There has been a lot of conversation lately about a State Tax Referendum. What exactly is this and is it something you should be supporting?
Last month, the Utah legislature passed Senate Bill 2001, which essentially raised tax on retail sales and lowered income tax. Many feel that this is an unfair allocation of tax burden and are asking that the voters be given the opportunity to overturn the legislature's decision.
Why does this matter? States generally raise income from three sources: Income Tax, Sales Tax and Property Tax. Some states, like Nevada raise enough money through their sales tax that they do not need an income tax, similarly, Texas has no income tax because of its large property tax. Oregon has no sales tax, while Hawaiians pay copious amounts of all three. In contrast, Utah's tax is fairly evenly distributed.
The problem arises due to the fact that the Utah constitution requires income tax dollars to be spent on education. In the past few years, the education fund has had a surplus, while the rest of the State's budget has fallen short. Giving the legislature authority to mingle these funds would require a constitutional amendment, which is something voters are reluctant to do.
Okay, so what's in the new law that has everyone so upset? Many people argue that things that sustain human life, like food and medicine, should not be taxed. The Utah Legislature concluded that the state could not afford to fully eliminate the tax so, in January 2008, they voted to lower the tax rate on unprepared food by half to a flat 3%. The new law now reinstates that tax which, according to the Bureau of Labor Statistics, equates to approximately $344 annually for an average family of 4.
In addition to food, the new law requires sales tax on the following:
■ Peer to peer home and auto sharing (such as; Uber, Lyft, TURO, VRBO, AirB&B)
■ Installation of certain Personal Property (ie. aircraft engines)
■ Toll free phone service
■ Textbooks (paper and digital)
■ Newspapers
■ Streaming Media
■ Security system monitoring
■ Parking
■ Tow truck service
■ Pet boarding
■ Dating services
■ Vending machines (if they accept credit cards)
■ Security Monitoring
■ Electricity consumed by ski resorts
There is also a small increase in tax on wholesale diesel fuel.
All of this comes on the heels of the Supreme Court decision of South Carolina vs. Wayfair, Inc. which makes it possible for a state to tax purchases made by its citizens even though the seller has no physical presence (or nexus) in the state. That means that online purchases from online retailers such as Amazon are also now taxable in the State of Utah. Bottom line, Utahns will be paying more sales tax!!!
Now the trade-off:
In exchange for the higher sales tax, the legislature lowered income taxes in four ways:
1) Increasing the Personal exemption from $579 to $2,500,
2) Implementing a Grocery Credit,
3) Creating a State Earned Income Credit to benefit lower income families and
4) Lowering the income tax rate from 4.95% to 4.66%
The lower personal exemption is retroactive to 2018, which means that if you filed Utah taxes in 2018 you could be eligible for a state tax refund of approximately $96 per person. There is nothing you need to do to claim this refund, it will be automatically mailed to you on April 1, 2020.
The grocery credit is also retroactive to the beginning of 2019 and will give $500 to a family of 4 to help offset the higher cost of sales tax on food. Additional family members add $50 each. These checks will be issued on July 1, 2020. Again, there is nothing you need to do to receive this credit. It will be automatically mailed to your last known address.
Finally, the State Earned Income Credit goes into effect for 2020 and will be equal to 10% of the Federal Earned Income Credit. This credit and the grocery credit are refundable, which means that if you will receive them even if you have no tax liability. The exemption credit can only be used to offset state tax previously paid.
So what’s the bottom line?
Although we take issue with some of the complexity of the new law, our average client seems to pay less tax overall with the new system. Of course, there will be some winners and some losers but on the whole, we feel like our representatives in the legislature acted in our best interest and do not necessarily need to be brought to task by the voters.
That’s our two cents worth, what do you think? We will be anxiously waiting to see if the referendum gathers enough signatures to put the issue to the voters and look forward to discussing these and other issues with you during our next tax appointment.
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