Explainer: Utah Stealthily Raised State Income Taxes

This morning, I woke up to this Twitter notification. (Turns out that Sheldon does really know me: this was #BrunsonBait in basically its purest form.) I immediately knew I was going to write a BCC explainer, and I figured it would be a quick and easy explainer: Utah’s tax conformity to the federal income tax meant that, when the TCJA reduced personal exemptions to $0, Utah’s personal exemptions fell to the same rate.

It turns out the story is more complicated than a story of the inadvertent loss of a tax benefit: Utah legislators did this deliberately.

But I’m getting a little ahead of myself. What’s the this that is happening to Utah taxpayers? In short, according to the article, the elimination of personal exemptions meant that Utahns, with their larger-than-average family size, would face a higher tax bill in 2018 than they would have without the federal TCJA.

Tell Me About Rolling Conformity

Utah’s income tax (like many states’) has “rolling conformity” with the federal income tax. What is tax conformity? It means that the state income tax adopts much (or all) of the federal income tax. And rolling conformity means that when the relevant federal tax law changes, so does the state’s.

How does this rolling conformity function in Utah? Well, under the Utah income tax, taxpayers calculate their taxable income by figuring out their adjusted gross income under the Internal Revenue Code, then making some adjustments laid out in the state tax law.

So the Elimination of the Federal Personal Exemption Changed the Federal Adjusted Gross Income?

This is the part that started confusing me. See, under the federal income tax, personal exemptions were deducted after figuring out adjusted gross income. Don’t worry too much about that; for these purposes, I just mean that eliminating the personal exemption for federal tax purposes wouldn’t impact a taxpayer’s adjusted gross income at all.

Okay, Now I’m Confused

I was, too. I had to dig through the Utah state income tax, and eventually I found the personal exemption language. And imagine my surprise at learning that it was utterly unrelated to the federal personal exemption. And, unlike the federal personal exemption, which was a deduction, the Utah personal exemption is a tax credit. And credits come long after adjusted gross income.

Okay, Gre … Wait a Second—What’s the Difference Between a Deduction and a Tax Credit?

Both reduce your tax liability. A deduction reduces your tax liability by the amount of the deduction times your marginal tax rate. A credit, by contrast, reduces your tax liability on a dollar-for-dollar basis. As an example: the current Utah personal income tax rate is 4.95%. So if you have a $100 deduction, that reduces your state income tax by $4.95. If you have a $100 credit, it reduces your state income taxes by $100. (This becomes relevant in just a minute.)

Great. Where Did the Article Get the Idea That the Personal Exemption Was Gone, Then?

That took me a lot of time to figure out. It turns out that in July 2018, Utah’s governor signed H.B. 2003, which adjusted the state income tax in several ways, including by addressing the personal exemption problem.

Prior to the amendment, the personal exemption did conform to the federal personal exemption. For each dependent, a taxpayer got a credit, calculated by multiplying 75% of the amount allowed as a federal personal exemption and 6%.

The federal personal exemption amount was indexed to inflation but, because the TCJA was enacted so late in the year, the IRS had already given the inflation-adjusted amount for personal exemptions. They would have been $4,150 per dependent. $4,150 x 0.75 x 0.06 = $186.75; in other words, a family’s state tax liability would go down by $186.75 for each dependent. A family with three qualifying children, then, would reduce their its tax bill by $560.25.

Of course, with conformity, that number would have dropped to $0. Seventy-five percent of a $0 federal personal exemption is $0. The Utah legislature thus replaced that personal exemption with its new version. And how much does the new version reduce taxes?

Not nearly as much. The new Utah personal exemption is $565 per dependent. To calculate the tax credit, a taxpayer multiplies that amount by 6%, and reduces her state tax bill by $33.90 per dependent (or a whopping $101.70 for three).

That is, Utah’s personal exemption has fallen by 82%.

Of course, this isn’t entirely apples-to-apples. The same bill reduced the income tax rate from 5% to 4.95%. And what does that mean? Let’s illustrate it with a hypothetical Utah family with three children under the age of 16 and $50,000 of Utah taxable income.

In a world without the TCJA, where Utah kept its tax rate at 5%, the family would originally owe $2,500 in taxes. They would reduce the tax bill by their $560.25 credit, for an ultimate state tax bill of $1,939.75.

In the world that exists, though, the family faces a tax rate of 4.95% for an initial tax bill of $2,475. They reduce that bill by their $101.70 for an ultimate tax liability of $2,373.30.

So Why Would Utah Do This?

To be fair, with state taxes, I’d never 100% write off the idea of incompetence.

But I kind of doubt it’s that. The math isn’t that complicated. Honestly, I suspect it was a stealth tax increase.

I mean, it’s very clearly a tax increase; the amount of tax the family owes went up by more than $400, which is right around 1/5 of the total tax bill. Some rough back-of-the-keyboard math: about 30% of Utah’s 3.2 million person population is under 18. Assuming they all qualify as dependents of Utah taxpayers, that means there are about 960,000 minors in Utah. If each child represents a $152.85 increase in the family’s state tax bill, that’s an additional $146.7 million for the state. (My numbers are almost certainly high: the credit is non-refundable, so if a family isn’t paying taxes, they don’t have a tax reduction. And not every child under 18 is going to be a dependent. But it gives a rough sense of how much money is at stake.)

But it’s not an obvious tax increase. In fact, the legislature lowered the tax rate. So legislators can say—honestly and with a straight face—that they didn’t increase taxes while, at precisely the same time, increasing taxes.

[Thanks to Nicole Kaeding, John Buhl, and Jared Walczak, who helped me think through this stuff on Twitter.]

Comments

  1. Great explainer, Sam. Tricksly little legislatorses.

  2. The whole thing is a joke. We have NEVER in 36 years of living in Utah owed any state tax at the end of the year. In fact, we have on average gotten about $3,000 back. We purposefully set our numbers that way by claiming zero allowances, even when we had kids in the house. This year we were shocked to discover we owed $1200! With zero allowances, how is that possible?! We even decided to pay someone to double check our numbers. Again, something we have never had to do. We were not happy.

  3. [Rephrasing Sam] In Utah a dependent used to be worth $186.75 in tax savings (at a 5% tax rate), would be worth $0 on strict conformity, and now is worth $33.90. And the overall rate is now 4.75%. That gives everybody who wants one a story about increase OR decrease in taxes.

    What bothers me most is the lack of transparency. Idaho is an interesting comparison, as a nearby state with important Church member representation in state government. (Arizona would be the other interesting comparison, but Arizona’s tax system does not conform to Federal in the same way and the Arizona exemptions appear to be unaffected by the TCJA.)

    In Idaho the State Tax Commission issued estimates of effect without legislation, showing that loss of the personal exemption would increase Idaho revenue by $272.3 million and loss of dependent exemptions would increase Idaho revenue by $139.5 million. (Idaho State Tax Commission, January 19, 2018). In response, in 2018 Idaho added a $205 per dependent credit “to help offset the loss of the dependent exemption.” The credit is not a full offset, but taking into account an overall rate reduction the net effect is rough justice at modest income levels.

  4. We’ve always set our exemptions so we generally get a couple hundred dollars back. This year we owe just over $400. We’re a pretty average middle class family with 4 kids. Thanks Utah.

  5. Laurie L Holman says:

    Nebraska dealt with this last legislative session (2018). They were very open and transparent (and angry) when debating this bill on the floor, talking about how they were making sure they would NOT give the state a HUGE WINDFALL at the taxpayer’s expense. And they passed it, which restored the personal exemptions to the Nebraska tax code that were deleted in the federal tax code. The takeaway: Never assume your state legislators are honest simply because they are members of the LDS church.

  6. “To be fair, with state taxes, I’d never 100% write off the idea of incompetence.”

    Bingo . . . although with the Utah Legislature I’d never 100% write off a deliberate decision cloaked with a lack of transparency either.

  7. Kevin Barney says:

    Ah, Utah’s conservative, tax-averse legislators at work. Thanks for this fascinating look at how the sausage gets made.

  8. I was told there wasn’t going to be any math on this blog.

  9. Thanks for this article. I was also confused as to how the federal tax change would affect Utah taxes without affecting AGI, but I’m not tax-savvy enough to figure it out myself.

    Was there also a change to how Utah does withholding? Because the stories I’m hearing about thousands of dollars difference between last year’s refund and what’s still owed for this year seem to involve amounts much larger than $186.75 per dependent versus $33.90 per dependent. I know we have large families here, but I’m guessing that a swing of over $4000 isn’t for a family of over 20.

  10. Mike, that’s an interesting question, and I’m afraid I don’t know. I’m not a Utahn myself, and I’m not primarily a state tax guy, so I pretty much created and exhausted my knowledge of Utah state taxes in the OP.

  11. This is an extraordinary post. Also BrunsonBait = StapleyNip.

  12. Regarding withholding:
    1. At reasonably high confidence, the big dollars (multiple $thousands) are almost certainly Federal income tax.
    2. At middling confidence, tax experts are saying “you should have known” about withholding, but everybody else is highly suspicious that the government–both State and Federal–has/have been shy about communicating bad news and in particular wanted to get beyond the mid-terms of 2018 before the real dollar impact of the TCJA hit.

  13. Kevin Barney says:

    The IRS lowered its withholding tables in the wake of the TCJA to reflect a lower tax liability. As a consequence, people may be paying less tax but also getting less refund or having to pay out of pocket. In theory those people are still better off, but in practice many feel cheated out of the type of refund they were accustomed to getting in the past. If they don’t want to have to pay on April 15th in the future they need to talk to HR and increase their withholdings.

  14. The dishonesty of these Utah GOP lawmakers makes me sick.

  15. There’s one other factor that also need to be considered that helps lessen the blow a bit and one that actually increases the blow. Utah is also allowing the increased standard deduction when calculating the credit a taxpayer receives. So while the amount of the personal exemptions for Utah purposes may be going down, the amount allowed for standard/itemized deductions for Utah purposes may be going up (depending upon the taxpayer’s situation). For example, a family of 6 with itemized deductions of $13,000 (net of state taxes) would have had a credit of about $1,900 under old law ($4150*.75*6*.06+$13,000*.06) before any phaseouts. Under new law, this family does have a lower amount from exemptions (lower amount of $565 and only dependent children count now, so 4 people instead of 6 as in the past, increasing taxes), but they’ll have a higher standard deduction now that exceeds their old itemized deduction amount. So the credit is $1,575 ($565*4*.06+24,000*.06), a tax credit difference of $325 before any phaseouts.

    For this fictional family of 6 in the article assuming the standard deduction of $24,000 for 2018 and the old standard deduction that was in place in 2017 ($12,700), their taxes would be $1,179 under new law and $897 under old law.

    The people who will actually see a decrease in taxes (mostly from the change in rate) are those with higher incomes, because they are usually phased out of the credit, so the number exemptions, deductions, etc. have no impact on their taxes. They were paying a flat 5% and are now paying a flat 4.95%.

  16. On the question of whether the Utah Legislature did this intentionally or out of incompetence:

    This was intentional. Legislators debated the implications of federal tax law changes on state income tax at length in the 2018 General Session. In the end, they voted to lower the income tax rate from 5.0% to 4.95% so they could claim they had voted to lower taxes, even as they chose (through inaction) to raise state income taxes by taking no action in response to the changed federal tax law. Classic doublespeak.

    Later that summer they met in special session and took some actions to meet the changes halfway. But the long and the short of it: The Legislature knew very well that inaction would increase income taxes and chose to just let it happen.