Sales Tax by Nick Youngson CC BY-SA 3.0 Alpha Stock Images
If your Twitter feed is anything like mine, you’ve probably heard by now that the Utah legislature passed a tax bill last week in a special session. The governor has apparently said he plans to sign the bill.
The bill has been controversial, to say the least. It was even protested by an odd assortment of characters including not only Utah Legislative Watch and Alliance for a Better Utah, but also Santa Claus and the Grinch. A lot of the objections seem to be to process—the bill went from proposed to passed in less than a couple days, and was passed in a special session (though, as a non-Utahn, I don’t actually know what that means). But there has been pushback against the substance, too. A lot of that pushback resonates with me: there have been significant complaints that the changes amount to a more-regressive tax burden on Utahns, with new taxes burdening the poor, while tax cuts redounding to the benefit of the wealthy. And that, in the words of both of Isaiah and the Twitter feed of the greatest blog in the universe, would be grinding the faces of the poor.
So is that what Utah’s doing? Not entirely, it turns out.
First, though, two caveats: state and local taxes, including Utah’s, aren’t my primary focus. Also, the bill is 217 pages long, and I didn’t read the whole thing. I’m going to focus here on the income tax cuts and the sales tax changes. And I’ll refer to the page numbers of the PDF I linked to, rather than line numbers or statute numbers, mostly because that’s easier.
So first, the income tax cut: under the bill, Utah’s individual and corporate income tax rates fall from 4.95% to 4.66%.[fn1] The benefit of these cuts will redound primarily to the wealthy, for a couple reasons. One is, the wealthy pay more. So if I (pretending I’m a Utahn) have $50,000 of taxable income, I currently pay $2,475. With the tax cut, I’ll pay $2,330, giving me a tax cut of $145. If I have $5 million of income, I currently pay $247,500, and under the bill I’ll pay $233,000, for a tax cut of $14,500.
But it’s more than that. Utah law provides for a tax credit of 6% of a taxpayer’s federal standard deduction.[fn2] I’m not going to show my work, but doing the math, that basically means married Utah taxpayers who file a joint return don’t pay taxes on their first ~$30,000 of income. Those taxpayers get no benefit at all from an income tax cut, because both before and after, they’re not paying income tax.
They are, however, paying sales tax. Now, sales tax is an inherently regressive tax. A regressive tax is one where lower-income individuals pay a higher percentage of their income in taxes than higher-income individuals.[fn3] Why? Because generally speaking, lower-income individuals have to pay a higher percentage of their income in taxable consumption than higher-income individuals. Higher-income individuals can certainly buy more products and more-expensive products, but at the end of the day, they also have leftover money they can invest, save, or spend on non-taxable consumption (more on that in a minute). Poorer individuals, on the other hand, have to spend a higher percentage of their money on basic consumption, without necessarily the ability to shift it to non-taxable consumption.
Often, states deal with this by exempting some necessities from the sales tax, or taxing them at a lower rate. Groceries and medications are notable examples of this (and over the last couple years, tampons have started to join states’ lists of exempt necessities).
There are two big problems with exempting certain things from the sales tax, though. One is, it requires really specific rules to police the boundaries. So, for instance, many states exempt (or have a lower rate) on groceries, but then they take “candy” out of the definition of groceries (so candy’s subject to ordinary sales tax where groceries aren’t). But then the state has to define the difference between candy and groceries. Many states (including mine!) use flour in their definition. So Twix—which includes flour—is classified as tax-exempt groceries, while Reese’s Peanut Butter Cups–which don’t—are taxable as candy. So exempting groceries introduces both complexity and artificiality into the tax base. It’s harder to enforce and harder for retailers to know what to do.
The second big problem is it narrows the tax base. That means that the sales tax rate has to be higher on those things that are subject to the sales tax. People who consume those things bear a larger percentage of the tax burden, and people have an incentive to shift their consumption to untaxed items (like, if you like Twix and Reese’s, from a tax perspective, you should buy Twix).
You can eliminate both of these problems by taxing all food at the same rate. But doing that means the tax burden on the poor will increase. So what do we think about the sales tax changes?
In the first instance, most of them are probably progressive. The tax change did import groceries into the tax base (raising the tax rate of them from 1.75% to 4.85%).[fn4] But that was just a small part: a big thing the bill does is to put services into the sales tax base. Under the bill, the sales tax now also applies, among other things, to 900 numbers (are those still a thing?), online streaming services, downloading music and books and things, security system monitoring, some in-state transportation (which seems to be largely taxis and Uber), parking, pet grooming and boarding, dating services, and identity theft protection services.[fn5] It’s an empirical question, of course, but most of these services likely appeal to middle- and upper-income individuals. If that’s right, most of the burden of the additional sales tax will fall precisely where it should, while, at the same time, broadening the tax base in a socially-desirable way.
But what about the increase in the sales tax on groceries? Well, the legislature also introduced a refundable grocery tax credit. The credit applies to families with income up to 175% of the federal poverty level (or, if the family has more than 5 people, up to 175% of the poverty level for a family of 5).[fn6] In 2019, for a family of 4, the federal poverty level is $25,750, and 175% of that number is $45,062. So Utah families with up to $45,062 of income get the full refundable credit. After that, it phases out as income rises.
And what is the credit? It’s $125 per person for a family of up to 4, and an additional $50 per dependent above 4. So a family of four gets a $500 credit. That’s the equivalent of the sales tax on about $10,300 of groceries a year, or $860 of groceries per month. So if a family of four buys $860 of groceries a month, the credit means they’re effectively not paying sales tax on their groceries. If they pay less for groceries, they’re effectively getting a rebate from the state, and if they pay more, they’re paying a lower effective rate.
Moreover, the credit is refundable, which means that if they don’t pay any income tax, Utah will send them a check for $500. If they owe $300 in state taxes before the credit, their tax bill will go down to zero and they’ll get a check for $200.
Now, this system isn’t perfect. If the low-income family pays state income taxes, they file for the credit on their return. If they don’t pay state income taxes, the state will issue a new form that they have to fill out. So getting the credit will require affirmative effort by individuals who may not have the emotional bandwidth to file an additional form. Paying the tax, however, will be automatic. So unless the state makes it really easy to file for the credit, and advertises its existence widely, the most vulnerable may not get the benefit. And that’s a real problem. And I frankly don’t know if the amount of the credit is set well, because I don’t know how much families below 175% of the poverty level pay for groceries.
Also, instead of lowering everybody’s income tax, Utah should have shifted to a progressive income tax. (Progressive state income taxes undo some of the regressivity inherent in sales and property taxes.)
Overall, though, the refundable grocery tax credit, combined with the fact that Utah is including services aimed at middle- and upper-income families in the sales tax, makes me less negative toward this change than I was before I read through it.
[fn1] Look at pp. 42 & 50.
[fn2] p. 58.
[fn3] FWIW, the quintessential regressive tax is a head tax. If every person owes a tax of $1,000, that’s 10% of the income of an individual who earns $10,000 a year, but it’s only 1% of the income of an individual who earns $100,000, and 0.1% of the income of an individual who earns $1 million, etc.
[fn4] p. 140.
[fn5] This list starts on p. 136 and goes on for a number of pages.
[fn6] All of the grocery tax credit stuff starts on p. 76 and goes for several pages.