Capitol Daily Memo: tax deductions, exemptions and credits in Utah

Today, the Legislature’s Revenue and Taxation Interim Committee discussed the number and amount of deductions, exemptions and credits in Utah’s tax system (property taxes, income taxes and sales taxes). These policies impact the lives of Utahns and their families in various significant ways: from whether people can afford to stay in their homes to how well they can support and provide for their family’s needs.

The takeaway from the committee meeting was simple: there are a whole lot of deductions, exemptions and credits in Utah’s tax system.

For instance, there are 21 categories of property tax exemptions mentioned in the Utah Constitution. One of the more prominent ones is the 45 percent exemption on the value of a homeowner’s property. In other words, Utahns’ property tax bill is calculated by taking the property tax rate and multiplying it by 55 percent of a homeowner’s property value, rather than the full property value. This has the effect of reducing the amount of property taxes Utah taxpayers would otherwise pay. 

For individual income taxes, there are currently 42 categories of credits and deductions in Utah’s income tax law (eight categories of tax deductions and 34 categories of tax credits). These range from tax deductions forU.S. government obligations and railroad retirement income to tax credits for purchases of clean fuel vehicles and hand tools for farm operations.

For state sales taxes, there were 22 categories of sales tax exemptions in Utah in just one section of Utah’s tax code in 2012 (others exist as well but were not discussed). The amount of these deductions (i.e. the amount taxpayers keep in their pockets from these deductions) is significant, coming in at nearly $430 million. In addition to this list of sales tax exemptions, the state taxes sales of certain items at lower rates than others, such as food purchases.

Some of these 84 categories of property, income, and sales tax deductions, exemptions, and credits are easy to understand and justify (e.g. the homeowner property tax exemption as a way to protect private property rights). For others, the logic is not so apparent (e.g. the income tax credit for farm operation hand tools).

Aside from the individual justifications for these deductions, exemptions and credits, the presence of so many of them in Utah’s tax system raises important policy questions that touch on several, sometimes conflicting principles for conservatives. For instance, since every tax dollar is created by and belongs to taxpayers, not government, tax deductions, exemptions and credits would seem to be a good thing because they keep tax dollars in taxpayers’ pockets.

On the other hand, it is generally good for every citizen to have “skin in the game” and be required to pay for some part of the freedom that certain government services provide (e.g. fire and police protection), even if many citizens don’t directly use those services. Tax deductions, exemptions and credits can undermine this principle. As they multiply and accumulate over time, they will allow some taxpayers to take advantage of the increasingly complicated tax system to pay little or no taxes at all, leaving everyone else to pay the price for their freedom.

Balancing these principles in a reasonable way that can be justified in terms of human impact is something that any fiscally responsible, conservative policymaker must do. Given the fact that no one (understandably) wants to give more of their money to government, this is no easy task.

Imagine you could change Utah’s system of deductions, exemptions and credits any way you wanted: would you create more of them because you think taxpayers should keep more of their money, or would you reduce them because you think too many people pay nothing in taxes as it is? What do you think?

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