The Education Tax: Income Taxation in Utah

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The income tax is one of the legs of Utah’s “three-legged stool” of tax revenues, along with the property and sales taxes. It is the largest of the three in 2017, bringing in approximately $3.6 billion. While federal income taxes are often a target for jokes on complexity, Utah’s state income taxes are relatively straightforward. Income taxes are a frequent focus for those who want increases for education on the one hand and those who want decreases to stimulate the economy on the other.

This report helps readers understand the income tax. To do so, it explains how the tax is imposed, examines recent changes and explores the impacts of potential changes.

This is the second installment in Utah Foundation’s Utah Tax Policy Series. The previous report addressed property taxes; the next report will address sales taxes.

Download this report here.

Key Findings of this Report

  • The highest-earning 20% of income tax filers produce two-thirds of Utah’s income tax revenue. They earn 60% of the income in the state.
  • The lower-earning half of income tax filers generate only 7% of Utah’s income tax revenue and earn 12% of the income.
  • The Legislature’s decision to drop Utah’s top marginal income tax rate from 5% to 4.95% meant Utah’s ranking dropped from 30th to 34th nationally. However, based on the most recent data, Utah’s income tax burden per $1,000 of personal income ranks 16th nationally.
  • Among Utah’s six neighboring states, only Idaho’s top tax rate is higher. Two neighboring states, Nevada and Wyoming collect no income tax.
  • Utah’s largest income tax credit, the Taxpayer Tax Credit, reduced state revenue by about $1.2 billion in 2016.
  • While the nominal 5% tax rate applies to all income earners, the Taxpayer Tax Credit reduces the median effective rate (the rate people actually end up paying) to 3%.
  • Cutting income taxes is not a silver bullet for economic growth. While income tax rates matter, there are an array of other factors that come into play as well.
  • Utah is set to receive a windfall in income tax revenues as a result of the 2017 federal tax reform. The Utah Legislature’s recent .05% reduction in income tax rates will decrease this windfall, but will not result in a significant tax cut for households.
  • The federal income tax changes mean that lower- and moderate-income households benefiting from the Utah Taxpayer Tax Credit will pay more in Utah state income taxes. While the Legislature acted to reduce the windfall from the federal tax change by reducing the tax rate, the combined changes will disproportionately benefit the
    highest income earners.
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