Guest opinion: State income tax cut: A win or a loss for Utah’s middle class?
The Utah Legislature is now just past the halfway point of its 2022 session and just passed a cut in the state income tax rate from 4.95% to 4.85%. The Legislative Fiscal Analyst says it means $164 million less in the state Education Fund and $164 million more in the pockets of Utahns. The bill’s sponsors have said publicly that, for a family of four making Utah’s median income of $72,000 a year, it would mean about $98 a year.
Have you wondered how it is possible that an income tax rate cut that gives middle class families just $98 can possibly cut our schools out of $164 million of revenue? Maybe you did the math — $98 times roughly 1 million households adds up to far less than $164 million. And it seems even stranger when you consider that families below the median income would get far less from this tax cut. Not only that, but most of the lowest-income fifth of Utahns — those earning under about $30,000 a year — are shielded from income tax entirely. (They do pay other taxes, however, like gas, sales and property taxes, adding up to about 7.5% of their meager incomes, which is actually a higher effective tax rate than that paid by the highest-income Utahns.) So then how is it possible that an income tax cut that low-income Utahns won’t see any of and which will only provide $98 a year to middle-income families can end up costing Utah’s Education Fund a grand total of $164 million?
The answer lies in what sometimes might seem to be the magical mathematics of the income tax.
The most magical part of the income tax can be described as what I call the three-fifths/one-fifth rule. Three-fifths of the Utah income tax is paid by the top one-fifth of households, those earning over about $135,000 a year. (And four-fifths is paid by the top two-fifths, those earning over about $85,000.)
Is this unfair to high-income Utahns to ask them pay the majority of the income tax? Actually, it is not, because they earn the majority of all Utah income. According to Utah State Tax Commission data, the same three-fifths/one-fifth rule applies to Utah income as applies to the income tax. In other words, the top one-fifth of Utah households earns about three-fifths of all Utah income. Thus, we can see that the income tax is the only tax in Utah’s tax system that actually lines up with Utah incomes. In fact, it is the only nonregressive tax we have. All the other taxes — property tax, sales tax, gas tax — are regressive taxes. This means that when we cut the income tax rate, not only are we giving a huge windfall to the families that need it the least, we are also making our overall tax system more regressive instead of less.
This means that the income tax rate cut that barely helps the median-income family with that extra $98 a year actually gives the wealthiest Utahns a break of thousands of dollars a year. In fact, fully a fifth of the tax cut goes to the roughly 1% of households earning over half a million dollars a year, giving each of them a tax break averaging $1,500 — and much more for millionaires and above.
But it gets worse. That average middle-class family with two kids in school is actually losing much more than that $98. When you divide the $164 million price tag by Utah’s K-12 student population of about 675,000, then multiply by two kids in school, that average family that is gaining $98 in a tax break is giving up $485 that is now not going to be spent on their kids’ education every year. Not going to be spent on smaller class sizes or more experienced teachers or more up-to-date technology. Not going to be spent on closing the gaps in our education system between majority and minority groups and between haves and have-nots, gaps which are larger than nationally.
Because that is the magic of the income tax. Middle-class families pay in a modest amount and get back many times more. It’s a very good return on investment. It’s also an excellent investment in Utah’s future. Unfortunately, for Utah’s middle-class families, this year’s income tax rate cut will mean a smaller ROI and a skimpier investment in Utah’s future.
Matthew Weinstein is fiscal policy director at Voices for Utah Children, which has worked since 1985 to make Utah a state where all children thrive.