Income Tax Earmarking and Grocery Taxes on the Ballot in Utah

Utah’s taxes are unusually earmarked. The entirety of individual and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.
collections, along with revenues from intangible property, are earmarked for public education (both K-12 and higher education), and over a quarter of sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.
revenue is currently earmarked as well, for priorities ranging from transportation to water and natural resources.

Utah is the only state to earmark the entirety of one of its major taxes (Alabama is the only other state that comes close, earmarking most of its income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
), but a measure on the ballot this November might change that. The proposed constitutional amendment would replace the total earmark with authorization to use part of the revenue for other governmental purposes, once public education funding obligations have been met. It would also trigger prior contingent legislation exempting groceries from the state sales tax.

By dedicating the income tax to education, along with more typical dedications (like using gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline.
revenues for infrastructure spending), architects of Utah’s tax code made the sales tax supremely important for funding the rest of government. Unfortunately, while income taxes continue to show robust revenue growth—which has led to several rate reductions in recent years, returning some of that growth to taxpayers—sales tax revenues are declining as a share of state tax collections.

Four decades ago, income tax collections accounted for 2.2 percent of state income while sales taxes brought in the equivalent of 2.5 percent of state income, all of it unearmarked. Today, income taxes generate 3.5 percent of state income despite multiple rounds of rate cuts, while the sales tax brings in 2.1 percent—and the unearmarked portion only 1.5 percent. The income tax earmark, enshrined in the constitution at a time when the tax mix looked radically different, is increasingly unbalanced and makes it difficult for legislators to budget. The income tax is, moreover, considerably more volatile than the sales tax, so using it as the source of education funding creates substantial uncertainty about year-to-year funding levels.

The Utah Constitutional Requirements for Education Funding Amendment, a legislatively referred amendment, adds “to support other state needs after the fulfillment of the requirements in Subsection (5)(b),” which requires support for public and higher education, as a valid use of income tax revenues. The provision does not define school funding requirements, though this is not unusual: specific school funding requirements throughout the country are statutory or court-driven, rather than detailed in state constitutions.

Ratification of the amendment would also trigger a contingent provision of House Bill 54 (2023), repealing the state’s sales tax on groceries. Local sales taxes would continue to apply to grocery items, and—as in all states with sales taxes—prepared foods would remain in the sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.
.

Eliminating the tax on groceries is unquestionably a tax cut, albeit a poorly targeted one. When cutting taxes, policymakers tend to focus on promoting economic growth, achieving certain distributional aims, or both. Removing groceries from the state sales tax base reduces revenues in a way that is unlikely to promote economic growth. That may be fine, from policymakers’ point of view, if it achieves some other outcome, and indeed, the general argument for exempting groceries from the sales tax base is to provide targeted relief to low-income households, making the tax code more progressive.

However, as we and others have previously demonstrated, the grocery exemption is poorly calibrated for this. Many grocery purchases by low-income households are made with SNAP benefits, and those purchases are already exempt from sales tax (a federal requirement). While these households obviously have non-exempt grocery purchases as well, and will get some relief through the new exemption, they would get more relief from an across-the-board cut to the sales tax rate. While groceries are a large part of low-income households’ consumption, the fact that many of these purchases are already exempt means that grocery tax relief confers less benefit than broad-based rate relief. We provide calculations here.

The effects of the amendment are, therefore, a mixed bag. But should the amendment pass, Utah’s path to balancing the budget would become significantly easier, and funding for education and other priorities could be based on calculations and formulas rather than on the amount of revenue flowing each year from a single, volatile tax.

Share

Twitter
LinkedIn
Facebook
Email