FAQ: Answers to your questions on Utah’s new tax law
December 19, 2019
- How will the new tax law affect me personally?
It’s difficult to say without knowing your specific income or household size. But we can tell you that about 85 percent of Utahns will pay less under our new tax system than they paid under the old one. Factoring in adjustments to sales tax and gas tax, we have cut taxes by over $160 million for this coming fiscal year.
In fact, that number includes taxes paid by tourists and others moving through our state. Utahns will experience over $200 million in tax cuts this coming year.
Much of that net tax cut is targeted directly to low- and middle- income Utahns.
You can also view legislative projections to get a better sense of how the new law will impact you.
2. Will this tax bill hurt the poor?
This bill does increase the existing state sales tax rate on food from 1.75 percent to the standard state sales tax rate, which is a 4.85 percent state rate. This does not include local government taxes imposed on food.
Food provided by SNAP, WIC, and charitable organizations like food pantries is not subject to sales tax, and that does not change under this new law.
The standard tax rate on food is expected to bring in $250 million in taxes for the state. We were concerned that adjusting this tax would impact low- and middle-income individuals and families, so we built in tax credits going directly to those who otherwise could have felt burdened by adjustments to the grocery tax.
Specifically, we built in a $135 million grocery tax credit to offset the burden of this tax on low- and middle- income families. This tax credit is expected to more than cover the amount these families will spend on increased food taxes.
The Governor’s Office and the Governor’s Office of Management and Budget worked with the legislature to add in a $6 million earned income tax credit targeted specifically to benefit working families experiencing intergenerational poverty. The bill also includes Social Security tax credits for seniors. Additionally, S.B. 2001 increases the Utah dependent exemption amount from $565 to $2,500. In addition to dependents, joint filers with no dependent children can now receive one exemption.
The new system will collect money in new and different ways, but it will not collect more tax revenue or increase the tax burden on Utahns.
It’s worth noting that under every projection we have run, lower- and middle- income individuals are better off under the new tax system than they were under the old one.
If you have further questions about why adjusting the food tax was necessary, see question #8.
3. Who qualifies for the new earned income tax credit, and how do you apply for it?
Utah’s new earned income tax credit for families in intergenerational poverty is designed to function in tandem with the federal earned income tax credit. In fact, Utah’s EITC is calculated off the amount provided in the federal earned income tax credit, and provides 10 percent of that total amount to qualifying individuals and families.
For example, a single mother earning $20,000 a year, in intergenerational poverty, with two children at home, would qualify for a federal earned income tax credit of a little over $5,600. Thanks to the creation of Utah’s new EITC, she could also receive an additional $560 from the state.
As the saying goes, we should not only give a fish to those in need, we should also help them learn how to fish. Providing this benefit only to those who have earned wage income helps incentivize and reward work efforts, which are essential in helping lift individuals and families out of poverty. This money will make a real difference in helping break the cycle of generation-to-generation poverty.
The Utah Department of Workforce Services will assess eligibility for the Utah EITC. Families who have experienced poverty for more than one generation are encouraged to contact their office to determine whether or not they will be eligible for Utah’s EITC. Approximately 25,000 Utahns in intergenerational poverty are expected to qualify.
The federal tax credit is targeted to low- and middle-income households, so it gradually phases out as income increases, fully phasing out at a little over $50,000 per year for single filers with three or more children, and $56,000 for a married couple with three or more children. Smaller households will phase out at lower income levels. Utah’s EITC is based off of these numbers, but it is worth noting that the federal EITC does not have an intergenerational poverty requirement.
It’s pretty simple to apply for both the federal and state EITCs when filing your federal and state tax returns. You can find the link to apply for an earned income tax credit here. If you make too little to pay taxes and do not currently file a tax return, contact the Department of Workforce Services, which can help you through the filing process.
We encourage anyone who thinks they might qualify for this tax credit to contact the Department of Workforce Services, which will determine eligibility for the credit. They can also assist applicants in filing their federal and state tax returns.
4. How do I know if I am eligible for the grocery tax credit? How much will it be? How do I apply?
The grocery tax credit fully phases out at 175 percent of the federal poverty level, so your eligibility will be determined by factoring your income in relation with your household size. For example, a family of four with an income of $45,000 will receive a full, unadjusted grocery tax credit of $500. If that same family’s income were to rise much above $45,000, the credit would begin to phase-out. Larger families may continue to receive a portion of the credit even if they are making up to $81,300 a year.
The grocery tax credit amounts to $125 a year, per person in a family of four, with an additional $50 dollars per additional child.
If you currently file a tax return, you don’t have to take any extra steps to receive the benefit of the grocery tax credit. If you make too little to pay taxes and do not currently file a tax return, contact the Department of Workforce Services, which can help you through the filing process.
5. The claim is that there is an issue with collecting revenue. How can that be when Utah had a billion dollars in new revenue last year?
The issue isn’t how much we’re collecting, but how we’re collecting it. Utah is the only state in the nation that reserves all revenue gathered through income tax for education spending. That means all other state funding has to come through the general fund, which is supported by sales tax.
In 1960, goods accounted for about 53 percent of consumer spending in Utah. Today, in our ever-changing economy, they make up 31 percent of consumer spending, with nearly 70 percent going to largely untaxed services. It’s not fair or moral to make a shrinking segment of our economy shoulder an increasingly larger burden. The new system begins the work of fixing this by broadening the sales tax to a variety of services that were exempted.
Our economy is thriving, and year after year, income tax revenues increase significantly. But the general fund, while increasing, is not keeping pace with our population growth, inflation, or increasing demand for services. We need to rebalance our tax structure to create a more stable system to support our state and its citizens in the future.
It may help to think of the state’s tax structure like a retirement savings portfolio that needs to be balanced to ensure both growth and stability over the long-term.
6. Will I be part of the “15%” of Utahns that will see an increase in their taxes?
It’s hard to say without knowing the specifics of your income and household size, but you can take a look at some of the legislative projections yourself by clicking below.
7. You claim this is a tax cut for Utahns. How can you justify that when you are cutting education funding? And how can you justify cutting education spending when we rank last in the nation in per pupil spending?
This is a tax cut for Utahns. Even with adjusting for added sales and gas taxes, Utahns will see over $200 million in net tax cuts in this coming fiscal year because a portion of the sales tax increases are shifted to tourists and other nonresidents.
We can afford to give this tax cut, and continue increasing education funding by the same amount we have each year for the last four years. In the last four years, we’ve given $1 billion of new ongoing money to education — that’s $250 million of new ongoing money per year. (In fact, we’ve put $2 billion of new ongoing money toward education over the course of the last decade.) The governor remains committed to dedicating at least that same increase amount —$250 million of new ongoing money — to education in his upcoming budget recommendations.
Moreover, what is good for the general fund isn’t just good for government services. It’s also good for education.
Income tax is a historically unstable revenue source, and it drops dramatically during an economic downturn. This puts education funding at risk. For example, during the recession of 2008, when income tax revenues dropped by over 20 percent, we had to dip into the general fund to make up the difference. Back then, the general fund contained enough money to supplement losses in the education fund, but with our current imbalance, this would no longer be possible.
Strengthening the general fund is a long-term step toward creating a more robust and equitable foundation for education funding.
Not only is there not a cut to education funding, but the steps we are taking this year will provide for increased education funding into the future; general fund dollars spend just as well as income tax dollars.
It’s also worth noting that while we’re dedicated to providing more funding to education, spending more is not the end goal — improving outcomes for our students is the goal. By that standard, Utah is doing quite well. For example, we have some of the highest ACT and AP scores in the nation and our graduation rates continue to rise steadily.
8. Why was it necessary to increase the sales tax on food to 4.85 percent?
Solid tax policy relies on taxing places where everyone pays, in good times and in hard times. Returning to collecting a 4.85 percent state tax on groceries will bring in essential funds to our slow-growing general fund, which is supported by sales tax. This fund pays for core government services, and the grocery tax will generate approximately $250 million for the state. It bears repeating that stabilizing the general fund and diversifying our system have remained the main goals of tax reform.
This is a very stable revenue source. By collecting less in income tax from Utahns, but a little more in sales tax on food, we take a big step toward stabilizing revenue gathered from taxes year-to-year.
9. Why did you choose to call a special session now with the regular legislative session right around the corner? What couldn’t wait another six weeks?
Early in the legislative session, budget analysts and legislators undertake the arduous and necessary task of setting base budgets for government for the year. It’s a complex process that is dependent on accurate projections. Passing the bill ahead of the session was vital to getting legislators and economists reliable projections they can use to set those budgets.
The general session will also give us the opportunity to make any tweaks for technical issues in the bill that need to be addressed.
10. I thought you had said you would not call a special session unless there was consensus? Everyone I have spoken with is against the bill that just passed.
When the governor calls a special session, he relies on consensus from the legislature in determining whether or not to make a call. Specifically, he waits for legislative leadership to express that they have reached accord on an issue.
The governor determined that it was necessary to pass the tax bill in a special session so that legislators and economists would have more reliable projections to set budgets for the coming fiscal year.
Tax changes come with anxiety, but the governor is hopeful that that anxiety will subside as Utahns experience the lightened burden of our tax system in 2020.