Sales Tax by Nick Youngson CC BY-SA 3.0 Alpha Stock Images
If your Twitter feed is anything like mine, you’ve probably heard by now that the Utah legislature passed a tax bill last week in a special session. The governor has apparently said he plans to sign the bill.
The bill has been controversial, to say the least. It was even protested by an odd assortment of characters including not only Utah Legislative Watch and Alliance for a Better Utah, but also Santa Claus and the Grinch. A lot of the objections seem to be to process—the bill went from proposed to passed in less than a couple days, and was passed in a special session (though, as a non-Utahn, I don’t actually know what that means). But there has been pushback against the substance, too. A lot of that pushback resonates with me: there have been significant complaints that the changes amount to a more-regressive tax burden on Utahns, with new taxes burdening the poor, while tax cuts redounding to the benefit of the wealthy. And that, in the words of both of Isaiah and the Twitter feed of the greatest blog in the universe, would be grinding the faces of the poor.
So is that what Utah’s doing? Not entirely, it turns out.
First, though, two caveats: state and local taxes, including Utah’s, aren’t my primary focus. Also, the bill is 217 pages long, and I didn’t read the whole thing. I’m going to focus here on the income tax cuts and the sales tax changes. And I’ll refer to the page numbers of the PDF I linked to, rather than line numbers or statute numbers, mostly because that’s easier.
So first, the income tax cut: under the bill, Utah’s individual and corporate income tax rates fall from 4.95% to 4.66%.[fn1] The benefit of these cuts will redound primarily to the wealthy, for a couple reasons. One is, the wealthy pay more. So if I (pretending I’m a Utahn) have $50,000 of taxable income, I currently pay $2,475. With the tax cut, I’ll pay $2,330, giving me a tax cut of $145. If I have $5 million of income, I currently pay $247,500, and under the bill I’ll pay $233,000, for a tax cut of $14,500.
But it’s more than that. Utah law provides for a tax credit of 6% of a taxpayer’s federal standard deduction.[fn2] I’m not going to show my work, but doing the math, that basically means married Utah taxpayers who file a joint return don’t pay taxes on their first ~$30,000 of income. Those taxpayers get no benefit at all from an income tax cut, because both before and after, they’re not paying income tax.
They are, however, paying sales tax. Now, sales tax is an inherently regressive tax. A regressive tax is one where lower-income individuals pay a higher percentage of their income in taxes than higher-income individuals.[fn3] Why? Because generally speaking, lower-income individuals have to pay a higher percentage of their income in taxable consumption than higher-income individuals. Higher-income individuals can certainly buy more products and more-expensive products, but at the end of the day, they also have leftover money they can invest, save, or spend on non-taxable consumption (more on that in a minute). Poorer individuals, on the other hand, have to spend a higher percentage of their money on basic consumption, without necessarily the ability to shift it to non-taxable consumption.
Often, states deal with this by exempting some necessities from the sales tax, or taxing them at a lower rate. Groceries and medications are notable examples of this (and over the last couple years, tampons have started to join states’ lists of exempt necessities).
There are two big problems with exempting certain things from the sales tax, though. One is, it requires really specific rules to police the boundaries. So, for instance, many states exempt (or have a lower rate) on groceries, but then they take “candy” out of the definition of groceries (so candy’s subject to ordinary sales tax where groceries aren’t). But then the state has to define the difference between candy and groceries. Many states (including mine!) use flour in their definition. So Twix—which includes flour—is classified as tax-exempt groceries, while Reese’s Peanut Butter Cups–which don’t—are taxable as candy. So exempting groceries introduces both complexity and artificiality into the tax base. It’s harder to enforce and harder for retailers to know what to do.
The second big problem is it narrows the tax base. That means that the sales tax rate has to be higher on those things that are subject to the sales tax. People who consume those things bear a larger percentage of the tax burden, and people have an incentive to shift their consumption to untaxed items (like, if you like Twix and Reese’s, from a tax perspective, you should buy Twix).
You can eliminate both of these problems by taxing all food at the same rate. But doing that means the tax burden on the poor will increase. So what do we think about the sales tax changes?
In the first instance, most of them are probably progressive. The tax change did import groceries into the tax base (raising the tax rate of them from 1.75% to 4.85%).[fn4] But that was just a small part: a big thing the bill does is to put services into the sales tax base. Under the bill, the sales tax now also applies, among other things, to 900 numbers (are those still a thing?), online streaming services, downloading music and books and things, security system monitoring, some in-state transportation (which seems to be largely taxis and Uber), parking, pet grooming and boarding, dating services, and identity theft protection services.[fn5] It’s an empirical question, of course, but most of these services likely appeal to middle- and upper-income individuals. If that’s right, most of the burden of the additional sales tax will fall precisely where it should, while, at the same time, broadening the tax base in a socially-desirable way.
But what about the increase in the sales tax on groceries? Well, the legislature also introduced a refundable grocery tax credit. The credit applies to families with income up to 175% of the federal poverty level (or, if the family has more than 5 people, up to 175% of the poverty level for a family of 5).[fn6] In 2019, for a family of 4, the federal poverty level is $25,750, and 175% of that number is $45,062. So Utah families with up to $45,062 of income get the full refundable credit. After that, it phases out as income rises.
And what is the credit? It’s $125 per person for a family of up to 4, and an additional $50 per dependent above 4. So a family of four gets a $500 credit. That’s the equivalent of the sales tax on about $10,300 of groceries a year, or $860 of groceries per month. So if a family of four buys $860 of groceries a month, the credit means they’re effectively not paying sales tax on their groceries. If they pay less for groceries, they’re effectively getting a rebate from the state, and if they pay more, they’re paying a lower effective rate.
Moreover, the credit is refundable, which means that if they don’t pay any income tax, Utah will send them a check for $500. If they owe $300 in state taxes before the credit, their tax bill will go down to zero and they’ll get a check for $200.
Now, this system isn’t perfect. If the low-income family pays state income taxes, they file for the credit on their return. If they don’t pay state income taxes, the state will issue a new form that they have to fill out. So getting the credit will require affirmative effort by individuals who may not have the emotional bandwidth to file an additional form. Paying the tax, however, will be automatic. So unless the state makes it really easy to file for the credit, and advertises its existence widely, the most vulnerable may not get the benefit. And that’s a real problem. And I frankly don’t know if the amount of the credit is set well, because I don’t know how much families below 175% of the poverty level pay for groceries.
Also, instead of lowering everybody’s income tax, Utah should have shifted to a progressive income tax. (Progressive state income taxes undo some of the regressivity inherent in sales and property taxes.)
Overall, though, the refundable grocery tax credit, combined with the fact that Utah is including services aimed at middle- and upper-income families in the sales tax, makes me less negative toward this change than I was before I read through it.
[fn1] Look at pp. 42 & 50.
[fn2] p. 58.
[fn3] FWIW, the quintessential regressive tax is a head tax. If every person owes a tax of $1,000, that’s 10% of the income of an individual who earns $10,000 a year, but it’s only 1% of the income of an individual who earns $100,000, and 0.1% of the income of an individual who earns $1 million, etc.
[fn4] p. 140.
[fn5] This list starts on p. 136 and goes on for a number of pages.
[fn6] All of the grocery tax credit stuff starts on p. 76 and goes for several pages.
By Common Consent, a Mormon Blog 
Of course the poorest won’t file at all, won’t have easy access to cash checks at all without penalties, won’t be able to fill out the forms, etc., so the refund is ineffectual for those hit hardest by the grocery hike.
I mean, ultimately it’s a matter of implementation, and I can’t speak at all to that. I agree (as I mentioned) that requiring non-filers to file a form is likely to be a big problem, though if the state prepares the form itself (that thing that Intuit hates), it becomes less of a problem. And it also matters how the state distributes the refundable credit. But refundable credits themselves are a fairly effective manner of providing welfare benefits (for all its problems, the EITC does great things). So conceptually, I think this is a reasonable move, contingent, of course, on how it’s implemented.
In answer to your question about not knowing what a special session means: Utah has a part-time legislature that only meets full-time to pass laws for 45 calendar days, starting this General Session on last Monday in January. They meet in interim committee meetings one day a month for the rest of the year, but not as a full House or Senate. The Governor (and in “an emergency” the Legislature itself) can call the legislature to meet in a Special Session to pass bills as if it was a General Session. Typically these are called to address relatively urgent needs and oversights in laws passed during the previous general session. That varies from when the Legislative Fiscal Analyst essentially made a big Excel sheet error and they had to almost completely reallocate the state budget one year. Another example was earlier this fall; in the General Session the Legislature voted to allow higher alcohol-by-volume beer in grocery and convenience stores, but they didn’t allow retailers to legally stock up on it until after the effective date (Halloween). So to avoid a situation where beer shelves would be emptied of soon-to-be-discontinued lower ABV beer on Halloween, they met in a special session to allow retailers to stock in warehouses (but not sell) higher ABV beer.
Because Utah is dominated by Republicans, most of the decisions on bills for Special Sessions are decided by closed-door party-member caucus meetings and involvement by the Governor. It was the same in this case; the actual tax bill that was passed was made public only minutes before it was debated, and ultimately passed, on the floor of the houses. And the Governor immediately signaled his intention to sign the bill.
Some of the criticism of the rushed process is that, while there were several task force meetings held statewide, there were no bill drafts produced until late in the process. Additionally, there seems to be no reason to pass a bill in December other than for it to take effect for the new year. Part of the bill is tax “prebate” checks sent sometime in 2020 with the household’s share of the income tax cut; it is believed that this is an election-year tactic to remind voters of cut taxes.
Thanks for the context, Brett. That’s really helpful.
Saying that Utah should shift to a progressive income tax seems straightforward in the post, but as a political reality would likely not be easy. Utah’s constitution requires that all income tax be spent on education. If the purpose of changing the tax is to stabilize income for the state overall, enabling the government to spend additional revenues collected by altering the income tax on things in addition to education, that section of the constitution would have to be removed or at least revised. And there is a large constituency that would oppose such a change for fear that the government would spend less than the already appallingly low amount it currently spends on education. So the weird finagling they’ve done here is likely an attempt to broaden the base and stabilize revenues without having to go through the difficult process of amending the state constitution and without facing the broad pushback they faced when attempting to tax all services.
See, there’s tons I don’t know about state of politics in Utah! I’m looking purely from a tax perspective.
Those earmarking income taxes solely for education seems super-dumb to me, and I hate state constitutional limitations on income taxes. (Illinois will, I hope, soon change its constitution to permit progressive income taxes.)
Might be worth noting that the Utah constitution is a lot easier to amend than the U.S. constitution. Seems like there’s a set of amendments on the ballot every couple years, and they pass more often than not. But I suspect that it might be harder to get a constitutional amendment through to remove the requirement that income taxes be spent on education. The restriction is bad — but who would trust the legislature’s motives for proposing that it be removed?
Please note that people who condemn Utah state legislators for “not adequately funding” public schools are shills for the teacher unions. Who only know that more money is always the answer to fix all educations problems. Utah is committed to funding public education as much as possible when it is spending over 40% of the entire state budget to education. Despite the fact that across the country government schools are failing to educate our children in basic academics.
Utah, with its culture of stable two parent families (usually with Moms managing the home) produce among the best education outcomes. Other states that spend more money have worse outcomes because the backbone of stable marriages and families are missing.
Mark L., that’s outside the point of the post. It’s also flat-out wrong, and if that attitude pervades Utah funding, then Utah’s doing a huge disservice to its most vulnerable students. But Utah’s educational outcomes are, like I said, nowhere near the ambit of what the post explores.
Given that poor people also buy non-food items, I’ve always felt that not taxing food doesn’t do much good in the end. I’d rather keep sales tax simple and apply it to everything.
What is wrong about my previous post? No one ever talks about the percentage of state budgets going to education. You only hear that Utah is last in the nation, and we need to drastically increase spending.
I’m wondering if the state rectified the nasty consequences many Utah taxpayers incurred from the legislature’s failure to act when the US tax code was changed re exemption amounts in 2018.
High taxes doesn’t always equate to better education. I’m in an area with 6.9% state income taxes, compared to Utah at 4.95%. But, our sales tax comes in at 10.5%, and the education system here is one of the worst in the country. Add a state lottery that claims to fund education exclusively, and there’s plenty of money being thrown at the problem.
Utah may claim to be last in the nation in education, but from my time living there, I’d hazard a guess that more than 45% of high school graduates are able to read at a 5th grade level.
wvs, I don’t remember offhand what Utah’s issue was (though I assume that with federal conformity Utahns’ lost their exemptions). The personal exemption in Utah jumps up under this bill to $2,500, so I think they tried to fix it.
And if we’re dying to wade into education: Mark, you argue that Utah can underfund education (comparative, at least, to other states) because so many Utahns’ have stable two-parent homes. And you’re absolutely right that having two-parent homes where both parents have college+ education virtually ensures good educational outcomes. But if the education system is based on the backstop of dual-parent homes, they aren’t serving kids who don’t come from that background. And a quick Google search says that that is nearly 20% of Utah’s kids. So sure, 80% will thrive, because they would thrive no matter what the education system looked like. But if we’re aiming our education system at those 80%, we’re leaving the 20% without advantages behind.
A couple years ago I was at a presentation about Chicagoland schools. The suburbs here have some reputationally-strong schools, while the city has a reputation for poorer schooling. But the researcher discovered that, if you control for where the kids start and their socioeconomic backgrounds, Chicago Public Schools added more value to the students’ education (that is, their results improved more than the suburban kids). Now, there are all sorts of things that go into that. But it’s not accurate to look at, say, poor test results and write off a school as providing a poor education.
And it’s not fair to assume that all of the kids have certain advantages, and not fund to support those kids without the advantages,
I am so glad there are people smarter than me who can read these bills and understand them. Thanks for reading and explaining this stuff Sam.
As usual, I enjoy your tax analysis, and today I also appreciate most of the comments explaining Utah politics.
Where I live in firmly Republican territory in Utah, progressive income tax is a nonstarter. You really can’t even discuss it except in meetings of Democrats. Sure, a Constitutional amendment makes it more difficult. But it wouldn’t pass in the legislature even if it only required a plurality. It might pass as a citizens initiative, but I doubt it, and the legislature has a history of cancelling or diluting citizen initiatives anyway.
When I asked a few member friends what they liked about the flat tax, their answer was they think it should be like tithing: everyone pays the same percent. If it’s good enough for the church it’s good enough for them.
In case you’re wondering, I’m not at all a fan of this school of thought.
If it helps, my family falls easily under the 175% line for a family of 5, and we spend around $900/month on groceries. But there are more than five of us.