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Research & Commentary: Utah Tax Plan is Full of Bad Ideas

December 18, 2019

In this Research & Commentary, Matthew Glans examines a tax reform proposal in Utah that would impose a “millionaire tax” on higher income taxpayers and replace the state sales tax with a gross receipts tax on businesses.

In early December, a new tax proposal was introduced in the Utah House that would make two major changes to Utah’s tax system. The first change would impose a “millionaire tax” on higher income taxpayers earning more than $150,000. The second change would replace the state sales tax with a gross receipts tax on businesses. Both taxes are highly disruptive and could have strong negative effects on Utah’s economy, business climate, and economic competitiveness. 

A decade ago, Utah moved away from progressive taxation to a flat income tax, which is now set at 4.95 percent. According to the Deseret News, the plan would either keep the existing tax rate on earnings up to $150,000 or decrease it to 4.64 percent. Earnings above $150,000 would be taxed at 6 percent up to $250,000; 7 percent between $250,000 and $600,000; and 8 percent above $600,000.

So-called millionaire taxes are an unreliable source of revenue. Scott Hodge of the Tax Foundation notes millionaire status is both temporary and fluid. Many taxpayers achieve millionaire status only once in their lifetime. In addition, the number of millionaires fluctuates based on the business cycle. Before the recent recession, from 2002 to 2007, the number of millionaire tax returns more than doubled nationwide, to a record 392,220. After the recession, from 2007 to 2009, the number fell by 40 percent.

Moreover, higher taxes drive wealthy taxpayers out of states, taking their income, capital, and tax revenues with them. In 2009, Maryland imposed a millionaire tax projected to raise an additional $106 million. Instead of providing the expected new revenue, by the next year, the number of Marylanders reporting incomes of $1 million or more fell by one-third. Maryland took in $100 million less from millionaire earners than the previous year. No wonder the state allowed the tax to expire in 2010.

Although income taxes are often sold to the people as a tax on the rich, they almost never remain as such. Income taxes nearly always expand over time to cover increasingly more taxpayers, due to government’s insatiable need for tax revenue, which it uses to fuel out-of-control spending. Instead of increasing taxes on Utah’s most productive residents, state elected officials should focus on making the state a more attractive place for businesses and workers, a goal that would best be accomplished by restraining spending, lowering tax rates, and reducing unnecessary regulations.

The second proposed change would replace the state’s 4.85 percent state sales tax with a 0.9 percent gross receipts tax (gross receipts tax) on sellers and service providers. GRTs are not popular or entirely effective in the states in which they have been proposed or implemented. Most states repealed their gross receipts taxes by the 1930s and replaced them with retail sales taxes. Unfortunately, these taxes have made something of a comeback in recent years, with legislators looking to access additional tax revenue.

Gross receipt taxes are economically detrimental because they impose a tax on total revenue, not merely profits, thereby requiring even struggling businesses that aren’t earning a profit to pay the tax. Second, unlike corporate income taxes and sales taxes, GRTs apply to all transactions, including business-to-business purchases of supplies, raw materials, or equipment. This creates “tax pyramiding,” the layering of taxes at each stage of production. The result is higher costs to consumers, who often have no idea how much in taxes they ultimately pay for their purchases. This means GRTs inevitably violate the good-government principle of transparency.

While Utah has built a strong business climate, ranking 9th in the Tax Foundation’s State Business Tax Climate Index, the state still lags behind its neighbors in competitive tax policy. Utah’s state-local tax burden of 9.6 percent is higher than many of its neighbors, including Arizona, Colorado, Nevada, New Mexico, Idaho, and Wyoming.  

Rather than increase taxes on businesses and high earners, Utah elected officials should focus on making the state a more attractive place for businesses and workers, a goal that would best be accomplished by restraining spending, lowering tax rates, and reducing unnecessary regulations.

The documents cited below examine millionaire taxes, gross receipt taxes, and their effects on taxpayers and economic growth.
 

Gross Receipts Taxes: Lessons from Previous State Experiences
https://taxfoundation.org/gross-receipts-taxes-state-experiences/
In this article, Nicole Kaeding and Erica York of the Tax Foundation examine gross receipts taxes in several states, how they fared, and why states have chosen to move away from these taxes.

Resisting the Allure of Gross Receipts Taxes: An Assessment of Their Costs and Consequences
https://taxfoundation.org/gross-receipts-tax/
Garrett Watson of the Tax Foundation examines the effects and consequences of gross receipts taxes and argues against their use by states.

Ten State Solutions to Emerging Issues
https://www.heartland.org/publications-resources/publications/ten-state-solutions-to-emerging-issues-2018
This Heartland Institute booklet explores solutions to the top public policy issues facing the states in 2018 and beyond in the areas of budget and taxes, education, energy and environment, health care, and constitutional reform. The solutions identified are proven reform ideas that have garnered significant support among the states and with legislators.

Taxing the Rich Will Bankrupt Your State
http://heartland.org/policy-documents/research-commentary-taxing-rich-will-bankrupt-your-state
John Nothdurft explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.

Trend #1: “Millionaires’ Taxes”
http://taxfoundation.org/article/trend-1-millionaires-taxes
Joseph Henchman of the Tax Foundation examines the millionaire tax trend in this Fiscal Fact article. “A number of states have enacted high income taxes on those with large incomes. Although nicknamed ‘millionaires’ taxes,’ they have hit income at much lower levels. The trend seems to have petered out although California and Maryland may see further action,” Henchman writes.

Should We Raise Taxes on the Rich?
http://spectator.org/archives/2012/11/14/should-we-raise-taxes-on-the-r
Peter Ferrara, senior fellow for entitlement and budget policy at The Heartland Institute, writes in the American Spectator about “taxing the rich” and explains why such policies make no fiscal sense.

Long-run Macroeconomic Impact of Increasing Tax Rates on High-Income Taxpayers in 2013
https://www.heartland.org/publications-resources/publications/long-run-macroeconomic-impact-of-increasing-tax-rates-on-high-income-taxpayers-in-2013?source=policybot
This report from Ernst & Young conducted on behalf of the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association, and the United States Chamber of Commerce examines the long-term impact of an increase in top income tax rates.

Seven Myths About Taxing the Rich
https://www.heartland.org/publications-resources/publications/seven-myths-about-taxing-the-rich
Curtis S. Dubay of The Heritage Foundation considers seven commonly cited myths about policies to tax the rich. Dubay argues raising taxes on the rich would increase the progressivity of an already highly progressive tax code. It also would damage economic growth by stifling job creation, further slowing already stagnant wage growth. Although some see raising taxes on the rich as a silver bullet for fiscal woes, it actually badly damages the economy, he writes.

Federal Tax Reform Might Push New Jersey to Reform Tax System
https://taxfoundation.org/new-jersey-federal-tax-reform/
In this article, Joseph Bishop-Henchman of the Tax Foundation writes about how the current federal tax reform proposals, which eliminate the state and local tax deduction, could affect effective tax rates in New Jersey. Bishop-Henchman says New Jersey would be hit hard by the proposed changes.

One Rich Guy Moves, New Jersey Budget in Peril
https://taxfoundation.org/one-rich-guy-moves-new-jersey-budget-peril/
Scott Drenkard of the Tax Foundation discusses how overtaxing the wealthy can drive high-earning residents from a state, thereby having a significant negative effect on a state’s budget.

10 Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”

Trend #1: “Millionaires’ Taxes”
http://taxfoundation.org/article/trend-1-millionaires-taxes
Joseph Henchman of the Tax Foundation examines the millionaire tax trend in this Fiscal Fact article. “A number of states have enacted high income taxes on those with large incomes. Although nicknamed ‘millionaires’ taxes, they have hit income at much lower levels. The trend seems to have petered out although California and Maryland may see further action,” Henchman writes.

Gross Receipts Taxes in State Government Finances: A Review of Their History and Performance
https://www.heartland.org/publications-resources/publications/gross-receipts-taxes-in-state-government-finances-a-review-of-their-history-and-performance?source=policybot
This paper, written by Indiana University economics professor John L. Mikesell, studies the historical use and effectiveness of gross receipts taxes, as experienced by American states and European countries.

Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes
http://www.taxfoundation.org/research/show/2061.html
This study by the Tax Foundation explains why gross receipts taxes are poor tax policy. The author notes that GRTs lead to harmful “tax pyramiding,” distort companies’ structures, and damage the performance of state and local economies.

 

Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR