Well that stinks. #utleg #utpol Utahns with large families could be paying a lot more in state taxes next year, via @sltrib https://t.co/kShKOo1nGw
— Michelle Quist (@MichelleLQuist) April 9, 2018
The Salt Lake Tribune is reporting that the Utah legislature has just enacted a large tax increase on many Utah families, in spite of its putative 0.05 percentage-point tax cut. How can that be?
It’s the result of something called “federal conformity.” Federal conformity basically means that the state income tax uses the Internal Revenue Code as a jumping-off point, and then makes adjustments where it feels adjustments are necessary. Why federal conformity? I’d imagine for a couple reasons. For one thing, writing tax laws is complicated, time-consuming, and hard. If a state starts with the federal income tax, it outsources most of that work to the federal government. For another, it makes it easier for a state resident, who has to calculate her taxes for both federal and state purposes, to use a single set of calculations.
Of course, outsourcing that work means that, when they federal government makes changes to the tax law, those changes potentially affect the state’s revenue, too. As a result, some states employ “static conformity,” meaning they’ve adopted the Internal Revenue Code the way it looked in 2008 or 2011 or 2016 or some other specific year. To the extent the federal income tax changes, the state legislature has to look at the changes and decide whether to accept them for state income tax purposes.
Other states (including Utah) employ “rolling conformity.” That means Utah’s tax law changes when the federal income tax changes.
And therein lies the problem.
So What’s Up With This Utah Tax Increase?
Two things. Utah bases its state taxable income on federal adjusted gross income. It allows certain adjustments to adjusted gross income, though. Two significant adjustments are credits for the standard deduction or itemized deductions and for personal exemptions. In short, it I take the standard deduction for federal income tax purposes, I get a tax credit against my Utah state income tax of 6% of my standard deduction. Similarly, I get a tax credit for 6% of my personal exemptions.[fn1]
Now, if you’ve been reading my posts regularly (and who hasn’t?), you may remember something about this new bill: it doubled the standard deduction and eliminated the deduction for personal exemptions. And because Utah has rolling conformity, that means these two changes factor into the state income tax. What does that mean, numerically? Let’s imagine you have a family of six. Before the tax bill was passed, the standard deduction for a married couple filing jointly would have been $13,000, and the personal exemption would have been $4,150 per individual. Combined, they would have reduced this family’s state income tax bill by $2,274.
But under the tax law as it now stands, the couple will have a standard deduction of $24,000 and personal exemptions of $0. Combined, the family’s state income tax is reduced by $1,440.[fn2]
The federal income tax partially and temporarily makes up for the loss of personal exemptions by basically doubling the child tax credit.[fn3] But that doesn’t work for Utah taxes, because Utah expressly disallows the use of federal tax credits in calculating state income tax.
Could the Utah Legislature Have Done Anything About This?
Of course they could have. States decouple their tax law from the federal income tax all the time. Sometimes that decoupling is broad; sometimes it’s only one or two provisions.
Moreover, the legislature did enact tax changes. Specifically, it cut the tax rate from 5% to 4.95%. Legislators can claim they cut taxes. And they did cut some individuals’ taxes. If you’re unmarried and don’t have kids, or if your income is high enough that the Utah tax credits I mentioned above have phased out, your taxes have been cut. But for our family of six, assuming they have state taxable income of $66,000 (roughly Utah’s median household income), that tax cut reduces their tax bill by $330. On net, then, the legislature’s inaction on the personal exemption and its tax reduction have increased the family’s state income tax by $504.
Now frankly, raising taxes is not necessarily the wrong thing to do. But it should be done transparently, rather than with the plausible deniability of a putative tax cut that turns out, in fact, to be a tax increase. And that’s what Utah’s getting.
[fn1] Note that these benefits phase out for higher-income individuals. I’m not an expert in Utah tax law, though (honestly, this is the first time I’ve looked at it specifically), so I’m going to call the phaseout outside the scope of this blog post.
[fn2] The bigger the family, the bigger the difference between the amount of tax reduction under prior law and the amount under current law.
[fn3] It’s not a perfect fix, as I explained in my earlier post, but it resolves a lot of the problems associated with the loss of personal exemptions for a lot of families.