How proposed tax reform would impact low-income households

Changes could yield new tax refunds for Utah’s impoverished and retired

Photo courtesy of Frantisek Krejci/Pixabay

By their own estimates, backers of a proposal to restructure Utah’s tax code say their plan would decrease the tax burden on residents from all income brackets, with one exception: one- and two-person households with annual earnings between $15,000 and $35,000.

Put another way, the proposal from the state’s Tax Restructuring and Equalization Task Force would increase taxes slightly for small, impoverished households and decrease taxes for everyone else.

The proposal, which lawmakers released late last week, contemplates both tax increases and tax breaks on various products and services around the state. On net, the most impactful tax breaks would go to low-income families with multiple children, offsetting the cost of caring for multiple dependents.

Related coverage: How tax reform will impact city revenues

Overall impact: Slight tax breaks for families

Among the most impactful changes in the tax restructuring plan is an increase on the tax rate of gasoline, new taxes on services like those at the veterinarian, a slight decrease in the income tax rate, and greater tax breaks for children and families.

Among the proposals put forward by the task force: an increase in the tax rate on groceries. The increase puts the taxes for unprepared food at the same rate as other sales – 4.85 percent instead of the existing 1.75 percent – and, for low- and middle-income households, it would be offset by a grocery tax credit that the state would distribute annually during tax season.

The proposal also gives greater tax credits for Social Security recipients and larger tax refunds for families experiencing intergenerational policy. The effects of these changes, overall, would be to leave more money in the pockets of retirees, chronically impoverished households, and households with multiple dependents.

Who benefits most?

For individuals and families, the tax breaks would vary in impact and distribution. The task force claims that families of four with annual household income of $30,000 would, under the plan, pay roughly $100 less in taxes each year. Similarly sized families with a smaller annual income could see around a $250 annual tax break.

The effect is stronger for higher income and larger families. For a family of eight with an annual income of $100,000, the annual tax break would be around $1,300, a figure on the higher end in terms of the total tax breaks that Utah families would enjoy under the plan.

The effect is weakest for small households and individuals without children. An individual without children making $20,000 annually would see a tax increase of a few dollars, according to the task force. A couple at the same income level, if filing together, would see a tax increase closer to $30.

These tax increases stem primarily from the task force’s proposal to expand the reach of the state’s 4.85 percent sales tax to include gasoline, which will already be subject to a 31-cent per gallon gas tax, and services such as sightseeing transportation and newspaper publishing. A full list of the services that will be subject to tax increases is available in accompanying coverage.

The task force, which released the proposal, said that the sales tax on gasoline is meant as a stopgap measure and that it hopes to replace it in the future with “user fee options that rely on more advanced technology,” according to the proposal.

On the side of tax decreases, all Utahns’ income tax rate would see a small reduction from 4.95% to 4.58%. A small tax break will also go to businesses that operate within the state, but the largest tax breaks would go toward low-income families with children.

A tax refund for impoverished families

The policy change that would likely have the most acute effect for the Utahns it impacts is a proposed tax refund that would effectively establish an earned income tax credit in Utah, augmenting the federal EITC.

This tax credit goes to many kinds of citizens, from poverty-level individuals to middle-income families. The federal EITC phases out for higher-income households; this year, a family with three children that collectively earns more than $54,884 annually finds itself right at the EITC cutoff and will be ineligible. Families with lesser incomes will see a higher refund through the program.

The proposed Utah EITC would provide to qualifying families a tax refund equal to 10% of the federal EITC they collected that year. For a family of two, the state EITC refund could be as much as $583, augmenting the $5,825 federal refund.

The qualifications for the tax credit, however, are somewhat strict. On top of the federal EITC income restrictions, the state will only offer its EITC credit to families who have a history of receiving public assistance. Other families can still receive the federal credit, but not the smaller state credit.

This requirement of having previously collected public assistance, interpreted by the proposal as an indication of “intergenerational poverty,” would limit the assistance only to families that have received public assistance for a total of two or more years. To qualify, the family’s head of household must also have grown up in a family that also received public assistance for at least a year.

A tax credit for children, retirees

The task force’s proposal includes a non-refundable tax credit for recipients of Social Security income and an expansion of the tax exemption enjoyed by families with children or other dependents, both most benefitting lower income households.

Children and individuals with disabilities will enjoy a higher tax exemption on their parents’ or caretakers’ income under the plan. The higher exemption accompanied by the standard tax credit for dependents would mean more money back on annual tax returns, particularly for larger families.

Families with parents jointly filing taxes qualify for the full tax refund if their annual household income is less than $29,000, and a reduced form of the tax refund extends to higher-income families whose annual earning are less than $220,000.

The Social Security income tax credit would provide a tax break to retirees collecting low to moderate incomes. Joint filers who together collect $48,000 per year or less would not pay state income tax on their Social Security income. Individuals collecting $30,000 per year or less also qualify for this tax break.

Retired persons with higher incomes would pay the state income tax for their Social Security income, but for lower-income individuals, the rate would be reduced from the proposed 4.58% individual income tax rate.