Policies and Revenue Trends Utah’s Major Taxes Policies and Revenue Trends Prepared for students of Brigham Young University April 2, 2014

Overview Overview Income taxes Sales and use taxes Property tax Utah’s tax burden

Why Does Tax Policy Matter? Sound tax policy is concerned with how taxes: Are designed and administered Affect the taxpayer Affect the economy Independent of the amount of money taxes raise Should consider if goal is to cut taxes or increase taxes Affects every citizen of Utah Provides revenue for state and local public services

Elements of an Optimum Tax System Reliable Sufficient Stable Certain Equitable Vertical Equity Horizontal Equity Simple For taxpayers to pay For tax collectors to collect Responsive to interstate and international competition Economically neutral Accountable and transparent Source: “New Realities in State Finance,” National Conference of State Legislatures

Overview

Utah’s Three Major State and Local Taxes: Income, Property, and Sales & Use Tax Revenues FY 2013 Source: Utah State Tax Commission

Utah Tax Base & Effective Tax Rates Source: Utah State Tax Commission

State and Local Sales & Use, Individual Income, and Property Tax Revenues FY 1970 to FY 2013 Source: Utah State Tax Commission

Real Per Capita State and Local Sales & Use, Individual Income, and Property Tax Revenues FY 1970 to FY 2012 Source: Utah State Tax Commission

Income Taxes Individual Income Corporate Franchise and Income

Utah’s Single Rate Individual Income Tax Took effect tax year 2008 5% of state taxable income Start at federal adjusted gross income (AGI) with certain additions and subtractions Taxpayer Credit: Equal to 6% of: Federal standard deduction or itemized deductions other than state income taxes, and 75% of federal personal exemption Credit phases out by 1.3 cents for each $1 above $24,000 married filing jointly $18,000 head of household $12,000 single Phaseout beginning points indexed for inflation Retirement Credit (taxpayers born before 1953) $450 for 65 and older $288 under 65 with certain retirement income Credit phases out by 2.5 cents for each $1 above $32,000 married filing jointly and head of household $25,000 single

Adjusted Gross Income Class Distribution of Returns, AGI, and Utah Tax Tax Year 2012 Full Year Residents Adjusted Gross Income Class % of Returns % of Exemptions % of Income (AGI) Utah Income Tax Less than $40K 52.9% 39.1% 13.5% 7.0% $40-80K 26.2% 31.9% 25.3% 22.6% $80-125K 12.9% 17.8% 21.2% 23.1% $125-250K 6.1% 8.5% 16.6% 19.6% $250K-$1M 1.6% 2.4% 11.2% Greater than $1M 0.2% 0.3% 12.3% 14.2% 100% Source: Utah State Tax Commission

Individual Income Taxes by AGI Class Tax Year 2012 Full Year Residents Source: Utah State Tax Commission

Why Does the Individual Income Tax Matter? Constitutionally earmarked revenue for public education and higher education Greatest ability to adjust for ability to pay and offset regressivity of other taxes Most detailed information on taxpayers Visible $ withheld from paychecks Annual tax return Tax on Income Individuals “Pass-through” business entities

Corporate Franchise & Income Tax

Corporate Franchise & Income Tax Revenues FY 1970 to FY 2013 Source: Utah State Tax Commission

Corporate Franchise & Income Tax Revenue by Utah Net Taxable Income, Tax Year 2012 Source: Utah State Tax Commission

Corporate Franchise & Income Tax Revenue by % of Business in Utah, Tax Year 2012 Source: Utah State Tax Commission

Sales & Use Taxes

The Utah Sales and Use Tax Base: What Do We Tax? Key transactions that are subject to tax include: Retail sales of tangible personal property Sales of certain telecommunication services or utility services (reduced rate may apply) Sales of food (reduced rate may apply) Certain admissions, such as movie tickets Certain services, such as a car wash when the purchaser doesn’t perform the labor, repairs of tangible personal property, or dry cleaning Certain hotel or motel charges Products such as computer software transferred electronically “Use tax”

The Utah Sales and Use Tax: What Don’t We Tax? General exemptions Professional services Personal care services Specific exemptions 80 plus exemptions in statute Estimated state revenue impact $640 Million

The Utah Sales and Use Tax Base: What Don’t We Tax? Specific exemptions and their fiscal impact Motor, special, and aviation fuels ($277 M) Manufacturing machinery & equipment ($80 M) Prescription drugs ($59 M) State and local government purchases ($41 M) Tangible personal property primarily used in farmin ($39 M) Sales of hay ($10 M) Source: Utah State Tax Commission

State and Local Option Sales and Use Tax Rates Rate on transactions equals sum of: State tax rate Local tax rates where transaction occurs The state tax rate depends on what is being taxed General state tax rate: 4.70% Residential fuels tax rate: 2.00% Food and food ingredients tax rate: 1.75%

Local Option Sales and Use Tax Rates Some may be used for general fund purposes Some may only be used for purposes specified in statute Public transit, roads, zoos, parks, etc. (0.10% to 0.30%) Some are only imposed on certain transactions Hotel tax on accommodations (up to 4.25%) Restaurant food (1.00%)

Sales & Use Tax Base Gross Taxable Sales as a % of GDP and Personal Income Source: Utah State Tax Commission & 2009 Economic Report to the Governor Over the long term, the sales and use tax base is gradually declining relative to the economy as a whole.

US Personal Consumption Expenditures 1929-2012 Source: US Dept of Commerce, Bureau of Economic Analysis

Sales and Use Tax Revenue - Where Does the Money Go? FY 2013 Source: Utah State Tax Commission

Real Per-Capita Sales and Use Tax Revenues Over Time Source: Utah State Tax Commission

Year-Over Percent Change in Utah’s Sales & Use Tax Base FY 1978Q4 to FY 2013Q3 Source: Utah State Tax Commission

Why Does the Sales and Use Tax Matter? Most significant source of revenue to state government and state higher education system Significant source of revenue to local governments, Utah Transit Authority, and other public transit districts Taxes consumption Politically popular May be “exported” Impacts zoning decisions

Major Sales and Use Tax Issues Creation of new exemptions Taxes on food Local option sales and use taxes Compliance with Streamlined Sales and Use Tax Agreement Internet sales Transportation funding Taxation of services State sales and use tax earmarking

Property Tax

The Property Tax: Embedded in the Utah Constitution Constitution places limits the Legislature’s authority relative to the property tax General Rule (Utah Constitution, Article XIII, Section 2) All tangible property shall be: Assessed at a uniform and equal rate in proportion to its fair market value; and Taxed at a uniform and equal rate Exceptions to General Rule Property Tax Exemptions

Exceptions to the General “Uniform and Equal” Requirement that the Legislature May Provide For The Legislature may by statute: Provide for agricultural land to be assessed based on its value for agricultural purposes Determine the manner and extent of taxing livestock Determine the manner and extent of taxing or exempting intangible property Exempt tangible personal property required to be registered for use on a public highway, waterway, or land or in the air Provide for the remission or abatement of the taxes of the poor

Constitutionally-Mandated Exemptions Government owned property Nonprofit entity-owned property used for religious, charitable, or educational purposes Burial places Farm equipment and machinery Water rights and facilities used to irrigate land owned by the owner of the water rights and facilities Nonprofit entity-owned water rights and facilities used to irrigate land, provide domestic water, or provide water to a public water supplier

Selected Discretionary Exemptions Inventory Up to 45% of residential property value Household furnishings, furniture, and equipment Tangible personal property that generates an inconsequential amount of revenue Property owned by a disabled veteran or unmarried surviving spouse or orphan

The Utah Constitution provides that if intangible property is taxed, that there be a rate limit and the state cannot tax the income from that property. Intangible property not generally taxed.

Property Taxes Where Does the Money Come From? 2012 Tax Year Utah State Tax Commission

Property Taxes Where Does the Money Go? 2012 Tax Year Utah State Tax Commission

Why Does the Property Tax Matter? Tax on wealth and capital Source of revenue for schools and other local government entities Oldest state and local tax Stable Transparent Unpopular tax Promotes political accountability Because of its transparency, the property tax lends itself to promoting political accountability on those who vote to impose property taxes. Property tax is an important source of revenue for local governments and schools.

What has the Legislature done to keep property taxes as low as possible? 45% residential exemption Reductions in minimum basic school property tax levy Never imposed a levy higher than the certified revenue levy Truth in Taxation Expanding options for local sales and use taxes Providing property tax relief to targeted groups

Effective Property Tax Rates Primary Residential Property and All Property 1995 – 2012 Tax Years Source: Utah State Tax Commission

School Basic Levy History 1980-2013 Source: Utah State Office of Education

Major Property Tax Issues Property value assessment practices of county assessors Improving taxpayer predictability Fair market valuation of property for purposes of taxation Acquisition cost as value of property for purposes of taxation Property tax relief Equalization of public school funding from property tax revenue

Utah’s State and Local Tax Burden: How Does It Compare?

State and Local Taxes as a Percent of Personal Income FY 2011 Utah ranks 17th lowest Source: U.S. Department of Commerce, U.S. Census Bureau

State and Local Total Own Source Revenue as a Percent of Personal Income FY 2011 Utah ranks 15th highest Source: U.S. Department of Commerce, U.S. Census Bureau

State and Local Taxes as a Percent of Personal Income Utah: FY 1994 to FY 2011 Source: U.S. Department of Commerce, U.S. Census Bureau Taxes as a percent Of Personal Income Utah’s rank among the 50 states and the District of Columbia

State and Local Total Own Source Revenue as a Percent of Personal Income Utah: FY 1993 to FY 2011 Taxes as a percent of personal income Utah’s rank among the 50 states and the District of Columbia Source: U.S. Department of Commerce, U.S. Census Bureau

State and Local Property Taxes as a Percent of Personal Income FY 2011 Utah ranks 16th lowest Source: U.S. Department of Commerce, U.S. Census Bureau

State and Local General Sales Taxes as a Percent of Personal Income FY 2011 Utah ranks 19th highest Source: U.S. Department of Commerce, U.S. Census Bureau

State and Local Income Taxes as a Percent of Personal Income FY 2011 Utah ranks 19th highest Source: U.S. Department of Commerce, U.S. Census Bureau

State and Local Fuel Taxes as a Percent of Personal Income FY 2011 Utah ranks 16th highest Source: U.S. Department of Commerce, U.S. Census Bureau

How Utah Compares Utah Taxes and Own Source Revenue as a Percent of Personal Income: FY 2011 Source: U.S. Department of Commerce, U.S. Census Bureau