Utah’s getting.


[fn1] Note that these benefits phase out for higher-income individuals. I’m not an expert in Utah tax law, though (honestly, this is the first time I’ve looked at it specifically), so I’m going to call the phaseout outside the scope of this blog post.

[fn2] The bigger the family, the bigger the difference between the amount of tax reduction under prior law and the amount under current law.

[fn3] It’s not a perfect fix, as I explained in my earlier post, but it resolves a lot of the problems associated with the loss of personal exemptions for a lot of families.

Comments

  1. lastlemming says:

    Lest non-Utah readers think this doesn’t affect them, here’s a link that talks about a lot of other states and how they are responding.

    https://itep.org/trends-were-watching-in-2018-part-1-state-responses-to-federal-tax-cut-bill/

  2. “Could the Utah Legislature Have Done Anything About This?” — I believe a few other states have addressed it rather than doing nothing, as Utah did.

  3. I’m interested in how knowing and intentional the Utah and other states’ reactions are? The common hypothesis these days is Republican-controlled legislatures–Federal and State–are looking to reduce taxes on business while preserving a re-election talking point that they have reduced taxes on individuals.

    Sam, your “plausible deniability of a putative tax cut” suggests an answer. I assume it’s intentional.

  4. Your explanation would make more sense if you showed more explicitly where your $504 figure came from. I assume it’s calculated by subtracting the new reduction (due to the increased standard deduction) of $1,440 from the old reduction (due to both the old lower standard deduction and the six exemptions) of $2,274. The difference is $834. Subtract out the $330 due to the putative tax cut and you get $504. I had to read this three times to follow your math.

    One assumption you make that I would dispute, however, is your $66,000 figure. You’re using that as taxable income and yet in parentheses are claiming that this is Utah’s median household income. But taxable income is generally quite a bit lower than income. In fact, in your example, you would reduce income by at least the $24,000 standard deduction to get taxable income. So maybe $42,000 is a more accurate figure for taxable income. This will affect your numbers.

  5. Wally, you’re right that taxable income is lower than median household income. But we’re looking at adjusted gross income here–that’s before the standard deduction. In fact, like I said in the post, Utah doesn’t have a deduction for the federal standard deduction. Instead, it provides a credit against taxes of 6% of the standard deduction. So while $66,000 is an arbitrary amount, it’s close enough (and likely closer than $42,000); moreover, I chose it merely to allow me to do the math for an example.

    And you’re right about the math. Again, at blog post level, I didn’t feel like showing my work.

  6. Should also address that the leg also raised the property and gas tax also during one of the largest surpluses in recent memory.

  7. Chadwick says:

    My guess is that UT, like many states, don’t know what to do. UT has a history of rolling conformity so this is status quo. The problem is that tax reform was not your average law change. I think it will takes years for both the feds and the states to truly understand if this legislation raises revenue or not. I truly doubt Utah gave it any real thought unfortunately.

    And since my area of expertise is corporate tax, I’ll add that the mess created there is even more complex to navigate.

    But on the plus side, my firm is having a banner year! :)

  8. Thanks, Chadwick. I’m sure you’re right that at least some didn’t know what was going on. But there should be staff that could explain this to them, right?

    Also, I’m glad that at least the tax changes have been ensuring work for you and for my students! #SilverLinings

  9. This post was more bad/good news for me personally. The vaunted Republican tax “cuts” will actually be a tax increase for me and millions like me, whose itemized deductions fall in between the old and new standard deductions. Because of the lost personal exemptions, my taxable income will increase dramatically. The lower rates help offset that, but I end up paying more under the new system. And I am middle class. So all this nonsense about a middle-class tax cut is largely propaganda. Many middle-class Americans will get a very small tax reduction, but this is also temporary. The big winners, as is always the case with Republican economic ideas, are the already wealthy and the big corporations. Trump, for instance, will make off like a, well, a bandit. Imagine that.

    And now it appears my Utah taxes will also increase. But I’m not complaining. I’ve been saying for years that people like me needed to be paying more to balance the budget. But I’ve also said that the wealthy need to be paying a lot more, and that, unfortunately, will never happen under a GOP regime. All that talk of the massive debt under Obama was just partisan posturing. Now the truth comes out. Do you hear any GOP congresspeople bemoaning the trillion-dollar annual deficits we will enjoy under Trump? Oh, a handful complained, but they also voted for this abominable tax bill. Remember that in November.