the way we tax - utah state legislature tax system 4.pdfpresentation outline tax policy overview...

The Way We Tax:Utah’s State and Local Tax System

Prepared for:

Bagels & Briefings

February 24, 2015

Presentation Outline

Tax Policy Overview

Utah’s Comparative State & Local Tax Burden

Income Taxes

Sales & Use Taxes

Property Tax

Fuel Taxes

Tax Policy:Why Does it Matter?

Tax Policy – Why Does it Matter?

It’s not only the amount of revenue that matters, but also how you get it

Sound tax policy is concerned with how taxes:

• Are designed and administered

• Affect the taxpayer

• Affect the economy

Tax policy affects every citizen of Utah

Tax policy provides revenue that funds 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

Utah Tax Base & Effective Tax Rates

$70$49

Property Tax Income Tax Sales & UseTax

Tax Base Effective Tax Rate

(billions)

ffectiv

Source: Utah State Tax Commission

Property, $2,768,460,738 ,

Sales / Use (state & local), $2,954,043,75

6 , 30%

Individual Income,

$2,862,452,407 , 29%

Corporate Income,

$353,818,749 , 4%

Fuel, $364,418,535 ,

Other State, $363,764,011 ,

Other Local, $140,455,045 ,

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

FY 2014

Total Revenue: $9.807 B

Billions

Individual Income Tax

Sales and Use Tax - State and Local

Property Tax

State and Local Sales & Use, Individual Income, and Property Tax RevenuesFY 1970 to FY 2014

Real Per Capita State and Local Sales & Use, Individual

Income, and Property Tax RevenuesFY 1970 to FY 2014

$1,000

$1,200

$1,400

Individual Income Tax

Sales and Use Tax - State and Local

Property Tax

Utah’s State and Local

Tax Burden:How Does It Compare?

Connecti

Illinois

hode Isl

Califo

Nevada

achuse

sPennsy

lvania

nLouis

iaSouth

Tenness

Dakota

State and Local Taxes as a Percent of Personal IncomeFY 2012

Source: U.S. Department of Commerce, U.S. Census Bureau

Utah ranks

21 2220

19 2022 23

State and Local Taxes as a Percent of Personal IncomeUtah: FY 1995 to FY 2012

Taxes as a percent

Of Personal Income

Utah’s rank among the 50 states

and the District of Columbia

15 33 33 19 21 15 0

TotalOwn

SourceRevenue

Taxes PropertyTaxes

GeneralSalesTaxes

IncomeTaxes

FuelTaxes

How Utah ComparesUtah Taxes and Own Source Revenue as a Percent of Personal Income

FY 2012

Income TaxesIndividual and Corporate

Utah’s Single Rate Individual Income TaxEffective Tax Year 2008

Single Rate

• 5%

Taxable Income

• Federal AGI

• Additions

• Subtractions

Several Tax

Credits

• Taxpayer

• Retirement

Credit Phase Out

• Based on

income

• 1.3%

• 2.5%

Effect of Recent Income Tax Changes

(Tax base x tax rate) – tax credits = tax liability

New system is moderately progressive

• Old system – progressive through tax base and tax rates

• New system – progressive through tax credits

Briefing papers available (visit le.utah.gov)

Utah’s Income Tax System Remains ProgressiveTax Year 2013

$10k -

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<$100k

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<$125k

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<$150k

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<$175k

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<$200k

$200k -

<$225k

$225k -

<$250k

$250k -

<$500k

$500k -

<$750k

$750k -

illion &

(thousa

Adjusted Gross Income

Average Effective TaxRate

Distribution of Returns and Utah TaxTax Year 2013

$10k -

$20k -

$30k -

$40k -

$50k -

$60k -

$70k -

$80k -

$90k -

<$100k

$100k -

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$125k -

<$150k

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<$175k

$175k -

<$200k

$200k -

<$225k

$225k -

<$250k

$250k -

<$500k

$500k -

<$750k

$750k -

illion &

(thousa

illions)

Adjusted Gross Income

Utah Tax Paid

Distribution of Returns and Utah Tax Tax Year 2013

Less than $80K, 78.30%

$80-125K,

13.30%

Greater than $125K, 8.40%

Returns by AGI

Less than $80K, 30.60%

$80-125K,

24.70%

Greater than $125, 44.70%

Utah Tax by AGI

Distribution of Returns, Exemptions, AGI, and Utah TaxTax Year 2013

Adjusted GrossIncome

% of Returns

% of Exemptions

% ofIncome (AGI)

% of Utah Income

less than $40K 52.1% 38.5% 13.9% 7.2%

$40-80K 26.2% 31.5% 26.0% 23.4%

$80-125K 13.3% 18.3% 22.5% 24.7%

$125-250K 6.5% 9.1% 18.2% 21.8%

$250K-$1M 1.7% 2.4% 11.6% 14.0%

$1M+ 0.2% 0.2% 7.8% 8.9%

100% 100% 100% 100%

Earmarked for public and higher education

Adjustable

• Ability to pay

• Offset regressivity of other taxes

Detailed information on taxpayers

Visible

• $ withheld from paychecks

• Annual tax return

Tax on Income

• Individuals

• “Pass-through” business entities

• Trusts and estates

Why Does the Individual Income Tax Matter?

Corporate Franchise & Income Tax RevenuesFY 1970 to FY 2014

Millions

Corporate Franchise & Income Tax Revenue

by % of Business in UtahTax Year 2012

Businesses that conduct 0% to

5% of total business in Utah

Businesses that conduct 5% to 100% of total

business in Utah

Earmarked for public and higher education

Volatile revenues

Tax on income

• Generally C-corporations

Why Does the Corporate

Franchise & Income Tax Matter?

Sales & Use TaxesState and Local

Certain admissions, such as movie tickets

Sales of food (reduced rate may apply)

Sales of certain telecommunication, utility, or

passenger services (reduced rate may apply)

Retail sales of tangible personal property

The Utah Sales and Use Tax Base:What Do We Tax?

“Use tax”

Products transferred electronically

Certain hotel or motel charges

Certain services, such as cleaning and

repair of tangible personal property

The Utah Sales and Use Tax Base:What Do We Tax?

TransactionsWhat we do

The Utah Sales and Use Tax Base:What Don’t We Tax?

Exclusions (transactions that are not

part of the tax base)

Selected exclusions

• Professional services

• Personal care services

Exemptions

• Currently 70+ exemptions

• Estimated FY 2013 state revenue effect: $697M

The Utah Sales and Use Tax Base:What Don’t We Tax?

Examples of sales and use tax exemptions:

• Motor, special, aviation fuels ($277M)

• Manufacturing machinery & equipment ($110M)

• Prescription drugs ($59M)

• Farm machinery & equipment ($39M)

• Natural gas, electricity, coal for industrial use ($25M)

• Food stamps & WIC ($8M)

• Certain religious / charitable sales & purchases ($7M)

Depends on what is being taxed

Sales and Use Tax RateWhat’s the Rate?

State Tax

Rate +Sum of

Local Tax

Total Tax

Depends on which local taxes

are imposed

Location of transaction

matters

The state tax rate depends on what is being taxed

Examples

Sales and Use Tax Rates

Food and food ingredients → 1.75%

Residential fuels → 2.00%

General → 4.70%

Counties, cities, and towns are authorized to impose a variety of local option sales and use taxes

Most local option sales and use taxes tax the same transactions taxed at the state level

Local Option Sales and Use Tax Rates

Imposed for general purposes

• Local option 1.00%

• County option 0.25%

Revenue

collected Deposited

General Fund of

county, city, or

Imposed only for a specified purpose

• Public transit tax, up to 0.30%

• County “zoo, arts, and parks tax,” 0.10%

Imposed only on certain transactions

• County transient room tax, up to 4.25%

• County tax on food sold by restaurants, up to 1.00%

State and Local Sales and Use TaxRates Over Time1970 to 2014

1 23 4 5

9 10 11 13 15 16

State Sales Tax Rate Local Sales Tax Rate (derived)

State and Local Sales and Use TaxShare of Revenues Over TimeFY 1970 to FY 2014

State Share of Sales Tax Revenue

Local Share of Sales Tax Revenue

State and Local Sales and Use TaxGeneral Purpose and Earmarked Revenues Over TimeFY 1970 to FY 2014

General Purpose Sales Tax Revenue

Earmarked Sales Tax Revenue

Sales & Use Tax BaseYear-Over Percent Change FY 1978 Q4 to FY 2013 Q3

1978.4

1979.4

1980.4

1981.4

1982.4

1983.4

1984.4

1985.4

1986.4

1987.4

1988.4

1989.4

1990.4

1991.4

1992.4

1993.4

1994.4

1995.4

1996.4

1997.4

1998.4

1999.4

2000.4

2001.4

2002.3

2003.4

2004.4

2005.4

2006.4

2007.4

2008.4

2009.4

2010.4

2011.4

2012.4

2013.4

Sales Tax Base as a % of Utah GDP

Sales Tax Base as a % of Utah Personal Income

Sales & Use Tax BaseGross Taxable Sales as a % of GDP and Personal Income1960 to 2013

Over the long term, the sales and use tax base is gradually

declining relative to the economy as a whole.

Source: US Dept of Commerce, Bureau of Economic Analysis

The Sales & Use Tax BaseWhy is It Declining Over the Long Term?

Changing purchasing patterns

• Movement to more of a service-based economy

• Many services excluded from sales & use tax base

Cross-border shopping

• Internet, phone, and catalogue purchases

Technological change

• Digitization of goods (software, books, music)

Legislated exemptions

Sources: “E-Commerce in the Context of Declining State Sales Tax Bases”

Donald Bruce & William Fox. National Tax Journal. Vol. LII No. 4, Part 3.

US Personal Consumption Expenditures1929-2012

Durable goods Nondurable goods except food

Food Medical services

Non-medical services

Source: US Dept of Commerce, Bureau of Economic Analysis

Sales and Use Tax RevenueWhere Does the Money Go?FY 2014

State Earmarked,

$453,855,085 , 15%

State not Earmarked,

$1,656,806,222 , 54%

General Local Option,

$496,435,229 , 16%

General County Option,

$124,399,383 , 4%

Local Transportation, $273,858,547 ,

Other Local (ZAP/RAP, rural hospital, resort

community, etc.), $54,552,089 , 2%

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

Tax on consumption

Politically more popular less unpopular than other taxes

Impacts zoning decisions

Why Does the Sales and Use Tax Matter?

Property Tax

General Rule

• 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

The Property Tax: Embedded in the Utah Constitution

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

Exceptions to the General Rule

The Utah Constitution Exempts:

• 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

Constitutionally Mandated 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

Selected Discretionary Property Tax

Exemptions

Property

Tangible

Intangible(not taxed)

Exempt

Personal

Improvements

Commercial Residential

CentrallyAssessed

Primary Secondary

Examples:GovernmentCharitableReligiousEducationalFarm EquipLivestockInventoriesIrrigation45% of Primary Res.Household furnishings

BusinessEquipment &Furnishings

Utilities

Transportation

Vehicles

Age Based 1

Agricultural Land Improved

Unimproved

MoneyStocksBonds“Goodwill”“Going concern”

The Property Tax “Tree”What is and is not taxed?

Value Based 2

Source: Office of Legislative Research and General Counsel.

Property TaxesWhere Does the Money Come From?2013 Tax Year

Primary Residential,

1,305,225,398, 46%

Commercial, 621,661,679,

Other Real, 288,434,721,

Personal, 182,322,224,

Motor Vehicles,

167,277,75…

Natural Resources,

117,577,461, 4%Utilities,

174,296,198, 6%

Property TaxesWhere Does the Money Go?2013 Tax Year

Schools55%

Counties18%

Municipalities14%

Special Districts

School Basic Levy History1980-2013

0.000000

0.000500

0.001000

0.001500

0.002000

0.002500

0.003000

0.003500

0.004000

0.004500

0.005000

$3501980

evenue

Millions

Basic Levy Revenue Basic Levy Rate

Source: Utah State Office of Education

Effective Property Tax RatesPrimary Residential Property and All Property1995 – 2013

ropert

Primary Residential Statewide - All Property

Tax on wealth and capital

Source of revenue for schools and other local government entities

Oldest state and local tax

Stability

Transparent

Unpopular tax

Provides political accountability

Why Does the Property Tax Matter?

Fuel TaxesMotor and Special Fuel

Millions

Combined Motor and Special Fuel Tax RevenueFY 1976 to FY 2014

Source: Utah Department of Transportation Annual Statistical Surveys; Utah State Tax Commission

Indicates a tax rate increase

Fuel TaxesWhere Does the Money Go?

Constitutionally earmarked for highway purposes (construction and maintenance)

70% to UDOT

30% to cities and counties (B&C Road Fund)

• Used under the direction of UDOT

• Distributed based on road length and pavement type

Why Do Motor and Special Fuel Taxes Matter?

Significant source of revenue for maintaining state highway system

Politically unpopular

Somewhat like to a user fee - taxes use of public highways

Taxed on a per-unit basis, so adjusts with consumption amount, not price

Please feel free to contact us with any questions at

(801) 538-1032

Leif Elder, Policy Analyst

Bryant Howe, Assistant Director

the way we tax - utah state legislature tax system 4.pdfpresentation outline tax policy overview...

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