While the debate over “tax modernization” and expanding the sales tax base to include services rages on, Utah has a solution staring it right in the face:
Cut the income tax rate.
We’ve heard policymakers argue that additional revenue needs to be captured through additional sales taxes on services, for example. There is concern among some groups and organizations that Utah needs to balance the so-called “three-legged stool,” which is government’s buzzword to describe its revenue from the sales, income and property taxes.
However, we disagree with this assessment. Utah does not have a revenue problem, yet some statistics that are being used seem to imply that there is some sort of crisis coming, particularly from our sales tax revenue, which funds the majority of state government operations. Utah is not suffering from a revenue problem. In fact, both Utah’s general fund (sales tax), and education fund (income tax) have been growing at rates not seen in years. This is why excess revenues, particularly in the income tax, should be returned to whom it belongs to in the first place — the taxpayer.
Before anyone sharpens the pitchfork and says that anyone who argues for an income tax cut will ruin education in Utah, take a lesson from North Carolina. Starting in 2013, its legislature passed a massive income tax cut that would change its system to a flat rate and phase down the individual income tax rate from 7.75% to 5.75% over three years. Then, if revenue came in as expected or better, the state said it would cut even further. That is exactly what happened — revenue grew. From 2013 through 2017, North Carolina’s individual income tax revenues have swelled from $10.2 billion to $11.9 billion. That is a jump of over 16%. In 2017 it reduced the income tax rate even further to 5.25%. North Carolina hasn’t stopped there. The state also reduced its corporate income tax rate a whopping 60% from 6.9% to 3.0% over the same time period and then lowered it even further to 2.5% in 2019. It is attracting businesses and the high paying jobs that come with them and seeing one of the fastest rates of net migration in the country.17 comments on this story
North Carolina is a real example of what economists and tax experts have long preached as a golden rule of tax policy: If you want more of something, you tax it less. Cutting income tax rates creates economic growth, which grows tax revenue over time. It rewards innovation and investment and attracts capital and the jobs that come with it, which produces more revenue for the government, not less.
So, as the debate rages on with “tax modernization,” economics and actual historical data provide the solution. It is the right call whether or not the legislature decides to expand sales taxes or formulates some other path: Cut the income tax rate.