an evaluation of utah’s tax system and a comparison of

An Evaluation of Utah’s Tax System

and A Comparison of Eight Intermountain Western States

Policy In-depth: 11-28-07 By Janis Dubno, MBA, Consultant, CPPA

and Levi Pace, MBA, Research Assistant, CPPA and OLRGC

Topic Area: Taxes

of 220 Center for Public Policy & Administration www.cppa.utah.edu

An Evaluation of Utah’s Tax System and A Comparison of Eight Intermountain Western States Policy In-Depth: 11-28-07 by Janis Dubno, MBA, Consultant, CPPA and Levi Pace, MBA, Research Assistant, CPPA and OLRGC Center for Public Policy & Administration email: [email protected] web: www.cppa.utah.edu Introduction The design of state tax policy must take many factors into consideration. State legislatures grapple with the task of raising revenue to fund state budgets and the desire to minimize taxes for its citizens. What constitutes good tax policy can be subjective and the interests of different taxpayers conflicting. The differences between state and local tax policy can also present various dilemmas, such as the desire for uniformity versus the need for local autonomy. Inevitably, discussions about the size and role of government come into play, intermingling politics and philosophy with public finance. All of these issues necessitate a comprehensive, thorough and unbiased analysis of the impact of different tax policies on the ability to fund state government and the impact of these policies on the economic lives of taxpayers. Through an understanding of the impact of different tax policy structures, state and local governments can better craft state and local tax policy to achieve their desired results. The purpose of this study is to evaluate Utah’s tax policy with respect to the income tax, state and local general sales tax, and property taxes and to compare these policies to those of seven Intermountain Western states, including Arizona, Colorado, Idaho, Montana, New Mexico, Nevada and Wyoming. We have chosen certain policy principles that we consider necessary for sound tax policy as criteria for the evaluation. The policy principles that we have chosen include simplicity, transparency, neutrality and efficiency, stability, sufficiency and adequacy, balance, equity and competitiveness. Simplicity and transparency address the process of filing taxes, how easy they are to understand and whether taxpayers are aware of their exact tax burden. Neutrality and efficiency assess the impact of the tax systems on the decision making process of individuals as to where to live, how much to work, how much and what they should consume and where to locate businesses. Neutrality analyzes how much impact taxes have on the economic behavior and decisions of its taxpayers. Stability, sufficiency and adequacy evaluate the viability of the income, sales, and property taxes as well as the total state and local tax revenue as funding sources for state government expenditures. Balance examines how diversified revenue sources are with respect to the three taxes included in the study and between state and local government. The principle of equity addresses fairness, how taxes are distributed across the income spectrum and among different family types, with respect to both effective tax rates and who pays the majority of the taxes collected. Finally,


competitiveness compares the attractiveness of the different tax systems from the point of view of the taxpayer. The report is divided into five parts. Chapter One is a discussion of the tax policy principles used as criteria for evaluation. Chapter Two describes Utah’s income, sales and property tax systems and evaluates Utah’s tax system according to the tax policy principles. Chapter Three compares Utah to the Intermountain Western states of Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, and Wyoming. The evaluations in Chapters Two and Three address all the policy principles except equity. We analyze actual tax revenue data from each state from 2000 to 2006 provided by the U.S. Census. Equity is addressed in Chapter Four, a Tax Incidence Analysis of all three taxes separately and combined. Utah is evaluated separately and then compared to the other Western states included in the study. It is our intent in the Tax Incidence Analysis to isolate differences in tax policy from differences in the demographic characteristics of each state. To do this, we use the same demographic profiles for each state and calculate taxes according to each state’s tax code. In this way, we are evaluating how Utah households would fare under each of the Intermountain Western state’s different tax policies. Therefore, the analysis is not intended to be a picture of tax incidence for Arizona citizens according to Arizona demographics, for instance, but how Arizona’s tax policy would impact Utah’s households. Chapter Five concludes the report by identifying the best practices in tax policy as illustrated by the links between different policy structures and the performance of the different states according to the various policy principles. We have also included, in Appendix 1, descriptions of the income, sales and property tax systems for each state. Appendix 1 is meant to be a reference, for the convenience of the reader, if further detail is desired.


Chapter 1 Discussion of Tax Policy Principles In evaluating a state’s tax system, it is necessary to develop a set of fundamental tax policy principles that can be used as a criterion for analyzing both the mechanics and results of tax policy. The set of principles discussed below will be used to critically evaluate Utah’s tax system and how it compares to the other Western Intermountain states. These principles include simplicity; transparency; neutrality and efficiency; equity; stability, sufficiency and adequacy; balance; and competitiveness. In exploring these various principles, one quickly learns that they are often interrelated and, at times, conflicting. We will not address in this study how much money should be raised or how that money should be allocated. Rather we will assess how well the income tax, sales tax and property tax systems satisfy the criteria for fundamentally sound tax policy as defined by the principles discussed below. Simplicity Few would argue that simplicity is an element of sound tax policy. Simplicity means that the tax system avoids complex provisions and regulations, multiple filing and reporting requirements, numerous deductions, exclusions and exemptions (Brunori, 2001). It fosters ease of compliance and minimizes the cost of compliance. Compliance costs include the time and resources it takes for an individual taxpayer to keep records, become educated about compliance requirements, prepare and file tax returns, and respond to IRS notices (Vedder, 1998). The more complex a tax is, the higher the compliance costs. While compliance costs can be hard to measure, the length of the tax instructions and the number of lines on the tax return provide insight into the simplicity of the tax (Vedder, 1998). The tax system should be easy for taxpayers to understand. Simplicity allows governments to more easily administer, monitor and enforce tax collections. Transparency Closely related to the principle of simplicity is transparency. A transparent tax system is one that taxpayers can understand. In a transparent tax system, taxpayers can easily calculate their tax base, the marginal tax rate, and their tax liability. Taxpayers know what their tax burden is, the logic behind the tax law, and who bears the overall tax burden (Vedder, 1998). The more complicated a tax system is the more difficult it is to achieve transparency. Transparency also dictates that there are no “hidden” taxes. For instance, income tax brackets that are not indexed for inflation implicitly raise income taxes in a way that is not apparent to taxpayers. Neutrality and Efficiency Economic theory proposes that taxes and tax policy should not influence the economic choices of individuals or businesses. A tax system should not create distortions by


changing the economic decisions that individuals make as to how much they should work, save, consume or invest (Vedder, 1998). Economists consider an economy to be efficient when resources are directed to their highest valued use. The highest valued use is one that maximizes an individual’s wellbeing. For instance, in the absence of taxes, individuals will make choices concerning consumption, work, savings and investment. Assuming that individuals are rational, they will make these choices such that their welfare is maximized. The combination of these decisions is therefore considered to be efficient. Taxes, however, can change the decisions of individuals resulting in an allocation of resources and time that is different than the allocation without taxes. Such a tax system would not be neutral. Taxes can create distortions by raising the prices of certain goods and services and, thereby, influences consumer choices. By altering how individuals allocate their resources, taxes generally create distortions that can result in economic inefficiencies since the resources are not allocated to their highest valued use. Inefficiencies resulting from distortions reduce economic wellbeing (Vedder, 1998). Differences in tax base, rates, and the nature and magnitude of deductions and credits can affect the extent to which different tax systems distort the economic behavior of individuals. Income and consumption taxes can affect decisions as to how much one should work. Research shows that decisions by secondary workers in a household are more sensitive to taxes than those of primary wage earners. Taxes on capital may impact decision concerning savings and consumption by affecting the after-tax rate of return on investments. Taxes on income from capital can also impact the location of investment (Vedder, 1998). These distortions can also make the tax system less equitable in that it may favor one taxpayer or type of business over another (Walker, 2004). Equity While there is agreement that a sound tax system is a “fair” system, there is less agreement as to what constitutes “fairness.” This is perhaps one of the most contentious aspects of tax policy. Tax equity can be measured in several ways. The following describes the primary ways in which the fairness of a tax system can been evaluated. Vertical Equity Vertical equity measures how the tax system allocates the tax burden across the income spectrum. With respect to vertical equity, tax systems can be regressive, proportional or progressive. A regressive tax system is one in which lower income taxpayers pay a higher percentage of their income in taxes than upper income families. A proportional system takes the same share of income across all income groups. A progressive tax system is one in which higher income taxpayers pay a higher percentage of their income in taxes than lower income taxpayers. A distinction here must be made between a progressive statutory tax rate structure and a progressive tax system. While statutory marginal tax rates may be progressive, the progressive nature of the tax may be offset by other features of the tax, such as deductions and credits (Vedder, 1998). As a result, it is important to look at the effective tax rate, the amount of tax a taxpayer pays as a percentage of their


income (after all deductions, exclusions and credits are taken into account), in order to evaluate equity. Horizontal Equity Horizontal equity measures the extent to which taxpayers with similar income levels pay the same amount in taxes. Complexity in a tax system can often lead to horizontal inequities through the utilization of tax credits and deductions. Credits and deductions can lead to taxpayers with similar incomes being taxed differently. For instance, as a result of the mortgage interest deduction on primary residences, two taxpayers with similar income may be taxed differently if one owns a home while the other rents. Similarly, child credits favor parents over non-parents. (8) Effective Tax Rates and Proportion of Total Taxes Paid Tax equity is typically evaluated by examining effective tax rates. However, another approach is to consider who pays the majority of the tax revenue collected. This latter approach measures how much of the total tax revenue is paid by each income group. It is common to find that lower income taxpayers pay a higher percentage of their income in total taxes yet upper income taxpayers contribute most to the total amount of revenue raised. Fairness in this context is subjective. Some argue that tax equity is defined by the spectrum of effective rates. Others focus on the amount that each income group contributes to the total of taxes paid. Both of these definitions of tax equity will be considered in our assessment. Benefits Received Another measure that is often considered in determining how equitable a tax system is concerns how the benefits of government expenditures are distributed. For the purposes of this study, however, we will focus on the tax burden as defined by the proportion of total taxes paid, the distribution of effective rates, and the ability to pay as measures of tax equity. Stability, Sufficiency and Adequacy Revenue stability is an essential feature of any tax and necessary for a stable budget and appropriation process. State and local governments would not be able to create budgets if they were not able depend on the continuity of the levels of revenue generated by the tax system. The primary purpose of imposing taxation is to raise revenue. Consequently, one principle of sound tax policy is whether the tax system raises a sufficient amount of revenue to cover a state’s budgetary requirements reliably with little variation over time. In addition, it requires that the tax system have enough flexibility to provide for changing budgetary requirement over time and business cycles. As mentioned earlier, we will not address whether or not state budgets are adequate to meet perceived needs. This can be


very subjective and perceptions of need vary significantly across different groups of taxpayers and across the political spectrum. For instance, many argue that the needs of public education are unfunded, as a result of Utah’s ranking as last in the nation in per pupil funding (U.S. Census, 2005). State legislatures and local governments determine through representative government the level of budget appropriations each year. In order to assess whether a tax is sufficient and adequate, we will examine if tax revenues in any given year, over the period 2000-2006, were sufficient to cover the prior year’s appropriation funded by the particular tax. In addition, we will examine if combined state income and sales taxes in any given year represent a consistent portion of the prior year’s direct appropriation by state government. A similar analysis will be presented with respect to property and local sales taxes and local government expenditures. In this way, we strive to not make assumptions or judgments as to the adequacy of the level of expenditures or the growth of expenditures from year to year. Balance The concept of balance when applied to tax systems means the extent to which there is balance between different revenue sources, both on a state and local level. Balance is important with respect to the diversification of sources of tax revenue. A balanced tax system is one in which the revenue sources are diversified, without a disproportional reliance on any one particular tax revenue. Just as portfolio diversification is an important element of personal investment strategies, diversification of tax revenue sources is an important element of public finance. Competitiveness The competitiveness of a state’s tax system is, by definition, a comparative analysis. Competitiveness with other neighboring states is important in order to attract economic activity to the state. One element of a competitive analysis is to compare stated income tax, sales tax and property tax rates. However, it is important to compare effective tax rates that incorporate differences in tax bases. The principle of competitiveness can often be in conflict with the principles of neutrality and efficiency, sufficiency, and equity. Certainly, the lowest rates and greatest number and magnitude of exemptions will make a state the most competitive. Yet, revenue needs, fairness, and neutrality might be undermined in this case. We will address the conflict between principles in our concluding section.


Chapter 2 Utah’s Tax System Overview of State and Local Taxes and Revenue Introduction The State of Utah and local governments raise revenue through taxes, fees and other sources. Taxes are levied at the state, county and local level. The income tax is levied only by state government while sales taxes are levied at the state, county and local level. Counties, cities and towns, school districts and special taxing entities levy property taxes to finance their budgets and schools. The budgets of Utah’s state and local governments are financed by the revenue raised by a variety of taxes, in combination with federal funds, fees and other non-tax revenues. While all these sources of revenue contribute to the fiscal landscape in Utah, we will focus on the income tax, the sales tax and the property tax. As will be discussed in detail below, Utah has instituted several tax reform measures in the income and sales tax that will be implemented from 2006 to 2008. The revenue numbers in the table below reflect the tax system in place during 2006. The revenue implication of the tax reform will be discussed in the income and sales tax sections later in this report. While many speak of the three-legged stool of the income, sales and property taxes as the foundation of Utah’s fiscal system, it is important to bear in mind that the income tax and the state sales and use taxes fund state government while the property tax and local sales tax fund local governments. The following table (Table 2-1) shows income tax revenues, state and local sales tax revenues and property tax revenues for 2006.

Table 2-1: 2006 Income Tax, Sales Tax and Property Tax Revenues Tax 2006 Revenue ($million) % Of Total Income Tax $2,277. 49* 34.73% State and Local Sales and Use Tax

2,222.20 33.89

Property Tax (charged)** 2,058.32 31.39 Total of 3 Taxes $6,558.01 100.00% Source: 2006 Utah Tax Commission Annual Report and Utah Property Tax Division 2006 Annual Statistical report *Excludes $9,093,876 in mineral production withholding taxes ** Revenue for Tax Year 2006


State Revenue and Taxes The State of Utah raises revenue through a variety of taxes. In addition to the income tax and sales tax, the other major sources of tax revenue at the state level, used to fund state government, are the motor fuel tax and the corporate franchise tax. The following table (Table 2-2) shows the amount of revenue raised by these sources for FY2006.

Table 2-2: Major Sources of State Tax Revenue for FY2006 Tax Amount ($millions) % Of Total State Tax

Revenue Individual Income Tax $2,277.478 41.72% State Sales and Use 1,890.793 34.64 Motor Fuel 2,59.218 4.75 Corporate Franchise 3,48.129 6.38 Total 4 Sources $4,775.18 87.48% Total State Tax Revenue $5,459.091 100.00% Source: U.S. Census Bureau The income tax is the largest source of state revenue, accounting for 41.72% of all state tax revenue. Sales tax revenue is the second largest source and accounts for 34.64% of all state revenue in FY2006. Together, the income and sales taxes provide 76.36% of state tax revenue.


The following table (Table 2-3) lists the other major state taxes, rates and the corresponding revenue for FY2006.

Table 2-3: Other Major State Taxes

Tax 2006 Tax Rate 2006 Revenue ($ Million)

Motor Fuel 24.5 cents per gallon $ 240.4 Corporate Franchise 5% 380.3 Special Fuel 24.5 cents per gallon 101.1 Aviation Fuel 9 cents per gallon non federally

certified carriers 4 cents per gallon federally certified carriers

6.98

Motor Vehicle Registration

Various 32.58

Proportional Registration

Formula 13.04

Highway Use Tax Based on weight 8.6 Mining Severance 2.6% of taxable value 17.0 Oil and Gas Severance Tiered range from 3 to 5% based on

price 71.5

Cigarette, Tobacco Tax, Licenses and Fees (in addition to state and local sales tax)

69.5 cents per package of 20 cigarettes, 86.875 cents per package of 25 cigarettes; 35% of price for non-cigarette tobacco.

52.1

Beer $12.80 per 31 gallon barrel of beer 8.7 Wine and Liquor 13% of all retail sales 20.6

Source: 2006 Utah Tax Commission Annual Report County and Local Taxes and Revenue The primary sources of revenue for counties and cities are the local sales taxes and the property tax. The following table shows the primary sources of revenue for counties and cities in Utah for 2005. Counties rely on the property tax as their principle source of revenue, accounting for 33% of 2005 revenue. Only 13% of 2005 revenue came from the county general sales tax. Cities receive 20% of revenue from locally imposed sales taxes as opposed to 17% from the property tax. Counties and cities receive almost 50% of their revenue from non-tax sources.


Table 2-4: County Level Revenue 2005-All Counties Tax Revenue % Of Total Property Tax $345,499,054 33% General Sales and Use 136,105,688 13 Special Base Sales Taxes 52,348,341 5 Total $1,046,955,831 100% Source: Office of Legislative Research and Counsel

Table 2-5: City Level Revenue 2005-All Cities Tax Revenue % Of Total Property Tax $272,854,288 17% General Sales and Other Sales Taxes

321,005,045 20

Total $1,605,025,226 100% Source: Office of Legislative Research and Counsel


The table below (Table 2-6) lists Utah’s major local taxes, rates and 2006 revenue. In most cases, the maximum levy that a locality may impose is authorized by state statute. However, the local government has the discretion of whether or not to impose the tax.

Table 2-6: Other County and Local Taxes Tax 2006 Rate 2006 Revenue Public Transit 0.25% $136,416,309 County Option Sales and Use

0.25% $102,809,849

Tourism, Recreation, Cultural and Convention Tax

Up to 1% Restaurant Up to 3% Leasing Up to 0.50% Room Rental

$45,401,207

Statewide Motor Vehicle Rental Tax

2.5% $4,243,466

Botanical, Cultural, and Zoological Tax

.01% $26,242,424

County Transient Room Tax

Up to 3% $20,294,926

Municipality Transient Room Tax

Up to 0.5% $1,089,242

Resort Communities Tax Up to 1% $10,609,677 Municipal Highways Tax 0.25% $10,344,378 Rural Hospital Tax Up to 1% $6,443,531 Town Option Sales and Use Tax

Up to 1% $33,112

Source: 2006 Utah Tax Commission Annual Report While all the taxes listed above provide revenue needed to fund state and local government, we will focus on the income tax, state and local sales taxes, and the property tax. The following section outlines, in detail, Utah’s tax policy with respect to these three taxes. Utah’s Tax System Income Tax Filing Requirements Every Utah resident who is required to file a federal return must file a state return. In addition, non-and part-year residents with Utah source income must file a return. Every individual with income earned in Utah and with income greater than a certain amount given their filing status must file. The following table illustrates the filing requirements.


Table 2-7: 2006 Utah Filing Requirements

Marital Status at end of 2006

Filing Status Age Gross Income at least:

Single Single Head of Household Qualifying Widow (er)

Under 65 65 or older Under 65 65 or older Under 65 65 or older

$8,450 $9,700 $10,850 $12,100 $13,600 $14,600

Married with dependent child. Living apart from spouse for last 6 ms of 2006

Head of Household Married Filing Joint

Under 65 65 or older Both under 65 One 65 or older Both 65 or older

$10,850 $12,100 $16,900 $17,900 $18,900

Married, living with spouse

Married Filing Separate

Any age $3,300

Married, not living with spouse at end of 2006

Married Filing Joint or Separate

Any age $3,300

Source: Utah Tax Commission Income Tax Exemption Utah also exempts certain individuals and families from the income tax if their income is below a certain threshold. If federal adjusted gross income is less than the sum of the federal standard deduction and 100% of federal personal exemption allowed, then the taxpayer is exempt from the income tax. The exemption was implemented as an attempt to shield taxpayers who are close to the poverty level from taxation. The following table shows the federal standard deduction and personal exemptions (Table 2-8).

Table 2-8: 2006 Federal Standard Deduction and Exemption Filing Status Standard Deduction Personal Exemption Single $5,150 $3,300 Head of Household $7,550 $3,300 Married filing joint $10,300 $6,600 Married filing separate $5,150 $3,300 Qualifying widow $10,300 $3,300 Source: Utah Tax Commission


Deductions and Personal Exemptions Utah follows the federal allowances for standard and itemized deductions and allows the taxpayer to deduct 75% of the federal personal exemption. The following table shows the standard deductions for 2006 (Table 2-9).

Table 2-9: 2006 Standard Deduction Filing Status Standard Deduction Single and Married Filing Separate $5,150 Head of Household $7,550 Married Filing Joint and Qualifying Widow $10,300 Source: Utah Tax Commission For 2006, the personal exemption allowed in Utah was $2,475 (75% of $3,300). Federal personal exemptions are reduced for taxpayers with income above a certain level. Since Utah follows the federal system, Utah also reduces the amount of personal exemption above certain income levels. The Adjusted Gross Income levels where the reduction begin are as follows:

• Married filing separate: $112,875 • Single: $150,500 • Head of Household: $188,150 • Married filing Joint or Qualifying Widow (er): $225,750

Calculation of Utah Taxable Income The starting point for calculating state taxable income is federal adjusted gross income FAGI). Taxpayers are then required to make certain additions and subtraction to FAGI to determine Utah taxable income. Additions to income include:

• State income tax itemized on federal return • Certain Lump sum distribution • State Taxes allocated from an Estate or Trust • Medical Savings Account • Utah Educational Savings Plan • Reimbursed Adoption Expenses • Child’s Income Excluded from Parent’s Return • Municipal Bond Interest • Untaxed Income of a Resident Trust • Untaxed Income of a Nonresident Trust • Equitable Adjustments


In addition to the standard deduction and 75% of the federal personal exemptions, Utahans are allowed to make certain subtractions from income. Subtractions from income include:

• One half of Federal Income Tax liability • Retiree Retirement Exemption • Adoption Expenses • Educational Savings Plan • Gains on Capital Transactions • Health Care Insurance Premiums • Interest from U.S. Obligations • Long term care Insurance Premiums • Medical Care Savings Account • Military pay • Native American Income • Railroad retirement income • Equitable Adjustments

2006 Tax Rates Historically, Utahans have calculated their income tax liability according to an income bracket and graduated rate system. The following tables show the income brackets and tax rates in effect for 2006.

Table 2-10: Single and Married Filing Separately If state taxable income is: The tax is: $0 to $1,000 2.3 percent of state taxable income $1,001 to $2,000 $23, plus 3.3 percent of amount over $1,000 $2,001 to $3,000 $56, plus 4.2 percent of amount over $2,000 $3,001 to $4,000 $98, plus 5.2 percent of amount over $3,000 $4,001 to $5,500 $150, plus 6.0 percent of amount over $4,000 Over $5,500 $240, plus 6.98 percent of amount over $5,500 Source: Utah Tax Commission

Table 2-11: Head of Household, Married Filing Jointly, and Qualifying Widow If state taxable income is: The tax is: $0 to $2,000 2.3 percent of state taxable income $2,001 to $4,000 $46, plus 3.3 percent of amount over $2,000 $4,001 to $6,000 $112, plus 4.2 percent of amount over $4,000 $6,001 to $8,000 $196, plus 5.2 percent of amount over $6,000 $8,001 to $11,000 $300, plus 6.0 percent of amount over $8,000 Over $11,000 $480, plus 6.98 percent of amount over $11,000 Source: Utah Tax Commission


Income Tax Credits The following tables list the nonrefundable and refundable tax credits available for 2006.

Table 2-12: 2006 Nonrefundable Tax Credits

Credit Eligibility 2006 Amount At-Home Parent Tax Credit

Child 12 mos. Or younger, fulltime care provided by mother, at home parent’s income must be $3,000 or less, FAGI of all taxpayers filing the individual return must be $50

$100 for each child

Qualified Sheltered Workshop

Cash contribution to a qualified shelter, not included a s charitable deduction in calculating income

50% of cash contribution, not to exceed $200

Renewable Energy Systems

Must install or upgrade renewable energy system

Depends on costs

Clean Fuel Vehicle Purchased a vehicle with propane, natural gas or electricity, or purchased and installed equipment to convert

Depends on costs

Historic Preservation

Utah residents Costs of qualified historical residential building

Enterprise Zone Hire employees, or rehabilitate building in qualified zone. Included Indian reservations

NA

Low-income Housing

Owners of low-income housing project who have received federal low-income housing credit

Determined by Utah Housing Corporation

Hiring Disabled Employers hiring disabled persons for at least 6 mos. and paid minimum wage

NA

Recycling Market Individuals and Businesses operating in a designated recycling market development zone

NA

Tutoring Disabled Tutoring a disabled dependent supplementing instruction in a public or private educational institution

25% of the cost paid by taxpayer for tutoring each disabled dependent. Not to exceed $100

Research Activities Expenses incurred for increasing qualified research activities

NA


Research Machine/Equipment

For machine, equipment or both used primarily for conducting qualified research in Utah for at least 12 consecutive months

NA

Taxes Paid to another state

Resident or part-year resident whose income is taxed by Utah And another state

Actual taxes paid by Utah and another state

Live Organ Donation Expense

Living Organ Donor Up to $10,000 of qualified expenses

Source: Utah Tax Commission NA: Information not available from Tax Instructions

Table 2-13: 2006 Refundable Credits Credit Eligibility 2006 Amount Targeted Business Tax Credit

Businesses providing a community investment project

NA

Special Needs Adoption Credit

Child must be 5 years or older, under 18 yrs, have a physical, emotional or mental disability, be a member of a sibling group placed together for adoption

$1000 for each special needs child adopted

Nonresident Shareholder’s Withholding Tax Credit

Utah nonresident owner of an S corporation

Any Utah income tax withheld and paid by S corporation

Mineral Production Withholding Tax Credit

Mineral Tax Withheld Mineral production tax withheld

Agricultural Off-highway Gas. Undyed diesel Tax Credit

Motor fuel and undyed diesel fuel purchased in Utah to operate stationary farm engines and self-propelled machinery used solely for commercial non-highway agricultural use

24.5 cents per gallon

Farm Operation Hand Tools Hand tools purchased and used or consumed primarily in a farm operation in Utah

Sales and Use tax paid

Source: Utah Tax Commission NA: Information not available from Tax Instructions


Income Tax Reform The Utah Legislature initiated a series of tax reforms beginning with the 4th Special Session in 2006 and the General Session in 2007. Prior to the 2007 General Session, the Legislature passed a single tax rate option during the 2006 4th Special Session (SB4001). For 2007, taxpayers can choose to calculate their tax liability using the progressive rate or “bracket” system previously in effect, or calculate their liability using a flat 5.35% rate based on federal adjusted gross income (FAGI). Effective January 1, 2008, the dual track system is eliminated and a single 5% tax rate (reduced from 5.35%) will be established. Utah will move from a “bracket” system with graduated rates and a top rate of 6.98% to a single rate system with tax credits and a top rate of 5% in 2008. Calculation of Utah Taxable Income and Tax Liability Under the new single-rate, credit-based system, taxpayers will report their federal Adjusted Gross Income (AGI) as it appears on their federal tax return. Federal AGI is the sum of all of the taxpayer’s sources of income less certain allowable deductions such as the IRA contribution, moving expenses, health savings account contributions, and student loan interest. The only adjustments to their federal AGI that will be allowed under the new system will be those required under Section 59-10-1204 or 1205 of the Utah Uniform Code (Section 59-10-1204 refers to Section 59-10-114 for the adjustments and 1205 addresses double taxation) (Dubno, Pace, 2007). It is important to note that under the previous bracket system, Utahans were able to deduct half of their federal taxes paid and gains on capital transactions if 70% of the proceeds were used to buy stock in Utah small business. These deductions will no longer be available under the new single rate system. Under the new system additions to federal AGI will include:

• Medical Savings account withdrawals and penalties deducted from state income;

• Adoption expenses deducted on a state or federal return; • Bond interest from other states’ bonds; • Particular lump sum distributions; • Deductions from AGI by a trust or estate; • A child’s income reported but not included in AGI; • Educational savings plan withdrawals that were deducted but not used for

higher education purposes; and • Trust distributions received by a resident beneficiary.

Subtractions from AGI under the new single rate system are:

• State tax refund included in AGI; • Deductions required by federal law (US bond interest, American Indian

income, railroad retirement income); and • Uinta-Ouray reservation income.

Under the new single rate system, the taxpayer will calculate their “state taxable income” by incorporating the adjustments indicated above and then apply a flat 5% rate to arrive at their base tax liability.


Nonrefundable Taxpayer Credit This tax liability is then reduced by a nonrefundable taxpayer credit depending on income level, filing status and family size. This is a significant departure from the previous deduction-based system that allows the taxpayer to make standard or itemized deductions and include personal exemptions to arrive at taxable income. The new taxpayer credit is a dollar-for-dollar reduction in the taxpayer’s tax liability. The credit is nonrefundable and limited to the taxpayer’s income tax liability. The taxpayer credit is calculated by first adding together the federal standard or itemized deductions (other than state income tax) and 75% of the federal personal exemption. The taxpayer then multiplies this amount by 6% to arrive at the initial credit amount. The credit is phased out as income increases by $0.013 for every additional dollar of taxable income. The phase-out begins at $12,000 for a single filing status, $18,000 for a head of household filing status, and $24,000 married filing status. These thresholds will be indexed for inflation (Dubno, Pace, 2007) Table 2-14 illustrates the initial credits and phase-out period for various filing statuses.

Table 2-14: Credits and Phase-outs for Various Taxpayer Profiles Filing Status

Single Head of Household

Married Filing Jointly*

Married Filing Separately

Dependents 0 2 2 2

Initial Credit $488 $956 $1,290 $803

Phase-out Begins: $12,000 $18,000 $24,000 $12,000

Phase-out Complete $49,500 $91,500 $123,231 $73,731

*The credit for this taxpayer profile is illustrated in the graph “State Income Tax Credit Phase-out. “

Graph 1 illustrates the reduction of the credit available for a family of four filing jointly for increasing levels of income. Families with less than $24,000 in taxable income receive the full credit of $1,290. The credit is reduced by 1.3 cents for every dollar of increase in taxable income until it is reduced to zero for income levels above $123,231. Taxpayers that are married and filing jointly with two dependents with incomes exceeding this amount will pay the full 5% tax on state taxable income.


Graph 1: State Income Tax Credit Phase-out

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$0 $15,000 $30,000 $45,000 $60,000 $75,000 $90,000 $105,000 $120,000 $135,000

State Taxable Income

Taxp

ayer

Cre

dit

credit after phase-outinitial credit

Family of Four, Married Filing Jointly, 2008 Tax Year

$24,000

$1,290

$123,231

Tax Credit Reduction

Comparison of Bracket System and Single Rate System Calculations Tables 2-15 and 2-16 below compare a simplified projected 2008 tax calculation under the bracket, deduction based system and the single rate, credit-based system (assuming only a deduction of half the federal income tax under the old system). While the effective rate for the representative taxpayer is essentially the same, the method of calculation differs.


Table 2-15: Bracket, Deduction Income Tax System Projected

to 2008* For a Married Filing Jointly Taxpayer with Two Dependents

Federal Adjusted Gross Income (AGI) $50,000

Minus: Standard Deduction ($11,000)

Personal Exemption ($2,625 times 4) ($10,500)

One Half of Federal Income Tax ($3,000 divided by 2) ($1,500)

Utah State Taxable Income (Federal AGI minus the three items above)

$27,000

State Income Taxes Due (For income bracket “over $11,000”)

Tax for first $11,000 (about 4.4%) Taxable Income over $11,000 Tax on Income over $11,000 ($16,000 times 6.98%) Total ($1,117 plus $480)

$1,597

$480 $16,000 $1,117 $1,597

Effective Tax Rate (Taxes Due divided by Federal AGI)

3.2%

* This tax scenario is based on Utah’s 2006 state income tax policy, except that 2008 values of the standard deduction and personal exemption are used for comparability to other calculations in this article. Key assumptions: federal income tax amount of $3,000 (each additional dollar of federal taxes reduces the final tax bill by 3.5 cents); no itemized deductions on state or federal tax return; no other deductions, exemptions, credits, etc. except those listed in table.

Source: CPPA, Policy Perspectives, “Utah’s Tax System,” May 2007

Table 2-16: Single Rate, Credit Based 2008 Taxpayer - Married Filing Jointly with Two Dependents

State Taxable Income $50,000

5% Flat Tax before Credits $2,500

Federal Standard Deduction* $11,000 Personal Exemption $10,500 Deduction plus Exemption $21,500

Initial Credit (6% of Deduction plus Exemption)

$1,290

Phase-out Beginning Point $24,000 Income in Phase-out Range (Income minus Beginning Point)

$26,000

Credit Phase-out Reduction (1.3% of Income in Phase-out Range)

$338

Credit with Phase-out Reduction (Initial Credit minus Reduction)

$952

State Income Taxes Due (Flat Tax minus Credit with Reduction)

$1,548

Effective Tax Rate (Taxes Due divided by State Taxable Income)

3.1%

Source: CPPA, Policy Perspectives, “Utah’s Tax System,” May 2007


Retiree Credit Under the Single Rate System Retirees receive a tax credit for “eligible retirement income” in addition to the standard taxpayer credit. A taxpayer can only be eligible for this credit if he or she was born before 1953. Eligible retirement income includes certain pensions and annuities. For taxpayers over 65 years in age, a nonrefundable credit of $450 is allowed. For taxpayers under the age of 65, the retiree may claim a credit in an amount equal to the lesser of either $288, or the retiree’s eligible retirement income multiplied by 6%. This credit is also subject to a phase-out equal to $0.025 for each dollar increase in “modified AGI”. The thresholds for the retiree credit are as follows: $16,000 for married filing separately, $25,000 for single, and $32,000 for married filing jointly and head of household. Additional Credits Under the Single Rate System Refundable and nonrefundable credits that were available under the previous system for 2006 remain under the new tax system, in addition to the new taxpayer and retiree credits. Voluntary check-off contributions already allowed, such as non-game wildlife contributions, homeless trust fund contributions, election campaign fund contributions for education, and children’s organ transplants also remain. Revenue Implications of the Income Tax Reform According to the Legislative Fiscal Analyst Office, the Income Tax provisions of SB 223 will result in a loss of revenue to the Education Fund of $27,175,000 in FY2008 and $108,700,000 in FY2009. Sales and Use Tax State Sales Tax Rates Sales and use taxes are levied at all levels of government in Utah. Currently, the state levies a statewide sales tax of 4.75%. The tax reform legislation enacted during the 2007 General Session lowers the statewide rate to 4.65% in 2008. This will result in a decrease in tax revenue of approximately $40 million. In addition, the statewide sales tax on food was reduced from 2.75% in 2007 to 1.75% in 2008, resulting in a decrease of an additional $40 million in revenue. The reduction in the tax on food applies to unprepared food (food and food ingredients) only and prepared food will continue to be taxed at 4.75%.


Table 2-17: State Sales Tax Rates: 2006-2008

2006 2007 2008 State General Rate 4.75% 4.75% 4.65% Food Tax Rate 4.75% 2.75% 1.75%

Source: “Tax Relief and Reform: What Does it Mean For Taxpayers,” Office of Legislative Research and General Counsel, March 2007

Local Sales Rates As previously mentioned, counties, cities and towns are allowed to levy local sales and use taxes. Most local option sales and use taxes are applied against the same base as the state tax base and most adopt the same exemptions to the base as the state. There are three local sales and use taxes:

• County Option Sales and Use Tax (0.25%) • Local Option Sales and Use Tax (1%) • Town Option Sales and Use Tax (Up to 1% for qualifying towns)

The Local Sales and Use Option tax of 1% and the County Option Sales and Use Tax of 0.25% can be used for general fund purposes. Currently, only the town of Snowville has imposed the Town Option Sales and Use Tax. Other local taxes such as the public transit tax (1%) can only be used for specific purposes. Some local taxes, such as the County Transient room tax, can only be imposed on specific transaction. (Utah Office of Legislative Research and Counsel, 2006) The following is a list of county and local taxes that may be imposed by local governments in addition to sales and use taxes:

• Resort Communities Tax (Up to 1.5%) • Rural Health Care Facilities Tax (Up to 1%) • Public Transit Tax (Up to 0.5%) • Highways Tax (0.25%) • Recreation Facilities and Botanical, Cultural, and Zoological tax

(0.1%) • Mass Transit Fixed Guideway (0.25% if public transit tax is

0.25%) • County Option Transportation (0.25% for qualifying counties) • Tourism Tax (varies according to good or service: 1% for

restaurants, 7% vehicle leases) • Motor Vehicle Rental (statewide 2.5%) • County Transient Room Tax (Up to 4.25%) • Municipality Transient room Tax (Up to 1.5%)


Combined State and Local Tax Rates As of July 1, 2007, the total state sales tax, the county option sales tax, local option sales tax and the town option sales tax ranged from a 5.75% to 7%. Only Snowville, in Box Elder County, imposed the 1% Town Option Sales tax, resulting in the 7% total rate. Otherwise, the range is from 5.75% to 6.0%, with 5.75% the total general sales tax rate (state, county, local and town) for Millard and Emery Counties. For all other Utah Counties and Cities, the total general sales tax rate is 6%. Including the other taxes listed above, the total combined tax rate ranges from 5.75% to 8.35%. The total combined rate includes state, local option, mass transit, rural hospital, arts and zoo, highway, county option, town option and resort taxes. As of July 1, 2007, the total combined rate for Salt Lake County was 6.85% (Utah Tax Commission, 3rd Q 2007). Local Sales Tax Reform The tax reform enacted during the 2007 General Session (SB223) made changes to local sales taxes that will result in a uniform statewide sales tax on food of 3% effective in 2008 (1.75% State Rate, 1% Local Option Rate, .25% County Option Rate). This rate is established by removing food and food ingredients from the sales and use tax base for the following local options sales and use taxes:

• Basic and Additional Public Transit • Basic and Additional Resort Community • Rural County Health Care Facility and Rural City Hospital • Municipal and County Botanical, Cultural, Recreational, and Zoological • Municipal Highway • Town Option • County Option for Highways, Fixed Guideways, or Systems for Public

Transit • County Option for Transportation

In order to compensate localities for the loss in revenue due to removing food from the base of the above taxes, SB 223 allows for the following:

• A county or municipality to increase its basic transit sales and use tax rate from .25% to .30%.

• A municipality to increase its Basic Resort Community Sales and Use Tax rate from 1% to 1.1%.

• A municipality to increase its Municipal Highways Sales and Use Tax rate from .25% to .3%.

• A county to increase its County Option Sales and Use Tax for Highways, Fixed Guideways, or Systems for Public Transit from .25% to .3%.


The table below (Table 2-18) shows the local general sales tax rate, including food, in effect for years 2006 through 2008.

Table 2-18: Local Sales Tax Rates

2006 2007 2008 Local Option Rate 1.00% 1.00% 1.00% County Option Rate 0%-0. 25% 0%-0. 25% 0.25% Other Local Rates 0%-2.10% 0%-2.35% 0.00%

Source: “Tax Relief and Reform: What Does it Mean For Taxpayers,” Office of Legislative Research and General Counsel, March 2007

Sales Tax Base The state and local sales tax base is described in Utah Code Section 59-12-103 and includes the following:

• Retail sales of tangible personal property • Sales of prepared food • Certain admission charges • Specific repairs or renovations of personal property • Cleaning or washing of tangible personal property • Hotel or motel rented for less than 30 consecutive days • Prepaid telephone calling cards • Sales of certain telecommunication and utility services • Property, leases, or rentals if tangible personal property is stored,

used or consumed within the state The following table shows annual Gross taxable sales and Gross Domestic Product for 2005 and 2006 by State for Utah. Gross Domestic Product is the sum of what consumers, businesses, and government spend on final goods and services, plus investment and net foreign trade. In 2006, taxable sales were 45.83% of GDP by state.

Table 2-19: Utah Gross Taxable Sales and Nominal GDP by State ($million) Gross Taxable

Sales State GDP Taxable Sales as a

Percentage of GDP 2006 $44,795.78 $97,749* 45.83% 2005 $39,241.25 $88,364 44.41% 2004 $35,310.87 $81,059 43.56 Sources: Gross Taxable Sales: Utah Tax Commission; State GDP: Bureau of Labor Statistics. *Advance Estimate


Exemptions Utah allows for certain exemptions from the sales tax base. Exemptions are entity based (such as sales to Utah and U.S. government entities), product based (such as an isolated or occasional sale, or prescription drugs), or use based (sales for resale). Utah Code Section 59-12-104 lists the exemptions to the sales and use tax. (Tax Commission-Sales and Use Tax Pub.25) For 2006, there were 67 exemptions for a total of $650,397,000 of state and local estimated revenue foregone (Utah Tax Commission 2006 AR). Exemptions are classified as economic development ($95 million), economic efficiency ($269 million), governmental ($44 million), and social service, health, charitable and other ($63 million) (Utah Tax Commission, 2006). Some transactions are not specifically exempt from the sales and use tax as allowed for in Section 59-12-104, but are not part of the tax base. For instance, certain services, such as professional services or personal care services, are not subject to the sales and use tax since they are not part of the tax base. (Utah Office of Legislative Research and General Counsel, 2006) According to the Federal Tax Administrators’ 2004 Survey on State taxation of Services, Utah taxes 57 out of 168 services, or 34%. (FTA, 2005) Property Tax Overview All real and personal property is assessed at the county level, including businesses and residences that are located within the county. Real and personal property that crosses state or county lines such as the property of airlines, railroads, utilities, and natural resource properties are centrally assessed by the State Tax Commission’s Property Tax Division. Assessment All taxable real property is assessed at 100% of fair market value minus any exemptions that may be permitted. The Utah Constitution allows the legislature to exempt up to 45% of the fair market value of primary residential property from taxation. Rental properties are eligible for the exemption, but secondary homes and business properties are not. Taxable value is the base against which the tax rate is applied to calculate the amount of property tax (Property Tax Division, Utah Tax Commission). Table 2-20 illustrates the assessment ratios for different types of property.


Table 2-20: Taxable Value as a Percent of Market Value Type of Property % Of Market Value Primary Residential Property 55% Personal Property (mobile home as primary residence)

55%

Personal Property (except mobile home as primary residence)

100%

Other Locally Assessed Real Property 100% Centrally Assessed Property 100% Source: Property Tax Division, Utah Tax Commission Exemptions and Abatements Other properties that are exempted by the Utah Constitution in addition to primary residential properties include:

• Properties owned by the State of Utah or any of it’s political subdivisions (school districts, cities and towns, counties, special districts)

• Federal property unless the federal government allows for its taxation • Property owned by a non-profit which is used exclusively for religious, charitable,

and educational purposes • Farm machinery and Equipment used primarily for agricultural purposes • Burial Lots • Livestock • Inventory • Household furnishings • Property owned or used by individuals or businesses for irrigating land, including

property used to provide power for irrigations • Intangible property • Certain tangible personal property if the property is required to be registered by

the state and if the property is taxed Equalization The Utah Constitution requires that all tangible personal property not exempt under law be assessed at a uniform and equal rate in proportion to its value. The State Tax Commission is required to monitor and equalize assessments among counties and conducts an annual assessment/sales ratio study and orders adjustments based on the results. Each county must adjust or factor its assessment rates using the most recent studies. In addition, County Boards of Equalization monitor and adjust assessment ratios within their counties (Property Tax Division, Utah Tax Commission).


Truth In Taxation The “Truth in Taxation” laws were passed in 1985. Prior to that property tax revenues were limited to 106% of the taxes collected during the previous year. The “Truth in Taxation” laws replace the 106% limit and require specific public notice and hearings when a taxing entity proposes to increase it’s property tax revenues (not rates) above those collected the previous year, exclusive of revenue from new growth. Since the law is revenue based, rather than rate based, a taxing entity is required to hold a hearing even if revenue will increase due to an increase in property values. In such an instance, a decrease in rate may be required to satisfy the limit in revenue growth. If an entity’s rate increases, but revenues remain the same, then no hearing is required. Property Tax Rates While maximum rates are mandated by state law, property tax rates are set by a variety of taxing entities, such as the state, counties, cities and towns and special taxing entities. The revenue from the property tax supports schools, local government budgets and the budgets of special taxing entities. With respect to the financing of local budgets, property tax rates are determined by calculating how much revenue must be raised in order to cover the proposed budget of the taxing entity. The taxing entity divides the amount of revenue needed by the relevant taxable base to determine the tax rate. Table 2-21 below describes the statewide average and effective tax rates for different classes of property. Table 2-21: 2006 Property Tax Rates

Class of Property

Average Actual Tax Rate (% of taxable value)

Effective Tax Rate (% of Market value)

Primary Residential

1.21% 0.67%

Commercial 1.25 1.25 Other Real 1.01 1.01 Personal 1.32 1.30 Motor Vehicles 1.50 1.50 Natural Resources 1.09 1.09 Utilities 1.17 1.17 Statewide 1.22% 0.88%

Source: Utah Property Tax: 2006 Annual Statistical Report The statewide average County property tax rate for 2006 was 1.0311%, with a county average range of 0.6681% in Kane County to 1.4858% in Weber County. (Property Tax Division, 2006).


School Funding The state of Utah requires school districts to impose a minimum basic property tax rate, “the Basic Rate”, as the districts contribution toward its cost in the Basic School Program. The state sets the rate and it is imposed by the school districts. The state determines how much revenue must be generated statewide to fund the basic school program and determines the rate based on that funding need. Since property values differ from school district to school district, the state supplements local property tax revenue with income tax revenue as needed. As a result, the amount of income tax allocated to each district varies in order to “equalize” funding for the Basic Program (Office of Utah Legislative Fiscal Analyst, 2007).

Table 2-22: Statewide Tax Rate for Basic School Program Year Basic Rate 2005 .001720 2006 .001515 2007 .001311 Source: Utah Property Tax Division and Legislative Fiscal Analyst Office In addition to the Basic rate, local governments may impose as many as twelve other property taxes to support public education. Table 2-23 lists these taxes and the maximum rate determined by statute.

Table 2-23: Additional School District Imposed Property Taxes

Levy Max. Rate State Supported Voter Leeway (operations and maintenance)

Up to .00200, including Board Leeway

State Supported Board Leeway Up to .000400 Reading Achievement Board Leeway Up to .000121 Special Transportation Up to .000300 Recreation No statutory ceiling Tort Liability Up to .000100 Judgment Recovery Up to rate needed to fund

property tax judgment Federal Aid Impact Up to .000800 Capital Outlay Up to .002400 Debt Service No ceiling Voted Capital Outlay Leeway Up to .00200 Ten Percent of Basic Up to the tax rate that yields

10% of the District’s Basic Program

Source: “School Facility Funding”, Prepared by the Office of Legislative Research and General Counsel, May 2007


Property Tax Base and Revenue: Market Value, Taxable Value and Taxes Charged The table below illustrates the market value, the taxable value and the taxes charged by property type. Primary residential property represents 61.1% of the statewide market value, but 46.4% of taxable value as a result of the 45% exemption. However, residential property taxes charged are by far the largest at 46.1%. Taxes charged are relatively proportional with respect to taxable value, but not proportional with respect to market value. Commercial Property is 14.0% of market value, but 19.3% of taxes charged. Similarly, Other Real Property, Personal Property, Motor Vehicles, Natural Resources, and Utilities represent a greater percentage of taxes charged than they represent with respect to market value. The following tables illustrate 2006 market value, taxable value and taxes charged by class of property.

Table 2-24: 2006 Market Value, Taxable Value and Taxes Charged ($million)

Class of Property

Market Value

% Taxable Value

% Taxes Charged

%

Primary Residential

142,298,276 61.1 78,264,052 46.4 $949,299,344 46.1%

Commercial 32,588,392 14.0 32,588,392 19.3 407,203,912 19.8 Other Real 19,383,478 8.3 19,383,478 11.5 195,256,676 9.5 Personal 8,821,667 3.8 8,655,086 5.1 114,572,734 5.6 Motor Vehicles

14,148,805 6.1 14,148,805 8.4 212,232,067 10.3

Natural Resources

6,219,780 2.7 6,219,780 3.7 67,567,569 3.3

Utilities 9,552,462 4.1 9,552,462 5.7 112,194,558 5.5 Statewide 233,012,856 100.00 168,812,054 100.0 $2,058,326,860 100.0%

Source: 2006 Utah Property Tax Annual Statistical Report: data reported for Tax Year 2006 The following table illustrates the property taxes charged by entity for 2006.

Table 2-25: Property Taxes Charged by Taxing Entity Statewide 2006 Entity Amount % General County $ 337,002,736 18% Schools 1,011,989,313 55% Cities and Towns 285,360,556 15% Special Districts 211,742,066 11% Total $1,846,094,670 100% Source: 2006 Annual Property Tax Statistical Report: data for Tax Year 2006


School districts charge more than half of the total property taxes charged statewide. This varies by county. Property taxes charged by Garfield County were 75% of all the property taxes charged in that county, while property taxes in Weber County and Emery County accounted for 47% of all property taxed charged in the county. General County charges ranged from 44% of all county property charges in Daggett to 10% in Tooele. Cities and Towns ranged from 1% of all property taxes in Grand and Emery Counties to 19% in Salt Lake County. Special Districts ranged from a low of 0% of all county property taxes in Sevier to 19% in Summit County. Piute County charged the least amount in property taxes at $677,171 and Salt Lake County charged the most at $834,038,865 (Property Tax Division, Utah tax Commission, 2007) The following table shows property taxes per capita and as a percent of income per capita.

Table 2-26: 2006 Property Taxes Per Capita Per Capita Property tax per capita as

% of income per capita Statewide $718 2.47% Highest (Summit County) $2,616 4.81% Lowest (San Juan) $293 1.75% Source: 2006 Annual Property Tax Statistical Report: 2006 Tax Year


Property Tax Relief Utah provides for property tax relief for homeowners or renters based on military service, disabilities, income, hardship and other circumstances. Categories of relief include:

Table 2-27: 2007 Tax Relief (Exemptions, Abatements, Deferrals) Category Eligibility Amount Veteran Exemption Disabled in military service

and unmarried surviving spouse or minor orphans

Up to $214,263 of taxable value for 100% disability. Based on percentage of disability.

Blind Exemption Legally blind, unmarried spouse or minor orphans

First $11,500 of taxable value is exempt

Indigent Abatement 65 years of age, or disabled, or extreme hardship Less than $26,941 household income (2007)

Up to 50% of tax due, max. of $798 for 2007

Indigent Deferral Same as above No limit, but must be paid if property is sold

Circuit Breaker Homeowners, owners of manufactured homes or renters who are 65 yrs of age (or a widow or widower under 65 yrs), less than $26.941 household income (2007)

Based on household income with a max. Of $798 for 2007. For homeowners, additional credit of 20% of FMV is allowed. For renters, credit is based on gross rent paid and household income with a max of $798 for 2004

Source: Utah Property Tax Division, State Tax Commission: Tax Relief and Abatements

Table 2-28: 2006 Property Tax Relief Type of Relief 2006 $ Amount Indigent $1,468,568 Blind $209,226 Veterans $7,426,701 Circuit Breaker $8,726,962 Total $17,831,457 Source: Utah Property Tax Division: 2006 Annual Statistical Report: 2006 Tax Year


Evaluation of Utah’s Income Tax, Sales Tax And Property Tax According to the Criteria Defined By Sound Tax Policy Principles Simplicity Income Tax Income tax systems that entail additions and subtractions to federal adjusted gross income, graduated income tax rates according to income brackets, and a variety of tax credits are by their very nature complex. The tax reform enacted by the Utah Legislature in 2007 simplifies the income tax structure from both the historical bracket based system and the dual structure system. While not as simple as a flat rate system with no credits, the Single Rate, Credit-Based system is an improvement with respect to simplicity. One can examine how many additions and subtractions there are to FAGI in order to calculate state taxable income, as well as the number of credits that are available. Under the single rate system, there are 8 additions to income and 5 subtractions as opposed to 11 additions and 12 subtractions under the current income tax system. In this regard, the Single Rate system is relatively simple. While the new single rate system simplifies the calculation of taxable income, the tax reform to date has not addressed the credits available to the taxpayer. The number of credits is the same under either system, with the addition of the Taxpayer Credit under the new system. For any individual taxpayer, determining which credits they may qualify for adds a measure of complexity and compliance cost, mitigating the otherwise successful simplification of the income tax enacted by the 2007 tax reform. While a final draft of the tax form for the Single-rate system has not been finalized, a draft of the tax form indicated that the number of lines would remain approximately the same. The current tax form has 36 lines while the draft showed 38. Sales Tax As the previous description of Utah’s sales tax rates indicate, the final tax to the consumer is the sum of the statewide, county and local taxes that are imposed on any given transaction. The range of rates by County for general sales tax is not very wide, from 5.75% to 6%, excluding Snowville. However, some transactions are not included in the base, some are included at the state but not local level, and some are included in the base, but are exempt. The disparate treatment of goods and services, through exclusions and exemptions, adds a significant element of complexity. The tax reform of 2007 does add a measure of simplicity by establishing a uniform 3% rate on food in 2008. Property Tax The property tax is complex. Property tax rates are set by many taxing jurisdictions for a range of purposes. School districts can levy up to 12 taxes and the state levies a


statewide rate. Local governments levy property taxes to finance their budgets. Special taxing entities may levy taxes as well. As a result, property tax levies vary from county to county, from locality to locality, and from school district to school district. What results is a matrix of tax rates depending on where each property is located. The statewide average County property tax rate for 2006 was 1.0311%, with a county average range of 0.6681 in Kane County to 1.4858 in Weber County (Property Tax Division, 2006) Determining taxable value is not as complex as determining rate structures. All residential property (and mobile homes) is assessed at 55% of Fair Market value. Other real property is assessed at 100% of market value. Transparency Income Tax Both the current bracket and single-rate, credit-based income tax systems are transparent. Taxpayers know exactly how much in taxes they are required to pay. Taxpayers see how much of their taxes were paid in payroll withholding and how much is either due or refunded at the time if filing. The exception with respect to the bracket system is that it lacked some transparency in that the income tax brackets were not indexed for inflation. As a result, taxpayers experienced “bracket creep” as more of their income was taxed at the top rate as income increased due to the increases in the cost of living. While taxpayers knew how much tax they were paying, the increase in effective rate due to bracket creep was not evident. Since the phase out thresholds for the taxpayer credits in the new single-rate system are indexed for inflation, taxpayers will not experience an increase in taxes and effective rate as a result. Sales Tax The sales tax is not transparent. While, the consumer is able to see exactly how much tax is charged on each transaction at the time of purchase, unless the consumer keeps all their receipts, the consumer is not aware of how much sales tax they are paying each year, or of what percentage of their income they are paying in sales tax. In addition, even at the time of purchase, the taxpayer is not aware of how much tax they are paying in state versus local taxes. The tax charged on each transaction is the sum of all the tax rates applicable in the jurisdiction applied to taxable transactions. Which goods and services are taxable may not be transparent as well, especially if large purchases of many types of goods are purchased from one store. Property Tax While the property tax is not simple, it is relatively transparent. Each year, taxpayers receive a notification as to how much they must pay in property tax, broken down by each levy and taxing jurisdiction. As such, taxpayers are aware of how much they are paying in property tax. In addition, the Truth in Taxation laws require local governments to notify the public if there is going to be an increase in property taxes. The truth in


taxation laws enhance transparency with respect to the local budget and rate setting process. Neutrality and Efficiency Income Tax Individual income tax systems are generally not economically neutral. Since marginal rates are not constant, the income tax can influence decisions concerning work, savings, and investment. This is most evident with respect to the federal income tax system, but is also a factor in progressive state income tax systems. The current bracket system taxes income in the lowest income bracket at 2.3%, and the highest at 6.98%. It is important to note that the top bracket is only $11,000 for married filing joint status. Thus, while income is taxed at different rates, the top bracket is quite low. Both the current and single-rate system use FAGI as a starting point and, as a result, the incentives and disincentives in the federal tax system pass through to the state system. State income tax systems are often designed to provide incentives for certain behaviors such as retirement savings and educational expenditures, and this is true of both the current and single-rate income tax systems (National Conference of State Legislators, 2003). Under the single rate system, taxpayers are required to make adjustments to federal AGI. As mentioned, there are 8 additions and 3 subtractions and, as a result, certain behaviors are treated differently. This is an improvement over the current system that allows 11 additions and 12 subtractions, including deductions for one half of federal taxes paid and certain capital gains. Both systems treat different income levels and family sizes differently. While taxpayers start with a flat 5% rate under the single-rate system, the taxpayer credit also distinguishes between income levels and household size. The number of personal exemptions is based on family size, and for households of similar income, larger families receive a benefit. Effective and marginal rates increase with income and decrease with family size. Tax credits also encourage some behaviors over others, reducing economic neutrality. Both the current and single-rate system allow for 20 income tax credits. However, since the top rate in the single-rate system has been reduced from 6.98% to 5%, the new system has improved the income tax system with respect to neutrality. In addition, by eliminating the federal taxes deduction (the old bracket system allowed taxpayers to deduct ½ of their federal taxes paid-favoring upper income tax payers) and the capital gains deduction, the new system treats sources of income more evenly. One method of analyzing neutrality is to ascertain the size of the tax base. It is possible to gain insight into the neutrality of the income tax systems by evaluating the tax base relative to FAGI and state personal income. The table below shows the tax base for both systems for 2005. Under the bracket system, Utah’s aggregate statewide taxable income


for full year residents was 62.90% of aggregate FAGI and 46.36% of aggregate state personal income. Under the Single-Rate system, the tax base relative to FAGI is expanded by 16.22% to 73.10%. The base is expanded by 4.16% relative to state personal income. As a result, the Single Rate system is an improvement with respect to economic neutrality in that it expands the base for the individual income tax.

Table 2-29: Taxable Income as Percent of FAGI and Personal Income* 2005

Bracket, Graduated Rate Single-Rate, Credit-Based Taxable Income/FAGI 62.90% 73.10% Taxable Income/Personal Income

46.36% 48.29%

Source: Bracket System: Utah Tax Commission; Single-Rate System: Office of Legislative Research and Counsel *Full Year Residents Sales Tax With respect to combined general sales tax rates (state sales tax rate, the county option sales tax rate, the local option rate and the town option rate), there is little variation statewide. With a range of 5.75% to 6%, general sales tax rates are somewhat uniform. As a result, goods and services are taxed that differently from county to county, and from city to city. While the 2007 tax reform will establish a single statewide rate on food by 2008, taxing food at a different rate may influence purchasing decisions. Neutrality is undermined, however, with respect to the sales tax base. Goods and services are treated differently with respect to inclusion in or exemption from the tax base. This disparate treatment impacts the relative prices of goods and services to consumers and, therefore, may impact consumers’ purchasing decisions. Services that are not included in the tax base are favored over goods and services that are. Utah taxed only 57 out of 168 services in 2004, just 34%. With 67 sales tax exemptions, totaling over $650 million for state and local taxes, the impact on neutrality is significant. In 2006 gross taxable sales were 45.83% of state GDP. Less than half of economic activity in the state is included in the tax base, undermining a fundamental component of neutrality and efficiency-a broad tax base. The exclusion of most services from the sales tax base puts the tax burden on the sales of goods. Certainly taxpayers that spend a disproportionate amount of their income on goods rather than services pay a disproportionate amount of total sales taxes. Lower income individuals spend a higher proportion of their income on goods rather than service. Upper income taxpayers consume a higher percentage of their income in services than lower income taxpayers. Thus, while upper income individuals may consume more in absolute dollars and pay more of the aggregate taxes paid, they pay less as a percent of their income than lower income individuals.


Property Tax Neutrality and efficiency with respect to the property tax would entail that all properties be assessed and taxed at the same rate. As we discussed earlier, residential and non-residential properties are assessed at different rates. Residential property is allowed a 45% exemption and taxable value, therefore, is 55% of market value, while non-residential properties are assessed at 100%. Overall, including all residential and non-residential properties, taxable value was 72.45% of total market value in 2006. Since the assessment process is local, similar properties may be valued differently. While the equalization process attempts to make assessment of market values consistent statewide, differences in assessment of similar properties do exit. One measure of uniformity of assessment is the coefficient of dispersion (COD) provided in the Assessment/Sales Ratio study. The coefficient of dispersion measures the average absolute deviation around the mean property assessment for similar valued homes (Utah Property Tax Division). The average of the county CODs for primary residential property is 13.4%, and 20.5% for commercial property (Utah Property Tax Division, 2007 Assessment/Sales Ratio Study). Another element of neutrality is uniformity of property tax rates. The wide range of property tax rates for different localities in Utah, therefore, undermines the neutrality of the property tax system. In 2006, the average county rate ranged from a low of 0.6681% in Kane County to 1.4858 %in Weber County. Differences from city to city are even greater. For 2005, property tax rates by city ranged from a low of .0211% to .6243% (Office of Legislative Research and General Counsel, 2005). Average tax rates are also different for different types of property. Actual tax rates (tax as a percent of taxable value) range from 1.01% for other real property, to 1.21% for primary residential property, to 1.50% for motor vehicles. Effective rates, which include the impact of the difference in tax base, ranges from 0.67% for primary residential to 1.50% for motor vehicles. With respect to commercial property, the difference in the treatment of tangible versus intangible property undermines neutrality. Businesses that have a significant investment in plant and equipment bear a greater tax burden than those that create value through intellectual property (National Conference of State Legislators, 2003). The exemptions to the property tax also reduce the neutrality and efficiency of the property tax by narrowing the tax base. In addition to the residential exemption, federal and state government entities, non-profit and charitable institutions do not pay property taxes. As a result, the revenue needed must be raised from a narrower base and those types of property that are included in the base (particularly those with a 100% assessment ratio) bear the burden of local property taxes. Property tax credits also favor some taxpayers relative to others. Elderly and indigent taxpayers receive property tax relief not available to the majority of taxpayers. The amount of credits allowed in 2006, however, was only $17 million out of $1.8 billion


charged, or 0.97%. This cannot be considered significant, and as we shall discuss later, contributes to a more equitable property tax system. Stability, Sufficiency and Adequacy The following analysis uses income, state and local sales, and property tax data, as well as state tax revenue, revenue from state sources, and state and local as provided by the U.S. Census (See Appendix 2 for revenue and expenditure definitions). We have chosen to use this data to facilitate the comparison between the Intermountain Western states presented in Chapter 3. Income Tax The income tax in Utah is dedicated to the Education Fund and is a primary source of financing for public education. In order to evaluate stability of the income tax as a revenue source, we will examine the annual growth rate of the income tax from 2000 to 2006, the annual growth rates of state personal income from 2000-2006, and the income tax as a percent of personal income over the same period. Volatility can be measured in several ways. We will consider the average, standard deviations and coefficient of variations (the standard deviation divided by the average) of the growth rates of the income tax, state personal income, the share of the income tax relative to tax revenue, total revenue and the prior year’s public education budget. The coefficient of variation will show the extent to which the income tax has deviated year to year from its average as a source of revenue. In addition, we will examine the volatility of the income tax relative to non-agricultural wages (Beta) as it was presented by “Governor Walker’s Recommendation on a Tax Structure for Utah’s Future (November 2004), and the elasticity of the income tax relative to personal income presented in “Tax Base Elasticities: A Multi-State Analysis of Long Run and Short Run Dynamics,” by Donald Bruce, William Fox and M, H, Tuttle (Southern Economic Journal, 2006, 73(2), 315-341). While the sufficiency and adequacy of a tax system is most relevant when looking at total tax revenues, Utah’s individual income tax system with respect to how well it raises funds for public education can be examined. It is particularly important to distinguish whether or not the income tax is sufficient to fund the education budget versus the perceived needs of the education system. According to the Utah Foundation, citing Census Bureau data, Utah ranked last in the nation in per pupil spending in 2005 (Utah Foundation). Many would argue that an increase in spending on public education is crucial to the state’s continued economic performance. Since the adequacy of public education spending is primarily a political issue, we will confine our assessment to the degree to which the income tax has been able to meet the prior year’s public education appropriation as determined by the legislature through a representative majority.


The analysis below will use the measures described for both the current Bracket, Graduated rate system and the new Single rate, Credit-Based system. While the single rate, credit based income tax is not yet in effect, we will draw upon estimates published by the Governor’s Office of Planning and Budget of what revenues would have been for fiscal years 2000 through 2006 in order to compare the new and previous income tax systems where the data permits. Current Income Bracket, Graduated Rate System Stability The table below shows income tax revenue as a percent of state personal income for Utah from 2000-2006 under the current bracket system. Income tax collections increase and decrease with personal income. The individual income tax as a percent of state personal income is relatively stable.

Table 2-30: Income Tax as a Percent of State Personal Income (Nominal Dollars)

2000 2001 2002 2003 2004 2005 2006 Income Tax as % of State Personal Income

3.08% 3.01% 2.76% 2.65% 2.67% 2.83% 3.07%

Source: Income Tax, Census Bureau; Personal Income, BEA


The table below compares the growth rates of the income tax and state personal income using a GDP deflator (U.S. Census) to calculate revenue in constant 2000 dollars. One can see that the growth rate of the income tax is more variable more than the growth rate of personal income.

Table 2-31: Income Tax and State Personal Income Annual Growth Rates: 2000-2006

2000 2001 2002 2003 2004 2005 2006 Income Tax Growth Rate (2000 Dollars)

-0.16%%

-7.50% -4.14 5.29% 10.54% 13.87%

Personal Income Growth Rate (2000 Dollars)

2.16% 1.00% -0.06% 4.55% 4.05% 5.10%

Growth Rate: Income Tax as % of State Personal Income (Nominal Dollars)

-2.27% -8.42% -4.09% 0.71% 6.24% 8.35%

Volatility In order to evaluate the volatility of the income tax, we will first compare the volatility of the income tax to that of state personal income. The coefficient of variation is equal to the standard deviation divided by the average. The coefficient of variation of the income tax from 2000-2006 (2000 Dollars) is 9.57% versus 6.02% for state personal income. This means that the variation of the income tax is approximately 1.58 times greater than the variation of state personal income. However, since the income tax follows the direction of personal income, the income tax as a percent of personal income does not vary as much as the income tax revenue, but more than personal income. The average share of the income tax as a percent of personal income was 2.87% from 2000-2006. The standard deviation was only 0.19% and the coefficient of variation was 6.53%. While, the income tax varies more than personal income, the two are positively correlated, and as a result, the income tax as a share of personal income was relatively stable.


Table 2-32: Average, Standard Deviation and Coefficient of Variation

Average 2000-2006

Standard Deviation (SD)(sample)

Coefficient of Variation= SD/Average

Income Tax (2000 dollars)

$ 1,637.97 $ 156.82 9.57%

Personal Income ($MM) (2000 Dollars)

$57,109.75 $3,439.51 6.02%

Income Tax as % of State Personal Income (Nominal Dollars)

2.87% 0.19% 6.53%

Another method to evaluate the volatility of the income tax is to compare how much the income tax changes relative to non-agricultural wages and personal income. The concept of Beta, a financial market analysis tool, was employed by Governor Walker’s Task Force to illustrate the volatility of the income tax relative to non-agricultural wages. In the financial markets, Beta is used to analyze whether or not, and by how much, a stock moves relative to the overall stock market. A Beta of 1 indicates that the stock moves with the market. A Beta greater than 1 means that the stock moves more than the market (in both direction, up and down), and a Beta of less than 1 means that the stock moves less than the overall market. Governor Walker’s analysis showed that the Beta of the income tax relative to non-agricultural wages is 1.4. In this context, a Beta of 1.4 means that the percent change in the income tax is 1.4 times the percent change in non-agricultural wages, indicating a level of volatility. A third method is to examine the elasticity of the income tax with respect to personal income. Elasticity is used to measure the change in income tax revenues relative to changes in personal income. Elasticity equal to 1 indicates that the two move in tandem. An elasticity of greater than 1 indicates that the change in the income tax will be greater than the change in personal income. Bruce and Fox (Bruce, Fox, 2006) measured the long run elasticity of the state income tax relative to state personal income, adjusting for inflation using the GDP deflator. Utah’s long run elasticity for the income tax is 1.477. This indicates that the individual income tax revenue has grown faster than the personal income base over time. (Bruce, Fox, 2006). This is consistent with the analysis above showing that the coefficient of variation of the income tax is 1.58 times that of personal income. Bruce and Fox analyzed data from 1967 to 2000 while the coefficient of variation analysis analyzes the period 2000 to 2006.


Table 2-33: Beta and Elasticity

Beta (Walker) (1980-2004)

Long –Run Elasticity (Bruce, Fox) (1967-2000)

Long –Run Elasticity (Bruce, Fox) Adjusted for rate Changes (1967-2000)

Income Tax

1.4 1.477 1.41

Source: Beta: Governor Walker’s Task Force; Elasticity, Bruce, Fox. The table (Table 2-34) below analyzes the trends in growth rates in the income tax, personal income, and the income tax as a percent of state personal income. The table indicates that the average real growth rates of the income tax (2.98%) and personal income (2.80%) from 2000-2006 are very similar. However, the standard deviation of the growth rate of the income tax is 8.38% as compared to 2.08% for state personal income. As a result, the coefficient of variation of the growth rate of the income tax is 281.07% as compared to 74.37% for personal income. Clearly, the income tax is more volatile than state personal income. While the income tax exhibits volatility, the growth rate of the income tax as a percentage of personal income averaged 3.17% and appears relatively consistent over the time period with a standard deviation of .07% and a coefficient of variation of only 2.20%.

Table 2-34: Average, Standard Deviation and Coefficient of Variation Annual Growth Rates: 2000-2006

Average

Annual 2000-20006

Standard Deviation (Excel-sample)


Income Tax Growth Rates (2000 Dollars)

2.98% 8.38% 281.07%

Personal Income Growth Rates (2000 Dollars)

2.80% 2.08% 74.37%


3.17% 0.07% 2.20%

Sufficiency and Adequacy Since state budgets generally, and the Public Education Budget specifically, receive funds from a variety of sources, one cannot evaluate sufficiency by examining whether


individual income tax revenue can entirely fund public education. Instead, we will evaluate whether the income tax has been a consistent share of tax revenue, total revenue from state sources (own source revenue) and the prior year’s public education budget. The table below shows the individual income tax revenue as a percent of tax revenue, total own source revenue and the previous year’s education budget. For the period 2000 to 2006, the income tax ranged from 39.76% of tax revenue in 2003 to 41.87% in 2001. Similarly, the income tax (for years for which the data is available), the income tax accounted for approximately 25% to 28% of state own source revenue. However, there is considerable more variation with respect to the income tax as a percentage of the prior year’s budget, ranging from 67.09% in 2003 to 88.81% in 2006. In periods of economic downturn (2002-2003), the percentage decline in the income tax is greater than the percentage decline in personal income. As a result, the share of the income tax as a funding source needed to maintain the prior year’s public education appropriation decreases.

Table 2-35: Income Tax Percentage of Tax Revenue, Own Source Revenue and Public Education Budget

(2000-2006)

2000 2001 2002 2003 2004 2005 2006

Income Tax as % of Tax Revenue

41.51% 41.87% 40.90% 39.76% 40.33% 41.11% 41.72%

Income Tax as % of Own Source Revenue

28.44% NA 25.30% NA 25.32% 25.85% NA

Income Tax as % of Prior Pub. Ed. Budget

82.37%

82.75% 72.80% 67.09% 73.46% 79.86% 88.81%

Source: Tax Revenue and Own Source Revenue: U.S. Census; Public Education Budget: Utah Governor’s Budget Summaries The following table further analyzes the trends illustrated above. Over the period 2000-2006, income tax revenue as a percentage of tax revenue averaged 41.03%. The standard deviation was relatively small, 0.77%. Accordingly, the coefficient of variation was only 1.87%. As described above, the income tax is more volatile than personal income, and consequently, in period of slowing economic growth, income tax revenue cannot always maintain its share of the prior year’s public education budget. This is reflected in the higher standard deviation of 7.40% and a coefficient of variation of 9.47%.


Table 2-36: Average, Standard Deviation, Coefficient of Variation

Average 2000-20006




41.03% 0.77% 1.87%

Income Tax as % of Prior Year Pub. Ed. Budget

78.16% 7.40% 9.47%

Income Tax Reform: Single Rate, Credit Based System In 2008, Utah will switch from the income bracket, graduated rate system to a single rate, credit based system. The following analysis is based upon pro-forma income tax revenue numbers estimated by the Utah Governor’s office of Planning and Budget (“Tax Reform: Methods, Models and Documentation”). The following table shows the fiscal year revenues for the new income tax system had it been in effect for the period 2000-2006. Income tax revenue would have been less in every year relative to the current system. Accordingly, the income tax represented a smaller share of personal income.

Table 2-37: Income Tax and State Personal Income: Single Rate, Credit-Based System

2000 2001 2002 2003 2004 2005 2006 Income Tax as % of State Personal Income

2.90% 2.88% 2.71% 2.62% 2.56% 2.70% 2.98%

Source: Income Tax, GOPB; Personal Income, BEA


The following table shows the income tax growth rates as well as the growth rate of the income tax as a percentage of state personal income.

Table 2-38: Income Tax and State Personal Income: Single Rate, Credit-Based System Annual Growth Rates: 2000-2006

2000 2001 2002 2003 2004 2005 2006 Income Tax Growth Rate (2000 Dollars)

1.50% -4.95% -3.30% 1.92% 9.66% 16.16%


-0.65% -5.89% -3.25% -2.51% 5.39% 10.52%

Volatility The table below shows the estimated average, standard deviation and coefficient of variation for the Single Rate system. The volatility of the income tax under the new rate system over this period was only slightly less volatile with a coefficient of variation of 9.23%, as compared to 9.57% under the current system. However, income tax revenue as a percentage of personal income would have been more stable under the new system with a coefficient of variation of 5.69%, as compared to 6.53% under the bracket system.

Table 2-39: Average, Standard Deviation and Coefficient of Variation: Single Rate, Credit-Based System

Average

2000-2006 Standard Deviation (Excel-sample)


Income Tax $ 1,579.27 $ 145.75 9.23% Income Tax as % of State Personal Income

2.76% 0.16% 5.69%

Similarly, the coefficient of variation of the growth rates of the income tax illustrate that the single rate, credit-based system exhibits greater stability, with a coefficient of variation of 215.10%. This compares to 281.07% under the bracket system. However, the growth rate of the income tax as a share of personal income averaged only 0.60% (as compared to 3.17%), but exhibited significantly more volatility with a coefficient of variation of 1022.61% (compared to 2.20% under the current system).


Table 2-40: Average, Standard Deviation and Coefficient of Variation: Single Rate, Credit-Based System Annual Growth Rates: 2000-2006

Average

Annual 2000-20006



Income Tax Growth Rates

3.50% 8.03% 229.56%

Growth Rate: Income Tax as % of State Personal Income

0.60% 6.16% 1022.61%

The Utah’s Office of Planning and Budget analyzed the elasticities of the bracket and single rate system relative to Adjusted Gross Income. The analysis concluded that the single rate system would be less elastic relative to state aggregate Adjusted Gross Income (Utah Governor’s Office of Planning and Budget, 2007). Sufficiency and Adequacy With a reduction in income tax revenue relative to the current bracket system, the income tax represents a slightly smaller share of state tax revenue and own source revenue (we also reduced total state tax revenue and own source revenue by the difference in the income tax revenue for the analysis). However, the reduction in income tax revenue would have been a significantly smaller share of the prior year’s education budget. Under the bracket system, the income tax covered 88.81% of the prior year’s public education budget in 2006. Under the new system, it would have decreased to 86.22%. While this is a reduction, the Single Rate system would still have provided a sufficient source of funds for public education.

Table 2-41: Income Tax Percentage of Tax Revenue, Own Source Revenue and Public Education Budget: Single Rate, Credit-Based System (Nominal Dollars)

2000 2001 2002 2003 2004 2005 2006


40.03% 40.78% 40.47% 39.55% 49.33% 39.92% 41.00%

Income Tax as % of Own Source Revenue

27.20% NA 24.97% NA 24.55% 24.92% NA

Income Tax as % of Prior Pub. Ed. Budget

77.47%

79.12% 71.52% 66.49% 70.48% 76.01% 86.22%


Since total tax revenue was also readjusted for the difference in income tax revenues, the coefficient of variation of 1.55% presented in the table below does not vary significantly from the coefficient of variation of 1.87% presented above for the current system. While the average value for the income tax as a percentage of the prior year’s education dropped from 78% to 75.33%, the coefficient of variation also dropped from 9.67% to 8.64%. Thus, while the income tax would not have been as sufficient over time as a source of education funding, it would have been less volatile.

Table 2-42: Average, Standard Deviation, Coefficient of Variation: Single Rate, Credit-Based System

Average

2000-20006 Standard Deviation (Excel-sample)



40.16% 0.62% 1.55%

Income Tax as % of Prior Year Pub. Ed. Budget

75.33% 6.51% 8.64%

Sales Tax State Sales Tax The method of analysis for the sales tax is similar to that of the income tax. Instead of measuring the sales tax against personal income, it will be evaluated with respect to state GDP. Since the sales tax is a tax on the sale of good and services (economic activity), the relationship between the sales tax and GDP will add insight into the stability and sufficiency of the sales tax. Volatility measures such as Beta and elasticity, analyze the sales tax with respect to non-agricultural wage growth and personal income, respectively. The following table shows the sales tax as a percentage of state GDP from 2000-2006. Sales tax as a percent of GDP has declined steadily over the last 5 years.

Table 2-43: State Sales Tax as a Percentage of State GDP 2000-2006

($MM) 2000 2001 2002 2003 2004 2005 2006 Sales Tax as % of state GDP (Nominal Dollars) 2.11% 2.11% 2.06% 1.97% 1.93% 1.94% 1.93%

Source: Sales Tax Revenue, Census Bureau; GDP by state, BEA


Stability The table below illustrates the annual growth rates in the sales tax, state GDP, and the annual growth rate of the sales tax as a percent of state GDP. The annual growth rate of the sales tax in constant 2000 dollars ranged between -3.07% to 6.49%, while the growth rate of state GDP in constant 2000 dollars ranged from 0.32% to 6.56%. Sales tax as a percent of GDP ranged from -4.58% to 0.52%.

Table 2-44: Annual Growth Rates: 2001-2006 2001 2002 2003 2004 2005 2006 State Sales Tax (2000 Dollars) 0.55% -0.40% -3.07% 2.78% 6.38% 6.49% State GDP (2000 Dollars) 0.32% 1.84% 1.58% 5.16% 5.83% 6.56% Sales Tax as % of State GDP (Nominal) 0.23% -2.20% -4.58% -2.25% 0.52% -0.07% Volatility The table below shows the average, standard deviation, and coefficient of variation for the sales tax, state GDP and the sales tax as a % of state GDP. The coefficient of variation of the sales tax is 5.30%, as compared to 8.12% for state GDP. Sales tax revenue as a percent of state GDP is the least volatile, with a coefficient of variation of 4.19%. This indicates that sales tax revenue is stable.

Table 2-45: Average, Standard Deviation and Coefficient of Variation ($ Million)

Average 2000-2006

Standard Deviation

Coefficient of Variation

State Sales Tax (2000 Dollars)

$1,457.19 $77.16 5.30%

State GDP (2000 Dollars)

$72.779.60 $5.908.89 8.12%

Sales Tax as % of State GDP

2.01% 0.08% 4.19%

The following table shows the Beat and Elasticity for the sales tax. A Beta of 1.1 indicates that the sales tax moves approximately 1.1 to 1 with non-agricultural wages. An elasticity of 0.873 indicates the sales tax moves less than personal income. This is


consistent with the analysis above which shows that the sales tax is less volatile than state GDP.

Table 2-46: Beta and Elasticity Source: Beta, Governor Walker’s Task Force; Elasticity, Bruce, Fox. A third measurement of volatility is the coefficient of variation of the annual growth rates of the sales tax, state GDP, and sales tax as a percentage of state GDP. While sales tax revenues are less volatile than state GDP, the growth rate is more volatile. The table below shows that the annual growth rate of the sales tax has a greater coefficient of variation, 180.69%, than state GDP at 73.54%. The growth rate of the sales tax as a percentage of state GDP averaged -1.39%, with a standard deviation of 1.98% and a coefficient of variation of 142.12%.

Table 2-47: Average, Standard Deviation and Coefficient of Variation Annual Growth Rates: 2000-2006

Average Standard Coefficient of

2000-2006 Deviation Variation State Sales Tax (2000 Dollars)

2.12% 3.83% 180.69%

State GDP (2000 Dollars)

3.55% 2.61% 73.54%

Sales Tax as % of State GDP

-1.39% 1.98% -142.12%

Sufficiency and Adequacy The table below illustrates the sufficiency of the state sales tax as a revenue source. The state sales tax is a reliable source of revenue, consistently accounting for over 1/3 of total state tax revenue, and approximately ¼ of own source revenue. Sales tax revenue as a percent of the previous year’s GF appropriation exhibits more variability, ranging from 82.10% in 2003 to over 100% in 2006.

Beta (Walker) (1980-2004)

Long –Run Elasticity (Bruce, Fox) (1967-2000)

Sales Tax

1.1 0.873


Table 2-48: Sales Tax Percentage of Tax Revenue, Own Source Revenue and General Fund (GF) Appropriation

2000 2001 2002 2003 2004 2005 2006

Sales Tax as % of Tax Revenue 35.77% 36.34% 38.22% 37.57% 37.20% 36.50% 34.64%

Sales Tax as % of Own Source Revenue

24.51% NA 23.65% NA 23.36% 22.95% NA

Sales Tax as % of Prior Year's GF Appropriation

92.63% 93.26% 87.50% 82.10% 85.52% 98.01% 100.84%

The table below further analyzes the sufficiency of the sales tax. The coefficient of variation of the sales tax as a percentage of tax revenue was only 3.26%, reflecting the stability of the sales tax as a revenue source. The sales tax as a percentage of the prior year’s General Fund Expenditures was more volatile, averaging 91.41% with a standard deviation of 6.76% and a coefficient of variation of 7.39%. While this shows more volatility with respect to budget expenditures than tax revenue, the analysis shows that the sales tax is both a reliable source of tax revenue and consistent financing source of General Fund budget appropriations.

Table 2-49: Average, Standard Deviation, Coefficient of Variation

Average 2000-2006

Standard Deviation

Coefficient of Variation

Sales Tax as % of Tax Revenue 36.61% 1.19% 3.26% Sales Tax as % of Prior Year's GF Appropriation

91.41% 6.76% 7.39%

Local Sales Tax The U.S. Census Bureau reports local sales tax revenue and total local tax revenue, own source revenue and expenditures for the years 2000, 2002, 2004, and 2005. As a result, we will limit our analysis of the local sales tax to the data available. Stability, Volatility, Sufficiency and Adequacy As the table shows, the local sales tax in Utah is a small portion of state GDP, ranging from 0.53% to 0.65%. However, the local sales tax is a significant source of revenue for local governments, ranging from 17.86% to 22.38%. Local governments receive a large proportion of their revenue from the property tax, and thus the sales tax is not as significant a revenue source at the local level as it is at the state level. Local sales tax as a percent of own source revenue ranges from 10.86% to 13.27%. The local sales tax


ranged from 6.5% of same year direct expenditures in 2000 to 5.67% in 2005, revealing a downward trend. Nonetheless, the local sales tax has been a consistent financing source for local expenditures. However, it is important to keep in mind that one would expect these results due to the nature of the local budget process.

Table 2-50: Local Sales Tax as Percent of State GDP, Tax Revenue, Own Source Revenue, and Direct Expenditures

2000 2001 2002 2003 2004 2005 2006

Local Sales Tax as % of state GDP

0.62% NA 0.65% NA 0.53% 0.53% NA

Local Sales Tax as % of Tax Revenue

22.07% NA 22.38% NA 17.86% 18.01% NA

Local Sales Tax as % of Own Source Revenue

12.95% NA 13.27% NA 11.02% 10.86% NA

Local Sales Tax as % of Same Year Direct Expenditures

6.50% NA 6.20% NA 5.40% 5.67% NA

The local sales taxes averaged 0.58% of state GDP, 20.08% of local tax revenue, 12.03% of own source revenue, and 5.94% of local expenditures (see table below). While a stable source of tax revenue, the analysis illustrates the importance of the property tax and non-tax sources of revenue, such as intergovernmental transfers and fees, in the financing of local governments.

Table 2-51: Averages (2000, 2002, 2004, 2005)

Average

Local Sales Tax as % of state GDP

0.58%

Local Sales Tax as % of Local Tax Revenue

20.08%

Local Sales Tax as % of Local Own Source

12.03%

Local Sales Tax as % of Same Year Expenditure

5.94%


Property Tax Budget Process Property tax rates and revenues are determined based on the revenue needs of the respective taxing entity. By definition, therefore, the property tax is sufficient to cover the budgetary needs of the respective entity. Stability, Volatility, Sufficiency and Adequacy The following table analyzes the property tax as a source of tax revenue, local own source revenue, and direct expenditures for the years 2000, 2002, 2004, and 2005, as reported by the U.S. Census. While property taxes charged data is available from the Property Tax Division, we have chosen to use U.S. Census data in order to facilitate the comparison of Utah’s property tax system to that of the other Intermountain Western states in the next section.

Table 2-52: Property Tax 2000-2006

2000 2001 2002 2003 2004 2005 2006 Property Tax as % of Local Tax Revenue

68.79% NA 67.58% NA 68.82% 68.48% NA

Property Tax as % of Local Own Source Revenue

40.37% NA 40.09% NA 42.47% 41.29% NA

Property Tax as % of Same Year Direct Expenditures

20.27% NA 18.71% NA 20.80% 21.57% NA

Source: Property Tax, Census The property tax represents a very stable and sufficient source of local tax revenue and own source revenue. The average of the years available for the property tax as a percentage of local tax revenue and local own source revenue were 68.42%, and 41.05%, respectively. While we are not able to calculate standard deviations due to the incompleteness of the available data, the table above indicates that the range does not vary very much. This conclusion is reinforced by the Beta of the property tax with respect to non-agricultural wages (see Table 2-53 below). A Beta of 0.4 indicates that the property tax is the most stable of all three taxes with respect to non-agricultural wages.


Table 2-53: Averages and Beta (2000, 2002, 2004, 2005)

Source: *Governor Walker’s Task Force School Funding The property tax is an important local source of school funding, but not the only source. Property tax revenues are supplemented by the state income tax to varying degrees from one school district to another. For instance, school districts with high property value, such as Park City, fund a larger portion (90% in 2005) of the Basic School Program from the property tax. Park City only receives 10% of their Basic School Program funding from the state income tax. Other school districts such as Davis, Sevier, Piute, and Tooele, among others receive 10% or less of the funding of their Basic School Program from the local property taxes (Office of Legislative Research and General Counsel, 2007). The following table shows the funding sources for public education for 2004-05. 35% of public school funding comes from local source, while 54% was provided by state sources.

Table 2-54: Public Education Finance: Percentage of Elementary-Secondary School Revenue From Federal, State and Local Sources, 2004-05

State Total

Actual Federal

Revenue %

Federal

Actual State

Revenue %

State

Actual Local

Revenue %

Local Utah 3,177,411 326,400 10% 1,729,443 54% 1,121,568 35%

Source: Census Bureau Publication on Public Education Finance, 2005 data. Property tax revenue accounted for 84% of local revenue used for public education. The property tax is the most significant source of local tax revenue for public education spending. However, according to the Census Bureau report, Utah ranks last in total elementary and secondary per pupil revenue, 43rd in per pupil revenue from state sources,

Average Beta* Property Tax 0.4 Property Tax as % of Local Tax Revenue

68.42%

Property Tax as % of Local Own Source Revenue

41.05%

Property Tax as % of Same Year Direct Expenditures

20.34%


and 45th from local sources. (U.S.Census, 2005). We will examine what other states spend per pupil in Chapter 3.

Table 2-55: Public Education Finance: Revenue from Local Sources, Percentage from Property Tax from Total Tax, 2004-05

State Total Local Revenue Property Taxes Actual

% Property Tax From Total

Utah 1,121,568 947,378 84% Source: Census Bureau Publication on Public Education Finance, 2005 data, published in 2007

State and Local Revenue In this section, we will examine the stability and sufficiency of state and local revenue relative to direct state and local expenditures for the current and new income tax systems. State Revenue Current Tax System (income Bracket, Graduated Rate Income Tax System) The following table shows state tax revenue as a percent of own source revenue and state direct expenditures, as well as state own source revenue as a percent of state direct expenditures (Table 2-56). State tax revenue has declined as a source of own source revenue from 68.51% in 2000 to 62.88% in 2005. Similarly state tax revenue as a percent of direct expenditures has decline from 60.16% in 2000 to 52.31% in 2005. State own source revenue’s share of direct expenditures has declined from 87.81% in 2000 to 83.19% in 2005.

Table 2-56: State Revenue, Own Source Revenue and Direct Expenditures 2000 2001 2002 2003 2004 2005 2006

State Tax Revenue as % of State Own Source Revenue

68.51% NA 61.87% NA 62.79% 62.88% NA

State Tax Revenue as % of State Direct Expenditures

60.16% NA 49.46% NA 48.33% 52.31% NA

State Own Source Revenue as % of State Direct Expenditures

87.81% NA 79.95% NA 76.97% 83.19% NA


Table 2-57 below shows the averages for the years that the data is available from the U.S. Census. State tax revenue averaged 64.01% of state own source revenue and 52.56% of direct expenditures. State own source revenue averaged 81.98% of state direct expenditures. The data shows that state own source revenue was a significant and sufficient source of financing for direct state government expenditures, but that state tax revenue accounted for only half of expenditures. This illustrates the importance of non-tax revenue sources in government finance.

Table 2-57: Average (2000, 2002, 2004, 2005)

(Bracket System) Average


64.01%


52.56%


81.98%

State Tax Revenue Using Pro-forma Single rate, credit Based Income Tax Revenue Estimates The following tables analyze the sufficiency of state tax revenue using revenue estimates had the income tax reform been in place since 2000. State tax revenue as a percent of state own source revenue would have ranged from 61.70% to 67.96%. It is estimated that state tax revenue as a percent of state direct expenditures would have ranged from 47.54% to 58.67%, a greater variation. State own source revenue would have ranged from 76.18% to 86.33% under the new system.


Table 2-58: State Revenue as Percent of Own Source Revenue and Direct Expenditures

(Single Rate, Credit Based Income Tax Revenue) 2000 2001 2002 2003 2004 2005 2006


67.96% NA 61.70% NA 62.41% 62.41% NA


58.67% NA 49.11% NA 47.54% 51.27% NA


86.33% NA 79.59% NA 76.18% 82.15% NA

The averages presented in the table below indicate that state tax revenue as a percentage of own source revenue and direct expenditure drop slightly to 63.62% (from 64.01%) and 51.65% (from 52.56%), respectively. Similarly, own source revenue as a percent of direct expenditures decreases slightly from 81.98% to 81.06%. One can conclude, therefore, that the income tax reform would not have made a measurable difference with respect to the degree of sufficiency of state tax revenue as a component of own source revenue, and the sufficiency of state own source revenue in financing direct expenditures.

Table 2-59: Average (2000,2002,2004,2005)

(Single Rate, Credit Based Income Tax Revenue)

Average State Tax Revenue as % of State Own Source Revenue

63.62%


51.65%


81.06%

Local Revenue The table below (Table 2-60) illustrates the share of local revenue of local own source revenue and local direct expenditures as well as local own source revenue as a percent of local direct expenditures. Unlike state revenue, local revenue as a source of financing of local governments has increased from 2000 to 2005. Local tax revenue as a percent of


total won source revenue and direct expenditures has increased from 58.69% to 60.30%, and from 29.46% to 31.50%, respectively. Similarly, local own source revenue as a percent of direct expenditures increased from 50.20% in 2000 to 52.24% in 2005.

Table 2-60: Local Revenue as Percent of Own Source Revenue and Direct Expenditures

2000 2001 2002 2003 2004 2005 2006

Local Tax Revenue as % of Total Own Source Revenue

58.69% NA 59.31% NA 61.71% 60.30% NA

Local Tax Revenue as % of Local Direct Expenditures

29.46% NA 27.69% NA 30.22% 31.50% NA

Local Own Source Revenue as % of Local Direct Expenditures

50.20% NA 46.68% NA 48.97% 52.24% NA

Local tax revenue averaged 60% of total local own source revenue, but less than 30% of local direct expenditures. Local own source revenue accounted for 50% of local direct expenditures, highlighting the importance of intergovernmental transfers and non-tax sources of revenue at the local level. Local tax revenue is not as sufficient in financing local government as state tax revenue is in financing state government.

Table 2-61: Average (2000, 2002, 2004, 2005)

Average

Local Tax Revenue as % of Total Own Source Revenue

60.00%

Local Tax Revenue as % of Local Direct Expenditures

29.72%

Local Own Source Revenue as % of Local Direct Expenditures

49.52%


State and Local Revenue Combined Under Current Income Tax System The following tables combine all state and local tax revenue, state and local own source revenue and direct expenditures. Total combined tax revenue’s share of combined own source revenue has decreased from 65% in 2000 to 61.93% in 2005. In 2002, a period of slow economic growth, the share of combined tax revenue declined to 60.95%, increasing to 62.39% in 2004, a period of recovery. State and local tax revenue and own source revenue have both declined as a percent of combined direct expenditures, although combined revenue had only declined from 69.27% in 2000 to 68.29% in 2005.

Table 2-62: State and Local Revenue as Percent of Own Source Revenue and Direct Expenditures

2000 2001 2002 2003 2004 2005 2006

State and Local Tax Revenue as % of Combined Own Source Revenue

65.00% NA 60.95% NA 62.39% 61.93% NA

State and Local Tax Revenue as % of Combined Direct Expenditures

45.03% NA 38.82% NA 39.63% 42.29% NA

State and Local Own Source Revenue as % of Combined Direct Expenditures

69.27% NA 63.69% NA 63.52% 68.29% NA

State and local tax revenue averaged 62.57% of combined own source revenue and 41.44% of combined direct expenditures. Combined own source revenue averaged 66.19% of combined direct expenditures. While combined tax revenue comprised approximately 3/5 of own source revenue, it financed less than half of direct expenditures. The importance of other revenue sources has increased from 2000 to 2005, as indicated by the decline in combined tax revenue as a percentage of direct expenditures. This is due to the decline in state tax revenue as a percentage of state expenditures.


Table 2-63: Average (2000, 2002, 2004, 2005)

Average


62.57%


41.44%


66.19%

State and Local Combined Tax Revenue Using Pro-forma Single Rate, Credit-Based Income Tax Revenue Estimates The following tables adjust the previous analysis using income tax estimates based on the single rate, credit based income tax system. On a combined basis, the single rate system would not have significantly impacted the sufficiency of tax revenue relative to own source revenues. Using income tax estimates under the single rate system, state and local tax revenue as a percent of own source revenue averaged 62.31% as compared to 62.57% above. Similarly, state and local tax revenue as a percent of combined direct expenditures averaged 40.97%, a slight decrease from 41.44% indicated above.

Table 2-64: State and Local Revenue as Percent of Own Source Revenue and Direct Expenditures

(Single Rate, Credit Based Income Tax Revenue) 2000 2001 2002 2003 2004 2005 2006


64.61% NA 60.84% NA 62.15% 61.63% NA


44.27% NA 38.64% NA 39.22% 41.76% NA


68.52% NA 63.51% NA 63.11% 67.76% NA


Table 2-65: Average (2000, 2002, 2004, 2005)

(Single Rate, Credit Based Income Tax Revenue Estimates) Average


62.31%


40.97%


65.72%

Balance State Taxes and Revenue In 2006, the income tax accounted for 41.72% of state tax revenue under the current tax system. The state sales tax accounted for 34.64%. Together, the income and state sales tax accounted for 76.36% of total state tax revenue. Similarly, had the single rate system been in effect in 2006, the income tax would have accounted for 41%. The sales tax share would have increases to 35.06%. The income tax and the sales tax combined would have declined only slightly to 76.06% of state revenue, a slight decline. While there is relative balance between the income and state sales taxes, state tax revenue is highly concentrated in the income and sales tax combined. Other tax revenues account for approximately 24% of state tax revenue.

Table 2-66: Percent of State Tax Revenue

(2006) Bracket, Graduated Rate Single Rate, Credit-Based Income Tax 41.72% 41.00% State Sales Tax 34.64% 35.06% Local Tax Revenue The property tax accounted for 68.79% of local tax revenue in 2005. The local sales tax was 22.07% of local tax revenue. Clearly, one can conclude that local tax revenues are not balanced, relying 3 to 1 on the property tax.

Table 2-67: Percent of Local Tax Revenue (2005)

Property Tax 68.79% Local Sales Tax 22.07%


State/Local Tax Revenue State tax revenue was 64.16% of combined state and local tax revenue in 2005 under the current bracket income tax system. Local revenue accounted for 35.84%. As we have seen previously, the tax reform would not have significantly changed this relationship. Under the single rate system, state tax revenue would have accounted for 63.70% of combined tax revenue and 36.30% of local tax revenue.

Table 2-68: Percent of State and Local Tax Revenue (2005)

Bracket, Graduated Rate Single Rate, Credit-Based State Tax Revenue 64.16% 63.70% Local Tax Revenue 35.84% 36.30% Income Tax, State and Local Sales Tax, Property Taxes Combined Many refer to income, sales and property taxes as the three-legged stool of state tax revenue. This is a misnomer to an extent, since local sales and property tax finance local government and school districts, while the income tax and state sales tax finance state government. The exception is that the income tax is used to fund equalization of school funding resulting from the differences in property tax collection between the various school districts. Nonetheless, it is informative to evaluate the degree of balance between the income, state and local sales tax, and the property tax with respect to total state and local tax revenue. The following table shows that there is indeed balance between these three revenue sources, albeit more reliance on the sales tax. The importance of the sales tax does increase slightly under the single rate system.

Table 2-69: Income, State and Local Sales Tax, and Property Tax Revenue (2005)

Bracket, Graduated Rate Single Rate, Credit-Based Income Tax * 26.38% 25.43% State and Local Sales Tax* 29.87% 30.25% Property Tax* 24.54% 24.86% * Share of State and Local Tax Revenue Competitiveness Competitiveness is, by definition, a comparative analysis. As such, we will address this principle in the next section that compares Utah’s tax policy with respect to the income, sales and property tax to the other Intermountain Western states.


Conclusion The tax reform passed by the Legislature in 2006 and 2007 improves Utah’s income and sales tax with respect to the policy principles discussed in this chapter (equity will be discussed in Chapter 4; Tax Incidence Analysis). The Single Rate income tax is the most simple and transparent of the three taxes, while the property tax is also transparent. While no tax is completely economically neutral, the Single Rate system expands the base and lowers the top tax rate, crucial elements to a relatively neutral income tax. The tax reform improves the neutrality of the sales tax system with respect to uniformity of tax rates by establishing a uniform rate on food. In addition, for the most part, the tax base is consistent across the state. The range of combined state and local general sales tax rates is not very wide, from 5.75% to 6%, excluding Snowville. Yet, neutrality is undermined, with respect to the sales tax base. Utah taxed only 57 out of 168 services in 2004, just 34%. With 67 sales tax exemptions, totaling over $650 million for state and local taxes, the impact on neutrality is significant. In 2006 gross taxable sales were 45.83% of state GDP. The property tax, like the sales tax, does not meet all the requirements for economic neutrality. Assessment ratios vary for different types of property and the range of property tax rates from locality to locality is significant. Sales and property tax revenues are more stable than income tax revenues under either income tax system. The coefficient of variation of sales tax revenue from 2000 to 2006 was 5.30%, while the coefficient of variation of income tax revenues under the Bracket system was 9.57% and 9.23% under the Single Rate system. While we were not able to perform a statistical analysis for the property tax, a Beta of .4 relative to non-agricultural wages indicates a stable revenue source. In fact, the property tax has the lowest Beta of all three taxes. The income and state sales taxes were consistent and sufficient sources of tax revenue and financing for the Education Fund and the General Fund over this time period. The income and sales tax contributes over 75% of state tax revenue. The property tax is the most important tax revenue source, averaging 68.42% of local tax revenue from 200 to 2006. The local general sales tax, however, averaged only 20.08%. Total state tax revenue, on average, comprised 64.01% of state own source revenue and 52.57% of state direct expenditures under the Bracket system. Under the Single Rate system, the percentages would have been 63.62% and 51.65%, respectively. Local tax revenue accounted for 60% of local own source revenue and 29.72% of local direct expenditures. State and local combined tax revenue averaged 62.57% of combined own source revenue and 41.44% of combined direct expenditures under the Bracket system (62.31% and 40.97%, respectively under the Single Rate system). While the income, state sales and property taxes are important and sufficient sources of state and local tax revenue, tax revenue overall funds 50% or less of direct government expenditures. The issue of what percentage constitutes sufficiency leads to several questions. Where are the other revenue sources funding expenditures coming from? Is


the existence of other sources of revenue mitigating the need for tax revenues? In the case of Utah, federal government revenue accounted for $2.9 billion in 2005, approximately 28% of general revenue. General revenue from own sources was 71% of general revenue in the same years. Total state tax revenue in 2005 $4.9 billion. Clearly, federal government revenue and other sources of revenue play an important role in the financing of state government in Utah. On the state level, there is relative balance between the income and state sales tax revenues. On the local level, however, property tax account for three times the revenue as the sales tax. As a percent of state and local combined revenue, there is balance between the income, state and local sales taxes and the property taxes. Overall, Utah’s tax system performs well under evaluation according to sound tax policy principles. Improvements such as expanding the sales tax base and instituting a uniform sales tax rate would improve the neutrality of the tax system. Similarly, simplifying the property tax system and improving the uniformity of property tax rates would enhance neutrality. However, the issue of local autonomy comes into play here and the need of local government to levy taxes according to their specific needs and preferences.


Chapter 3 Comparison of Eight Intermountain Western States Discussions of state tax policy often focus on a comparative analysis. In this chapter, we will compare Utah’s income tax, sales tax and property tax to those of Arizona, Colorado, Idaho, Montana, Nevada, New Mexico and Wyoming according principles of sound tax policy. Appendix 1 outlines the procedures for tax rates and tax bases of each tax by state, as well as the procedure for calculating taxable income. The analysis in this chapter will draw from the information presented in Appendix 1, and state and local revenue and expenditure information provided by the U.S. Census. Before we begin the comparison, it is useful to provide an economic and demographic context for each of the Intermountain Western states included in the study. The following table shows the median income and population estimates for the eight Western Intermountain states included in the study. The average state median income is $47,410. Montana has the lowest median income of $39,821. Utah has the highest, $55,169. The average population for all eight states is 2,605,748. However, the range is quite wide. Wyoming has the fewest people, 515,004, while Arizona is the most populous state in the study with over 6 million. The average state personal income is $87 billion, ranging from $21 billion for Wyoming to $194 billion for Arizona. The average GDP by state is $108 billion. Wyoming’s GDP by state was almost $30 billion, while Arizona’s State GDP was $232 billion. Finally, it is important to bear in mind that the period of analysis includes two years of recession.

Table 3-1: State Median Income and Population

Arizona Colorado Idaho Montana Nevada New Mexico

Utah Wyoming Average

State Median Income*

$46,693 $53,900 $45,919 $39,821 $51,036 $40,126 $55,169 $46,613 $47,410

Population 6,166,318 4,753,377 1,466,465 944,632 2,495,529 1,954,599 2,550,063 515,004 2,605,748 2006 State Personal Income ($ MM)

$193,983 $186,265 $43,923 $28,988 $92,557 $57,998 $74,229 $20,948 $87,361

2006 GDP by State ($MM)

$232,463 $230,478 $49,907 $32,322 $118,399 $75,910 $97,749 $29,561 $108,349

Source: State Median Income and Population, U.S. Census; State Personal Income and GDP by State: BEA Population numbers are annual estimates as of July 1, 2006 *2005-2006 average in 2006 dollars.


Income Tax Simplicity The following table compares the characteristics of the income tax systems with respect to the principle of simplicity. For Utah, we have included information for the current income tax system as well as the single-rate, credit-based system that will be in effect in 2008. Nevada and Wyoming do not levy an income tax. It is difficult to conclude unequivocally which state has the greatest simplicity with respect to the income tax. Montana has the least number of lines on their income tax form and the least number of pages in their instruction, yet the greatest number of additions and subtractions from income. Utah’s single-rate system has the least additions and subtractions, making the calculation of taxable income quite simple. Colorado and Utah (single rate) do not use income tax brackets, making the calculation of the income tax relatively simple. Colorado taxes Colorado taxable income at a flat 4.63% tax rate With the exception of Arizona and Montana, all the states follow federal standard deductions and personal exemptions. Utah allows 75% of the federal personal exemption. Idaho has the least number of income tax credits. Overall, it appears that Utah’s Single Rate system is the most simple income tax system while Arizona has the most complex income tax. One can conclude that the following elements would characterize a simple income tax system:

• Few additions and subtraction from FAGI to determine state taxable income • Flat tax rates • Federal standard deductions and personal exemptions • Minimize the number of income tax credits • Minimize number of lines on the tax form and minimize the number of pages in

the instructions.

As we will discuss later, a simple income tax system may not be the most equitable.


Table 3-2: Income Tax

Simplicity

Transparency All of the income tax systems are transparent in that taxpayers understand how much they are paying in taxes. However, for states that have many income brackets, the marginal tax rate can be difficult to ascertain for the average taxpayer. In addition, whether or not income tax brackets are indexed for inflation would make a difference in the degree of transparency. Montana and Idaho index their income tax brackets to adjust for inflation. Utah’s single rate system indexes the taxpayer credit thresholds. Therefore, while the income tax generally is a transparent tax, bracket creep resulting from income brackets that are not indexed mitigate transparency. This is the case for Arizona, New Mexico, and Utah’s Bracket system, While state will periodically readjust the income brackets, states that rely on income brackets, either with respect to a graduated rate structure, income thresholds, or credits linked to income thresholds, should adjust those brackets for inflation.


Utah (Bracket)

Utah (Single Rate)

Wyoming

Number of lines in Tax form

85 53 58 22 NA 34 36 38 (draft-subject to change)

NA

Number of pages on income tax instructions

22 9 33 4 NA 26 20 NA NA

Number of additions

20 6 8 20 NA 3 11 8 NA

Number of Subtractions

28 12 21 36 NA 17 13 5 NA

Number of Credits

28 22 7 25 NA 17 20 21 NA

Number of Income Brackets

5 None 8 7 NA 4 6 None NA

Standard Deduction

Different from Federal

Federal Federal Different from federal

NA Federal Federal Federal NA

Personal Exemptions

Different according to filing status

Federal Federal Different from Federal

Na Federal 75% of Federal

75% Federal

NA


Neutrality and Efficiency The following table summarizes the elements of the income tax that impact neutrality and efficiency. Some of the elements are repeated from the previous table, such as addition and subtractions from income and tax credits. These elements also indicate to what extent the income tax favors some behaviors relative to others. The more additions and subtractions to income, the more a tax system discriminates between different sources of income and, therefore, the less economically neutral it is. Utah’s Single-Rate system has the fewest number of additions and subtractions and does not allow for a capital gains deduction. The magnitude of the additions less subtractions from income, standard deductions and personal exemptions also shed light on neutrality. State taxable income is calculated by adjusting FAGI for the additions and subtraction to income specific to each state and deducting the standard (or itemized deductions) and personal exemptions. Taxable income as a percent of FAGI and State personal income illustrate how much of the tax base is captured by the income tax. Utah’s single rate system expands the base of the income tax to 73.10%, the largest tax base of the Intermountain Western states. Montana ranks second with taxable income of 69.39% of FAGI. Colorado taxable income is 68.23% of FAGI, reflecting a smaller number and magnitude of additions and subtractions. Neutrality is enhanced when the tax base is large and all forms of income are treated equally. With respect to the tax base, Utah’s Single rate system is the most economically neutral. A flat tax rate taxes all income proportionally, enhancing neutrality (again, we will discuss later that a neutral system may not be the most “equitable” by some definitions). Colorado and Utah’s Single rate system taxes taxable income at 4.63%, and 5%, respectively. Among those states with graduated rate, bracket systems, the lower the top bracket the more the system is similar to a flat rate one. Examining the ratio of top rate to bottom rate, we see that the top rate for Arizona is 1.75 times the bottom rate. Montana’s top rate is 6.9 times the bottom, but the top bracket is only $14,500. Personal exemptions also influence the degree of neutrality. Exemptions favor larger family sizes. The greater the amount of the exemption per person, the greater it undermines neutrality as it favors having children. Arizona’s personal exemptions are the most generous, while Montana’s is the smallest. This is also reflected in the tax base, the degree to which depends also on the demographics of each state. Finally, tax credits reward specific family types and behavior. Idaho has the least number of income tax credits. To summarize, the elements of an income tax system that would be the most economically neutral are:

• Create as large a tax base as possible • Limit personal exemptions so as not to discriminate according to family size • A flat tax rate: tax all income the same • Limit the number of tax credits



Neutrality and Efficiency

*Full Year Residents Stability, Sufficiency and Adequacy The section utilizes tax revenue data for each of the eight states provided by the U.S. Census in the State and Local Government Finance and State Government Tax Collections sections. We have chosen to use Census data for ease of comparison and consistency of information across states. Appendix 2 includes the definitions of categories used in the analysis such as income tax revenue, sales and use tax revenues,


Utah (Bracket

Utah Single Rate)

Wyoming

Number of additions

20 6 8 20 NA 3 11 8 NA

Number of Subtractions

28 12 21 36 NA 17 12 3 NA

Number of Credits

28 22 7 25 NA 17 20 21 NA

Number of Income Brackets

5 None 8 7 NA 4 6 None NA

Top Income Bracket (Married Filing Joint)

$300,001 None $47,928 $14,500 NA $24,000 $11,000 None NA

Range of Rate: bottom to top bracket

2006: 2.73%-4.79% 2007:2.59%-4.54%

4.63% 1.6%-7.8%

1%-6.9%

NA 1.7%-5.3%

2.3%-6.98%

Implicit in effective rate

NA

Personal Exemptions

According to filing status and number of dependents. Married filing joint, no dependents: $4,200; at least 1 dependent $6,300

Federal (implicit) $3,300

Federal ($3.300)

$1,980 Indexed for inflation

NA Federal $3,300

75% of Federal

75% of federal (3,300)

NA

Taxable Income/FAGI*

66.77% 2005

68.23% 2004

67.12% 2005

69.39% 2005

NA 62.10% 2005

62.90% 2005

73.10% 2005 data

NA

Taxable Income/Personal Income*

47.32% 2005

48.15% 2004

41.02% 2005

43.98% 2005

NA 37.77% 2005

46.36% 2005

48.29% 2005 data

NA


property tax revenue, revenue and direct expenditures. For state government tax revenue, data was available for all years between 2000 and 2006. For local government taxes, revenue, and expenditures, and state own source revenue and state direct expenditures, the Census does not report data for 2000-2001, 2002-2003, and 2005-2006. As a result, we were only able to conduct statistical analysis of the standard deviation and coefficient of variation for state tax revenue data, but not for local data or state own source revenue and direct expenditures. Stability New Mexico’s income tax revenue was the most stable from 2000 to 2006, with a coefficient of variation of 6.35%. This is well below the average for all the income tax systems of 9.91%. Utah’s Single Rate system ranks third with a coefficient of variation of 9.23%, behind Colorado (8.44%). For all states except New Mexico, the coefficient of variation of the income tax is greater than that of state personal income. The ratio of the coefficient of variation of the income tax to that of state personal income was lowest for New Mexico (.90), and the largest for Colorado (2.29). On average, the ratio was 1.60. That is to say, the coefficient of variation of the income tax, on average was 1.60 times the coefficient of the variation of state personal income. Utah’s bracket and single rate system was just below the average at 1.59 and 1.53, respectively.

Table 3-4: Income Tax Coefficient of Variation (Constant 2000 dollars)

*CV: Coefficient of Variation **Utah counted at two separate systems when data is available for both systems The average growth rate of the real income tax revenue for all the states averaged 2.62%. Arizona’s income tax revenue grew the fastest on average at 3.66%, while Colorado grew the slowest, 0.27%. The average growth rate of real personal income averaged 2.91%, with Arizona growing the fastest (3.74%), and Colorado, the slowest (1.58%). Utah’s average growth rate of personal income from 2000 to 2006 was 2.80%, just below the average of 2.91%.


Utah Bracket

Utah Single Rate

Wyoming Average (All systems)**

Income Tax: CV* 12.96% 8.44% 11.26% 11.53% NA 6.35% 9.57% 9.23% NA 9.91% Personal Income: CV

8.64% 3.69% 6.93% 6.29% NA 7.09% 6.02% 6.02% NA 6.38%

CV of IT/ CV of PI 1.5 2.29 1.62 1.83 NA 0.90 1.59 1.53 NA 1.60


Table 3-5: Income Tax Average Growth Rates (Constant 2000 dollars)

Montana had the most stable income tax growth rate, with a coefficient of variation of the real growth rate of 185.29%, well below the average of 780.22%. Utah’s Single Rate system ranks second, with a coefficient of variation of 229.56%. Colorado’s income tax growth rate, while the slowest, was the most volatile, with significant swings from positive to negative growth rates. The coefficient of variation of the real growth rates was 3288.35%. The ratio of the coefficient of variation of the real growth rate to that of state personal income was the lowest for Utah’s Single Rate system (3.09 times), followed by Montana (3.48). Colorado ratio was the highest at 28.66.

Table 3-6: Income Tax Coefficient of Variation of Growth Rates

(Constant 2000 dollars)

Bruce and Fox analyzed long run elasticity from 1967 to 2000. Higher elasticity means that revenue grows faster over a long period of time relative to personal income, but does not address volatility (Bruce & Fox, 2005). New Mexico had the highest income tax elasticity at 3.11 (adjusting for rate changes), while Colorado’s elasticity was the lowest at 1.17. Utah’s elasticity for the bracket system was 1.41, below the average of 1.74.

Real Growth Rate of Income Tax: Average

3.66% 0.27% 1.88% 4.28% NA 1.75% 2.98% 3.5% NA 2.62%

Real Growth Rate Personal Income: Average

3.74% 1.58% 3.03% 2.96% NA 3.45% 2.80% 2.80% NA 2.91%

Average Growth Rate IT/Average Growth Rate PI

97.86% 17.09% 62.05% 144.59% NA 50.72% 106.43% 125.00% NA 86.24%

Real Growth Rate of Income Tax Revenue: CV

295.23% 3288.48% 633.35% 185.29% NA 548.59% 281.07% 229.56% NA 780.22%

Real Growth Rate Personal Income: CV

59.03% 114.73% 84.37% 53.28% NA 70.70% 74.37% 74.37% NA 75.84%

CV of IT/ CV of PI 5.00 28.66 7.51 3.48 NA 7.76 3.78 3.09 NA 8.42



Elasticity

Sufficiency and Adequacy Utah’s bracket and single rate income tax revenues are the greatest percentage of state personal income of the Intermountain Western states, 2.87% and 2.76%, respectively. The average of all the income tax systems is 2.38%. Utah’s Single Rate system is the least volatile when assessing the income tax as a percent of personal income. The coefficient of variation for Utah’s single rate system is 5.69%, below the 7.69% average. Colorado’s income tax revenue as a share of state tax revenue was the greatest at 49.93% average, with Utah’s bracket system ranking second at 41.03%, above the average of 36.50%. Montana’s income tax was the smallest share of state tax revenue at 24.06%, but also the most volatile. The coefficient of variation for Montana of the income tax as a percent of state tax revenues is 9.04%, above the average of 4.36%. Colorado’s income tax, on average, funded 28.97% of direct expenditures, well above the average of 20.53%. Both Idaho and Utah were also above the average, 23.95% and 21.55% (bracket system), respectively.

Long Run Elasticity (Bruce, Fox: 1967-2000) Unadjusted/Adjusted for Rate Changes

1.14/1.55 1.26/1.17 1.57/1.65 1.60/1.60 NA 3.02/3.11 1.48/1.41 NA NA 1.67/1.74



Sufficiency and Adequacy

CV=Coefficient of Variation Competitiveness The table below outlines the top rates, top income bracket for married filing joint status, taxable income as a percent of FAGI, and income tax per capita. Arizona taxes the top income bracket at 4.54% and the top income bracket is $300,0000. Accordingly, income tax per capita is the lowest for Arizona at $527.59. With respect to a state’s competitiveness, a lower ratio of taxable income to FAGI is preferred, indicating that less of one’s income is included in the base. Utah’s Single Rate system has the largest tax base (73.105%) and New Mexico has the smallest base at 62.10% of FAGI.


Utah Bracket

Utah Single Rate

Wyoming Average

Income Tax as a % of State Personal Income: Average 2000-2006

1.56% 2.28% 2.69% 2.44% NA 2.03% 2.87% 2.76% NA 2.38%

Income Tax as % of State Personal Income: CV

8.85% 8.48% 11.52% 6.98% NA 5.81% 6.53% 5.69% NA 7.69%

Income Tax as % of State Tax Revenue: Average 2000-2006

26.05% 49.93%

37.52% 36.73% NA 24.06% 41.03% 40.16% NA 36.50%

Income Tax as % of State Tax Revenue: CV 2000-2006

6.97% 2.40% 6.56% 2.15% NA 9.04% 1.87% 1.55% NA 4.36%

Income Tax as % of State Own Source Revenue: Average (data available)

20.52% 34.58% 31.06% 23.59% NA 16.06% 26.23% 25.41% NA 25.35%

Income Tax as % of State Direct Expenditures: Average (Data available)

18.55% 28.97% 23.96% 16.97% NA 13.05% 21.55% 20.63% NA 20.53%



Competitiveness

Sales Tax The following analysis uses U.S. Census data regarding general sales and use taxes. (Please see appendix 2 for the definitions used by the Census in gathering the data). Simplicity The table below compares the state, county and local sales and use tax rates for the Intermountain Western states. State tax rates are relatively straightforward. However, on a combined basis and in any given locality, determining the sales tax rate can be complicated. Only Idaho exhibits simplicity with respect to sales tax rates. There is essentially one uniform state rate of 6%. A few Idaho cities impose a sales tax rate, but on a population weighted basis, it is negligible. Another layer of complexity with respect to the sales tax is the magnitude of exemptions and exclusions. Exemptions in some states, like Arizona and Colorado, can vary from place to place. Utah’s tax base is mostly consistent across the state. Simplicity is enhanced through a uniform tax base across all taxing jurisdictions.


Utah Bracket

Utah Single Rate

Wyoming

Top Rate 4.79% in 2006; 4.54% in 2007

4.63% 7.8% 6.9% NA 5.3% in 2006; 4.9% in 2008

Either 5.35% flat or 6.98 bracket

5% in 2008

NA

Top Bracket (Married filing Joint)

$300,001 None $47,928 $14,500 NA $24,000 $11,000 None NA

Income Tax Per Capita 2006

$527.59 $895.98 $833.68 $813.98 NA $575.03 $893.11 $867.12 NA

Taxable Income/FAGI

66.77% 2005

68.23% 2004

67.12% 2005

69.39% 2005

NA 62.10% 2005

62.90% 2005

73.10% 2005 data

NA


Table 3-10: Sales/Use Tax Rates and Exemptions State Arizona Colorado Idaho Montan

a Nevada New Mexico Utah Wyoming

State Rate 5.6% 2.9% 6% No sales tax

6.5% 5% Gross Receipts Tax

General Sales: 4.75% in 2006, 2007; 4.65% in 2008 Sales tax on unprepared food: 4.75 for 2006; 2.75%, 2007 and 1.75%, 2008

4%

County Rates

Not reported

State Collected Counties (all) range from 0.25%-5.0%

NA Total rates by counties range from 6.5% to 7.75%, therefore the county rates range from 0-1.75%

Up to 3.75% County Option 0.25%

Up to 1% for general purposes, 2% for specific purposes, but combined cannot exceed 2%, with voter approval

Local Rates

1.5% to 4%

State collected Cities range from 1%-4.5% Self-collected cities 1.5%-5%

9 Idaho cities

NA Only Carson City imposes an additional 0.25% rate

Up to 3.5625%

1% Up to 4% with voter approval

Combined State and Local Rate

County Averages range from 5.85%-6.725%

Complicated: State and Self Collected cities tax differently. No combined rate reported. Possible range from 4.15% to 12.90%

6% except for a few cities

NA Total rates by counties range from 6.5% to 7.75%

As of July 1.2007, range from 5.125% to 7.875%

2006: General Sales: 5.75-6%, except for Snowville (7%)

County sales tax ranges from 4% to 6%


Food* Exempt at state level

Food for home consumption exempt at state level, varies locally

Taxed At full rate

NA Exempt

Food for home consumption deduction

Food taxed at lower rate. Varies locally

Exempt through 6/30/08

Prescription Drugs*

Exempt at state level

Exempt Exempt

NA Exempt Exempt Exempt Exempt

Services** 58 services taxed (FTA)

14 services taxed (FTA)


NA 19 services taxed (FTA)



62 services taxed

*Source: FTA, January 1, 2007 **Source: Federal Tax Administrators’ (FTA) 2004 Survey on State Taxation of Services

Transparency Sales taxes are not transparent. As previously discuss in the evaluation of Utah’s sales tax, consumer do not know how much in sales taxes they are paying on an annual basis. With the exception of Idaho, the range of tax rates and their composition is not readily evident at the check out counter. Unless the consumer researches the different tax rates in different locations and what goods or services are included in the base from place to place, they will not be aware of what the rate consists of and which goods or services it is applied against. Since Idaho has essentially one uniform rate, it is more transparent relative to the other Intermountain Western states. Neutrality and Efficiency The table above also illustrates the degree of neutrality with respect to the sales tax. A wide range in combined rates indicates that goods and taxed services are treated very differently from one locality to another. Different rates for different goods in different places undermine economic neutrality. Idaho is the most neutral with respect to tax rates since is essentially imposes a combined uniform rate. In addition, the range of rates for Utah on a combined basis is not very wide, from 5.75% to 6% (excluding Snowville). Exemptions and exclusions also undermine neutrality. The following table shows taxable sales as a percentage of state GDP for 2006. New Mexico’s sales tax is a gross receipts tax and has the largest tax base with taxable sales equal to 61.56% of state GDP, although the range of rates shown above is one of the widest, from 5.125% to 7.875%. New Mexico taxes the largest number of services (156 out of 168 in 2004). This brings up an interesting point. A large tax base is not the only condition for neutrality. Neutrality is best achieved when both the tax base is large and the rates are uniform. The elements of an economically neutral sales tax policy include a uniform combined tax rate and broad tax base.


Table 3-11: Taxable Sales as a Percent of State GDP

State Arizona Colorado Idaho Montana Nevada New

Mexico Utah Wyoming

Taxable Sales as % of state GDP

46.76% 2006

28.83% 2006

44.13% 2006

NA 41.03% 2006

61.56% 2006

45.83% 2006

52.96% approx. (2007)*

Source: Taxable Sales: Tax Commissions; State GDP: BEA *Wyoming doesn’t track taxable sales. Percentage calculated by dividing FY2007 tax by the population-weighted rate of 5.287% for December 2007. Stability, Sufficiency and Adequacy Stability The following tables analyze the stability of the state sales tax for each Intermountain state. Colorado’s sales tax revenue from 2000 to 2006 was the most stable, with a coefficient of variation of 3.77%. Utah’s sales tax revenue is the second most stable, with a coefficient of variation of 5.30%. Idaho and Nevada are the most volatile with coefficients of variations of 12.56% and 12.73%, respectively. These states have the highest state tax rates, 6% for Idaho and 6.5% for Nevada. The ratio of the coefficient of variation of the sales tax to that of GDP by state is the lowest for Utah (0.65) and the highest for Idaho (1.46). A low ratio indicates that the sales tax was more stable than state GDP.

Table 3-12: State Sales Tax Coefficient of Variation

(2000 Dollars)

State Arizona Colorado Idaho Montana Nevada New Mexico

Utah Wyoming Average

Real Sales Tax Revenue: CV

8.74% 3.77% 12.56% NA 12.73% 8.58% 5.30% 12.26% 9.13%

Real State GDP: CV

8.57% 5.35% 8.63% NA 12.98% 10.89% 8.12% 14.40% 9.85%

CV ST/CV GDP

1.02 0.70 1.46 NA .98 .79 .65 .85 .92

Nevada’s sales tax revenue had the highest average growth rate at 6.30%, followed by Idaho (3.83%) and Wyoming at 3.64%. Utah’s average growth rate was 2.12%, below the average of the states’ average growth rate of 2.72%. The ratio of the average real


growth rate of the sales tax revenue to the average growth rate of real GDP by state was the highest for Nevada (1.17) and the lowest for New Mexico (.05). The higher ratio indicates that, on average, the sales tax grew faster than state GDP. A lower ration means the sales tax grew at a slower rate. Utah’s ratio was .60, just below the average ratio for the states of .61.

Table 3-13: State Sales Tax

Average Growth Rates (2000 Dollars)

Real Sales Tax Growth Rate: Average

3.42% -0.47% 3.83% NA 6.30% 0.20% 2.12% 3.64% 2.72%

Real GDP Growth Rate: Average

3.77% 2.24% 3.34% NA 5.39% 4.18% 3.55% 6.44% 4.13%

Average Real Growth Rate of ST/ Average Real Growth of State GDP

.91 -.21 1.15 NA 1.17 .05 .60 .57 .61

Arizona’s growth rate of sales tax revenues was the most stable, with a coefficient of variation of 157.29%. Utah ranks second with a coefficient of variation of the real growth rate of 180.69%. The ratio of the coefficient of variation of the real growth rate of sales tax revenue to that of state GDP was the lowest for Idaho 2.15, followed by Utah at 2.46. The low sales tax rate of 2.9% in Colorado is one explanation for its stability. In addition, Colorado’s sales tax base is only 28.83% of state GDP. It is difficult to generalize about the relationship between the size of the tax base and the stability of tax revenue since the composition of the tax base will affect its’ (the tax base) volatility and that of the revenue associated with it. However, Interestingly, Colorado’s state sales tax revenue as a percentage of state GDP was the smallest at 1.07%, but also the most volatile with a coefficient of variation of 21.55%.


Table 3-14: State Sales Tax Coefficient of Variation of Average Growth Rates

(2000 Dollars)

Sales Tax Growth Rate: CV

157.29% 824.55%* 245.65% NA 226.79% 4818.90% 180.69% 570.24% 1003.44%

GDP Average Growth Rate: CV

53.35% 89.95% 114.04% NA 62.72% 99.43% 73.54% 48.86% 77.41%

CV of Growth rate of ST/CV of Growth rate of GDP

2.95 9.17 2.15 NA 3.62 48.47 2.46 11.67 12.96

As a percent of state GDP, Arizona state sales tax was the most stable, with a coefficient of variation of 3.99%, followed by Utah with a coefficient of variation of 4.19%. Colorado and Utah sales tax revenue were the most volatile as a percent of state GDP, with coefficients of variations of 21.44% and 16.80%, respectively.

Table 3-15: State Sales Tax

Percent of GDP by State

State Sales Tax/State GDP: Average (Nominal)

2.37% 1.07% 2.25% NA 2.47% 2.55% 2.01% 2.33% 2.15

State Sales Tax/State GDP: CV (Nominal)

3.99% 21.55% 5.96% NA 9.50% 14.46% 4.19% 16.80% 10.92

Bruce and Fox (2005) analyzed the elasticity of the sales tax base with respect to personal income and found that all the Intermountain Western states included in this study have elasticities of less than 1. This indicates that the sales tax base changes less than personal income. Wyoming had the lowest elasticity with respect to personal income (.72). Utah’s sales tax base elasticity with respect to personal income is the second highest at .873, slightly above the average of .81.


Table 3-16: State Sales Tax Elasticity

Long Run Elasticity (Bruce, Fox) (1967-2000)

0.744 0.781 0.847 NA 0.781 0.924 0.873 0.720 .81

Sufficiency and Adequacy The table below illustrates the importance of sales tax revenues as a finding source for each state. Nevada’s sales tax averaged 50.19% of state tax revenue, and 39.80% of own source revenue. This is not a surprise since Nevada does not levy an income tax. However, Utah’s state sales tax as a percent of state revenue was the most stable, with a coefficient of variation of 3.26%. As in the case of the income tax, assessing sufficiency is more easily accomplished when the tax is dedicated to one source. In the previous chapter, we compared state sales tax revenues for Utah to the prior year’s General Fund appropriations. Again, sufficiency will best be explored when we examine total state revenue later in this chapter.

Table 3-17: State Sales Tax Sufficiency and Adequacy

(Nominal Dollars)


Utah Wyoming

State Sales Tax/ State Tax Revenue: Average

47.38% 28.20% 34.98% NA 50.19% 37.20% 36.61% 37.20%

State Sales Tax/State Tax Revenue: CV

5.25% 16.18% 9.26% NA 10.08% 6.66% 3.26% 23.68%

State Sales Tax/Own Source Revenue: Average

38.25% 20.76% 30.88% NA 39.80% 23.75% 23.62% 27.50%

State Sales Tax / State Direct Expenditures: Average

34.40% 17.57% 23.19% NA 42.66% 19.42% 19.27% 23.54%


The importance of local sales tax revenues is analyzed below. As a share of local tax revenue (38.22%) and local own source revenue (22.31%), New Mexico local sales tax was the most important. As a financing source, the local sales tax as a percent of local expenditures was greatest for Colorado. No doubt, this is impacted by the TABOR restrictions on revenue growth (11.33%) and the decentralized nature of the tax system (See Appendix 1-Colorado). New Mexico’s local sales tax averaged only 8.85% of local expenditures. The importance of Utah’s local sales tax ranks fourth for all three measures.

Table 3-18: Local Sales Tax Sufficiency and Adequacy

(Nominal Dollars)


Utah Wyoming

Local Sales Tax/Local Tax Revenue: Average

24.40% 30.74% .024% NA 5.72% 38.22% 20.08% 18.14%

Local sales Tax/Own Source Revenue: Average

15.59% 18.46% .011% NA 3.08% 22.31% 12.03% 8.70%

Local Sales Tax/ Same Yr Expenditures: Average

7.50% 11.33% .007% NA 1.67% 8.85% 5.94% 5.27%

Competitiveness The table below compares the state sales tax rates, combined rates, population weighted rates and sales taxes per capita. Colorado has the lowest state sales tax rate (2.9%). Wyoming’s combined state, county and local rate is the most competitive with a combined population weighted average rate of 5.386%. Utah is second with a representative combined rate of 5.81%. However, the per capita sales tax for both state ($1,213.44) and combined taxes ($1340.91) for Wyoming was the highest (no doubt attributable to low resident population and large recreation base). On a per capita basis, Colorado was the most competitive with respect to state sales tax ($442.85), but combined taxes are almost double ($941.60), another indication of Colorado’s decentralized approach to sales taxation. On a combined basis, per capita sales tax was lowest for Idaho ($789.50), reflecting the absence of local sales taxes.


Table 3-19: State and Combined Sales Tax State Arizona Colorado Idaho Montana Nevada New

Mexico Utah Wyoming

State Rate 5.6% 2.9% 6% No sales tax

6.5% 5% Gross Receipts Tax

General Sales: 4.75% in 2006, 2007; 4.65% in 2008 Sales tax on unprepared food: 4.75 for 2006; 2.75%, 2007 and 1.75%, 2008

4%

Actual Combined State and Local Rate

County Averages range from 5.85%-6.725%

Complicated: State and Self Collected cities tax differently. No combined rate reported. Possible range from 4.15% to 12.90%

6% except for a few cities

Total rates by counties range from 6.5% to 7.75%

As of July 1.2007, range from 5.125% to 7.875%

2006: General Sales: 5.75-6% (including Snowville, range is 5.75% to 7%, combined rate includes other taxes ranges from 5.75% to 8.35%

County sales tax ranges from 4% to 6%

Population Weighted Average Combined Rate

Population weighted averages, April 16, 2007: Retail 7.796% Restaurant 7.938% Lodging 10.049% Utilities 8.095%

6.7% as of July 9, 2007

6.006% as of July 9, 2007

7.564% as of Oct. 1,2006

6.713% as of Dec. 31,2007

5.81% 5.386% as of Dec.31, 2007

Per Capita State Sales Tax (2006)

$841.63 $442.85 $735.47 $1,267.80 $891.06 $741.47 $1,213.44

Per Capita Combined Sales Tax (2005)

$1,180.29 $941.60 $789.50 $995.84 $1,119.08 $876.12 $1,340.91


Property Tax Simplicity The table below outlines the major characteristics of the property tax for the Intermountain Western states. Property taxes are anything but simple. However, Idaho is perhaps the most straightforward. All property is assessed at 100% of Fair Market Value, while residences are allowed a 50% exemption with a maximum cap of $75,000 for 2006. Arizona is quite complex in that property is taxed at two different rates on two different bases (see Appendix 1). A simple property tax system would include uniformity of assessment, uniform and standardized rates across the state with few overlapping taxing jurisdictions, and easily understood rate and revenue caps.


Table 3-20: Property Tax

*Representative Rate equals residential taxes/residential taxable value Average rate = taxes/ taxable value Effective rate = taxes/market value


Utah Wyoming

Representative Residential Tax Rate (Tax Burden*)_

10.74% 7.93%/ 0.955% 54.594% 1.96% 2.63%/ 1.298% 6.345

Total Average 5.43% 7.35% 1.025% Actual:1.205% urban; 0.785% rural

52.68 3.1471% for 2006; 3.1526% for 2007

2.63% 1.22% 6.34%

Residential Assessment ratio

10% 2006: 7.98%; 2007&2008: 7.96%

50% with a maximum exemption of $75,000 for 2006, $89,325 for 2007

67.4% for 2006; 66.8% for 2007; 66% for 2008 Assessed value then multiplied by 3.14% for residential property to determine taxable value

35% 33.33% 55% 9.5%

Rate/Revenue Caps

Primary Value: 10% over previous year Primary Taxes: 2% annual growth. Combined primary tax, 1% of cash value

TABOR: requires voter approval of increases in revenue. Limit of revenue growth equal to the lesser of local growth and inflation, inflation, 5.5% annual increase.

3% increase over the highest of previous 3 three year’s property tax revenue

Residential: Amount of tax capped at 3.65% of assessed value. Annual increase in property tax bill of 3%. All other property: 8% annual increase in assessed value. Local gvt. revenue limited to 6% annual increase

Varies by taxing entity. Yield Control Statute limits tax increases approximately to inflation.

Truth in Taxation Law requires disclosure if tax revenue increase

Residential property tax rate cannot exceed 1.2% of assessed value

Tax Relief Disabled, Widow (er), Disabled Veterans

Seniors, Disabled Veterans, Agricultural Timberland

Circuit Breaker

Elderly, PTAP, EPTAP, Disabled Veterans

Circuit Breaker, veterans, Blind, Surviving spouses

Over 65, Head of Household. Veterans, disability. Totaled $1,047 million in 2006

Veteran, Blind, Indigent, Circuit Breaker. Total $17.8 million

Veterans, Homeowners Tax Credit, Deferrals, Low Income Property tax relief programs, Elderly


Transparency In all the Intermountain states, property taxes are transparent. Truth and taxation laws, revenue caps and rate caps require public hearing and disclosure before rates or revenue may be increased. Neutrality and Efficiency While data concerning the range of property tax rates from locality to locality were not available for all states, property taxes are by definition local and tax rates vary, undermining neutrality. Different tax rates can impact an individual’s decisions as to where to live or locate one’s business. The table below shows the tax base for residential property and all property, as well as the coefficient of dispersion for primary residential property and the tax relief available in each state. The coefficient of dispersion is a measurement of assessment uniformity. The higher the dispersion, the more variability is assessment around the mean. Nevada has the lowest COD of the states where data was available, 3.3%, followed by Colorado. This indicates that assessment uniformity was greatest in these states. The average county COD for Utah was the highest at 13.6%. Idaho has the largest tax residential base at 77.40% of fair market value. Idaho also has the lowest representative rate (0.955%). While statistics for total market value were not available, one can assume that the tax base for total property is also large due to the assessment rates of 100% for all property. However, it is important to note that the homeowner’s exemption in Idaho varies with home price due to the dollar cap on the amount of the exemption that a homeowner can deduct, a factor that reduces neutrality. Utah has the second largest residential tax base at 55%, and, excluding Idaho, the largest tax base for all property at 72.45% of market value. The average county property tax rate in Utah is 1.0311%, with a county high of 1.49% and a low of .67%. In Idaho, the average county tax rate is 1.025%, with a high of 1.88% and a low of .44%. With respect to the percentage change from the average, Utah has less variation from county to county.




Utah Wyoming

Primary Residential Coefficient of Dispersion

9.10% residential (2005)

6.2% (2007) 11.74% Improved Urban; 13.01% Rural subdivision (2006)

NA 3.3% Single Family Residential (2007)

NA 13.6% (2007 average of county CODs)

NA

Residential Taxable Value/Residential Market value

9.95% (2006)

7.96% (2006)

77.40% (2006)

3.11%(2006) 35.00% 31.88% (2006)

55.00%(2006) 9.5%(2006)

Total Taxable Value/Total Market Value

12.03% (2006)

13.44% (2006)

NA* 3.45% (2006)

35.00%(2006) 32.54% (2006)

72.45%(2006) NA*

Tax Relief Disabled, Widow (er), Disabled Veterans

Seniors, Disabled Veterans, Agricultural Timberland

Circuit Breaker

Elderly, PTAP, EPTAP, Disabled Veterans

Circuit Breaker, veterans, Blind, Surviving spouses

Over 65, Head of Household. Veterans, disability. Totaled $1,047 million in 2006

Veteran, Blind, Indigent, Circuit Breaker. Total $17.8 million

Veterans, Homeowners Tax Credit, Deferrals, Low Income Property tax relief programs, Elderly

*NA: not available As is the case with respect to the neutrality of the sales tax, elements of a neutral property tax would include:

• Uniform property tax rates throughout the state, • Uniform assessment of different types of property, • Minimize exemptions • Minimize tax relief

Sufficiency and Adequacy As the table below indicates, property tax revenue averaged over 90% of local tax revenue in both Montana and Idaho. Montana does not levy a sales tax and Idaho does not have local sales taxes, and consequently, local governments in both states rely heavily on the property tax. Yet, even in Montana, the property tax averaged 31.56% of direct expenditures, revealing the importance of non-tax sources of revenue at the local level. Revenue caps play an important role in sufficiency, limiting the property tax as a revenue source for public education and local government. Colorado’s TABOR (See Appendix 1) laws are the most restrictive with respect to the growth of revenue and government.


Table 3-22: Property Tax Sufficiency and Adequacy


Mexico Utah Wyoming

Property Tax as % of Local Tax Revenue: Average*

66.49% 60.95% 93.69% 96.12% 63.50% 54.42% 68.42% 75.36%

Property Tax as % of Local Own Source Revenue: Average*

42.49% 36.60% 46.45% 55.05% 34.09% 31.77% 41.05% 36.16%

Property Tax as % of Local Direct Expenditures: Average*

20.45% 22.46% 26.46% 31.56% 18.46% 12.60% 20.34% 21.94%

Rate/Revenue Caps

Primary Value: 10% over previous year Primary Taxes: 2% annual growth. Combined primary tax, 1% of cash value

TABOR: requires voter approval of increases in revenue. Limit of revenue growth equal to the lesser of local growth and inflation, inflation, 5.5% annual increase.

3% increase over the highest of previous 3 three year’s property tax revenue

Residential: Amount of tax capped at 3.65% of assessed value. Annual increase in property tax bill of 3%. All other property: 8% annual increase in assessed value. Local gov. revenue limited to 6% annual increase

Varies by taxing entity. Yield Control Statute limits tax increases approximately to inflation.

Residential valuation Increase cap of 3% for 1 year assessment cycle, 6.1% for 2 yr. assessment cycle

Truth in Taxation Law requires disclosure if tax revenue increase

Residential property tax rate cannot exceed 1.2% of assessed value

*Average of data reported by the U.S. Census (2000,2002,2004,2005) Public Education Funding The following tables examine local revenue and property tax revenue as a source of public education financing. Local revenue was 50% of Colorado’s total revenue for public education, while New Mexico’s local revenue was only 13%. Utah, Idaho,


Nevada, New Mexico, and Wyoming rely heavily on state source for public education financing.

Table 3-23: Public Education Finance: Percentage of Elementary-Secondary School Revenue From Federal, State and Local Sources, 2004-05

State Total

Actual Federal

Revenue%

Federal

Actual State

Revenue %

State

Actual Local

Revenue %

LocalArizona 7,480,905 897,553 12% 3,320,196 44% 3,263,156 44%Colorado 6,861,449 472,246 7% 2,954,915 43% 3,434,288 50%Idaho 1,795,287 192,039 11% 1,023,550 57% 579,698 32%Montana 1,285,070 191,687 15% 578,321 45% 515,062 40%Nevada 3,375,884 251,421 7% 1,996,995 59% 1,127,468 33%New Mexico 2,982,384 480,888 16% 2,102,670 71% 398,826 13%Utah 3,177,411 326,400 10% 1,729,443 54% 1,121,568 35%Wyoming 1,130,411 106,484 9% 585,789 52% 438,138 39%

Source: Census Bureau Publication on Public Education Finance, 2005 data, published in 2007 The table below shows the property tax as a percentage of the local revenue sources used for public education. Idaho’s property tax is the largest at source of local revenue for public education (87%), followed by Utah at 84%.

Table 3-24: Public Education Finance: Revenue from Local Sources, Percentage from Property Tax from Total Tax, 2004-05

State Total Local Revenue Property Taxes Actual

% Property Tax From Total

Arizona 3,263,156 2,495,667 76%Colorado 3,434,288 2,725,104 79%Idaho 579,698 502,872 87%Montana 515,062 324,110 63%Nevada 1,127,468 941,413 83%New Mexico 398,826 307,113 77%Utah 1,121,568 947,378 84%Wyoming 438,138 301,008 69%Notes: Source: Census Bureau Publication on Public Education Finance, 2005 data, published in 2007

With respect to per pupil spending, Wyoming spends $10,255 per pupil, while Utah spends the least of the Intermountain Western states at $5,257 per pupil. While Utah’s


property tax is a sufficient source of local revenue for public education, Utah spends the least on each pupil.

Table 3-25: Public Education Finance: Per Pupil Amounts for Current Spending of Public Elementary-Secondary School

Systems, 2004-05 State Total Arizona 6,261 Colorado 7,730 Idaho 6,283 Montana 8,058 Nevada 6,722 New Mexico 7,580 Utah 5,257 Wyoming 10,255 Source: Census Bureau Publication on Public Education Finance, 2005 data, published in 2007

Competitiveness From the point of view of the homeowner, low assessment ratios and low representative tax rates constitute a competitive property tax environment. The tax base incorporates differences in assessment ratios and exemptions. Montana has the lowest tax base (3.11%), followed by Colorado (7.95%). Montana, however, has the highest tax rate, 54.59%, and thus the tax on a home value of $100,000 is the highest at $1,155.32. Idaho is the most competitive with respect to the tax on a home with $100,000 of market value, followed by Wyoming. While Idaho has the second highest assessment ratio (Utah has a higher assessment ratio), it has the lowest representative rate, resulting in a tax of $477.50 for $100,000 of market value. For a home value of $200,000, Idaho is still the most competitive. One would expect, however, that due to the limit on the exemption, property taxes in Idaho for a higher valued home would rise disproportionally.




Utah Wyoming

Residential Assessment ratio

10% 2006: 7.98%; 2007&2008: 7.96%

50% with a maximum exemption of $75,000 for 2006, $89,325 for 2007

67.4% for 2006; 66.8% for 2007; 66% for 2008 Assessed value then multiplied by 3.14% for residential property to determine taxable value

35% 33.33% 55% 9.5%

Residential Taxable Value/Residential Market value

9.95% (2006)

7.96% (2006)

77.40% (2006)

3.11%(2006) 35.00% 31.88% (2006)

55.00%(2006) 9.5%(2006)

Residential Representative Property Tax Rate (residential property tax charged/residential assessed value)

10.74% 7.93% 0.955% 54.59% 1.96% 2.63% 1.298% 6.35%

Tax for $100,000 of Market Value*

$1,074 $633 $477 $1,155 $686 $877 $714 $603

Tax for $200,000 of Market Value*

$2,148 $1,266 $1,193 $2,310 $1,372 $1,754 $1,428 $1,206

*$100,000 X assessment ratio X representative rate State and Local Tax Revenue The following section examines the sufficiency and adequacy of state and local tax revenues as a source of state and local own source revenue, and as a financing source for state and local direct expenditures. The table below shows the averages for state tax revenue as a percent of state own source revenue, state tax revenue as a percent of state direct expenditures, and state own source revenue as a percent of state direct expenditures. Idaho’s state tax revenue was 84.92% of own source revenue, followed by Nevada (82.34%), and Arizona (79.82%). As a financing source for direct expenditures, Nevada state tax revenue was the most sufficient


with state tax revenue comprising 88.67% of direct expenditures. Nevada’s own source revenue averaged 107.54% of direct expenditures, while Arizona averaged 90.09%. With respect to state tax revenue as a source of own source revenue, Utah’s bracket system was second to last at 64.01%. Utah’s single rate system would have been last at 63.62%. Similarly, Utah’s bracket system was third to last with respect to state revenue as a source of direct expenditures (52.57%), and the single rate system would have been second to last at 51.65%. As a financing source for direct expenditures, Utah’s own source revenue under the bracket system is third to last at 81.98%, and Utah’s single rate system would have been second to last, averaging 81.06%.

Table 3-27: State Tax Revenue


Utah Bracket

Utah Single Rate

Wyoming

State Tax Revenue as % of State Own Source Revenue: Average

79.82% 69.35% 84.92% 63.82% 82.34% 64.19% 64.01% 63.62% 69.56%

State Tax Revenue as % of State Direct Expenditures: Average

71.91% 58.01% 64.73% 45.91% 88.67% 52.31% 52.57% 51.65% 59.84%

State Own Source Revenue as % of State Direct Expenditures: Average

90.09% 83.45% 79.06% 71.95% 107.54% 81.44% 81.98% 81.06% 86.00%

The table below shows the same analysis for local tax revenue. Local tax revenue in Arizona averaged 63.88% of own source revenue, the highest percentage of the Intermountain states. The range of averages among all the states, however, is relatively small, from a low of 47.97% for Wyoming to 63.88% for Arizona. The range of averages for local tax revenue as a share of own source revenue is also small, from a low of 24.28% in New Mexico to 36.86% in Colorado. There is more disparity among the averages for local own source revenue as a share of local direct expenditures. Colorado averaged 61.38%, while New Mexico averaged 39.53%.


Table 3-28: Local Tax Revenue State Arizona Colorado Idaho Montana Nevada New

Mexico Utah Wyoming

Local Tax Revenue as % of Local Own Source Revenue: Average

63.88% 60.04% 49.58% 57.32% 53.72% 61.42% 60.00% 47.97%

Local Tax Revenue as % of Local Direct Expenditures: Average

30.76% 36.86% 28.24% 32.43% 29.08% 24.28% 29.72% 29.10%

Local Own Source Revenue as % of Local Direct Expenditures: Average

48.16% 61.38% 56.97% 56.58% 54.15% 39.53% 49.53% 60.59%

The table below illustrates the sufficiency of combined state and local tax revenue. As a share of combined state and local own source revenue, Arizona’s combined tax revenue averaged 72.50%, followed by Idaho at 69.36%. Utah’s bracket and single rate systems were on the lower end, with 62.57% and 62.31%, respectively. As a financing source for combined direct expenditures, Nevada’s combined tax revenue was the most sufficient, averaging 49.62% of combined direct expenditures. Nevada’s combined own source revenue averaged 72.54% of combined direct expenditures.


Table 3-29: Combined State and Local Tax Revenue


Utah Bracket

Utah Single Rate

Wyoming

Combined Tax Revenue as % of Combined Own Source Revenue: Average

72.50% 64.40% 69.36% 61.53% 68.38% 62.66% 62.57% 62.31% 59.92%

Combined Tax Revenue as % of Combined Direct Expenditures: Average

46.62% 45.13% 46.77% 40.63% 49.62% 39.75% 41.44% 40.97% 43.42%

Combined Own Source Revenue as % of Combined Direct Expenditures: Average

64.31% 70.00% 68.19% 66.05% 72.54% 63.44% 66.20% 65.72% 72.41%

Balance Finally, we compare the degree to which the Intermountain Western states achieve balance between the sales and income taxes at the state level, local sales and property taxes at the local level, and between the income, state and local sales, and property taxes. The table below shows the income and sales tax as a percent of state tax revenue for 2006. Idaho and Utah achieve the greatest balance between the two taxes. Idaho’s income tax represents 38.90% of state revenue, the sales tax, 34.32%. Utah’s single rate system would have been slightly more balanced than the current bracket system. Under the single rate system, the income tax would have been 41% of state tax revenue, and the sales tax 35.06%.


Table 3-30: Income and State Sales Tax Revenue 2006


Mexico Utah (bracket)

Utah (Single Rate)

Wyoming

Income Tax/State Tax Revenue

27.77% 49.97% 38.90% 36.16% 0.00% 21.99% 41.72% 41.00% 0.00%

State Sales Tax/State Tax Revenue

44.31% 24.70% 34.32% 0.00% 51.42% 34.08% 34.64% 35.06% 29.45%

At the local level, New Mexico achieves the greatest balance between the local sales and property taxes. Local sales tax was 40.35% of local tax revenue in 2005, while property taxes represented 55.38%. The property tax makes up the larger share for most of the other states. Montana does not levy a sales tax, so it relies on property taxes as a local tax source, accounting for 95.57% in 2005. Since Idaho has practically no local sales taxes, property taxes represent 94.56% of local tax revenue.

Table 3-31: Property and Local Sales Tax Revenue 2005


Mexico Utah Wyoming

Local Sales Tax/Local Tax Revenue

23.33% 31.36% 0.00% 0.00% 5.69% 40.35% 22.07% 17.60%

Property Tax/Local Tax Revenue

68.97% 59.92% 94.56% 95.57% 63.80% 55.38% 68.79% 76.04%

The following table examines the balance between the income, total sales, and property taxes. Often, analysis of this balance analyzes the share of each tax relative to income, sales and property taxes alone. Since the income and sales taxes finance state government and local sales and property taxes finance local government, we believe that


it is most accurate to assess the balance of the taxes with respect to combined state and local revenue. Idaho achieves the greatest balance, followed by Colorado and Utah’s bracket system.

Table 3-32: Income, State and Local Sales, Property Tax Revenue 2005


Mexico Utah (Bracket)

Utah (Single Rate)

Wyoming

Income Tax*

15.54% 24.05% 24.88% 26.20% 0.00% 17.89% 26.38% 25.43% 0.00%

Total Sales Tax*

38.3% 28.00% 26.98% 0.00% 26.56% 35.51% 29.87% 30.26% 25.53%

Property Tax*

27.96% 31.51% 27.59% 36.63% 25.66% 14.22% 24.54% 24.86% 33.34%

*Percent Of Total State and Local Revenue Conclusion No one state performs the best under every policy principle. The tables below summarize the top performers, in order, for each principle evaluated. Utah Single Rate income tax system is one of the top performers with respect to the principles of simplicity, neutrality, stability, sufficiency, and balance. Colorado’s income tax system also ranks in the top performers for simplicity, neutrality, stability, and sufficiency. Arizona and New Mexico’s income tax systems are most competitive on a per capita basis, but only New Mexico is included as a top performer with regard to simplicity and stability. Utah also performs well with regard to the neutrality of the sales and property taxes, sufficiency of the state sales tax, and balance between the income and state sales taxes and all three taxes combined. Colorado decentralized sales tax system results in it being a top performer with respect to the sufficiency of property tax revenue, local sales tax revenue, and local tax revenue. Idaho is consistently one of the top performers with respect to the sales and property taxes evaluated under the principles of simplicity, transparency, neutrality, and competitiveness. Idaho also performs well with respect to the sufficiency of the property tax and state and local combined revenue. Idaho also does well in achieving balance between the income and state sales tax and all three taxes combined.


Table 3-33: Summary of Top Performers Income Tax Sales Tax Property Tax Simplicity UT 08, NM, CO ID ID Transparency All (MT, ID, UT

08) None (ID best) All

Neutrality UT 08, CO, MT ID, UT, NM (tax base)

ID, UT

Stability NM, CO, UT 08 CO, UT N/A Competitiveness AZ, NM ID (combined), CO

(state) ID, WY, CO

Table 3-34: Summary of Top Performers Sufficiency

Income Tax CO, UT 06, UT 08 State Sales Tax NV, UT Local Sales Tax NM, CO Property Tax CO, AZ, ID, State Tax Revenue NV, ID, AZ Local Tax Revenue CO, AZ, MT State and Local Combined Tax Revenue AZ, ID, NV

Table 3-35: Summary of Top Performers Balance

Income and State Sales Tax ID, UT 08 Local Sales and Property Tax NM Income, State and Local Sales, and Property Taxes Combined

ID, UT 06, CO


The table below shows the combined income, state and local general sales tax, and property tax revenue generated by each state in 2005. Arizona and Colorado are the most populous states in the study. It is, therefore, no surprise that those states collect the most in combined taxes. Nevada and Wyoming do not tax income, and derive significant revenue from other sources, such as gambling in Nevada and natural resources in Wyoming.

Table 3-36: Combined Income, State and Local General Sales and Property Taxes

Actual 2005

Combined Taxes ($MM) Arizona $14,626.787 Colorado $13,102.108 Idaho $ 3,322.838 Montana $ 1,529.951 Nevada $ 4,574.027 New Mexico $ 4,063.660 Utah (2006 system) $ 5,900.968 Utah (2008 system) $ 5,808.091 Wyoming $ 1,392.142

While we have evaluated tax policies of the eight Intermountain Western states with respect to simplicity, transparency, neutrality, stability, sufficiency, balance and competitiveness, we have not yet evaluated the different tax systems with respect to equity. Chapter Four is an analysis of tax incidence of the income, combined state and local general sales, and property tax systems of each of the states in the study. Chapter Five concludes with an analysis of the impact of different characteristics of the tax systems on each of the policy principles.


C h a p t e r 4

T a x I n c i d e n c e A n a l y s i s Introduction: The Tax Incidence Study separates the impact of demographics on tax incidence from tax policies. While Chapters 1 through 3 examined actual tax revenue data for each state in order to evaluate the tax systems with respect to the policy principles used as criteria, this chapter isolates tax policies through the use of consistent household profiles and income levels across all states. We are, in essence, overlaying different tax policies onto the same household profiles and evaluating how the different tax policies would impact these household profiles with respect to the principle of tax equity. What constitutes tax equity can be hotly debated. In this study, we will examine effective tax rates, the share of taxes paid (or collected), the ratio of the share of taxes paid to the share of adjusted gross income, and the Suits and Kakwani Indices in order to determine relative degrees of progressiveness, proportionality, or regressivity of the different tax systems. These results also measure tax equity for households with the same income, but with different marital status and family size. The study analyzes the income tax, combined sales tax and property tax systems separately and the three taxes combined. The first part of the chapter is a discussion of methodology and assumptions essential to an accurate understanding and interpretation of the results. The second section summarizes the results of the tax incidence study, with an in depth analysis of Utah first, followed by a comparison of the tax systems of the Intermountain Western states.


MM ee tt hh oo dd oo ll oo gg yy

Overview: The Tax Incidence Study estimates taxes paid by a variety of representative taxpayers in eight Western states: Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming. The taxes addressed are the income tax, the sales tax, and the property tax. Different approaches are possible in designing a tax incidence study. It is ideal to have actual data, such as income tax returns, that also include information on household characteristics. However, detailed income tax return data cannot be obtained from other states; data that gives sales taxes paid by different household type and income groups is not collected; and property tax data does not include any information on household characteristics. For a multi-state comparison, it is not feasible to use actual data. For comparing tax incidence of different states, it is common to select a handful of typical households, or case studies, for which taxes can reasonably be estimated. For example, the Washington DC comparative tax burden study1 evaluates the tax burden of a hypothetical household consisting of a married couple and two children at five different income levels, ranging from $25,000 to $150,000. Income, sales, property, and automobile taxes are estimated, assuming this household lives in the largest city of each of the fifty states. Another example of this approach is the Vermont Tax Study, which estimates the tax burden of 24 representative taxpayers in 12 different states.2 This study addresses the federal and state income taxes, sales and use tax, and other taxes, such as gasoline, restaurant, and motor vehicle taxes. A tax incidence study using representative households is insightful to the extent that households are representative of actual taxpayers in the real world. Such a study can succinctly focus attention on a handful of “typical” taxpayers. An advantage of this type of study is the ability to compare the tax burdens of a standard set of household profiles as if they were transplanted to other states in order to isolate tax policy differences. The tax policies of each state are demonstrated by the way they affect taxes owed by this

1 Office of Revenue Analysis. District of Columbia. “Tax Rates and Tax Burdens in the District of Columbia – A Nationwide Comparison: 2005.” August 2006. Online at http://cfo.dc.gov/cfo/cwp/view,a,1324,q,612643.asp. 2 Legislative Joint Fiscal Office. Vermont. “Vermont Tax Study: Volume II - Case Studies.” October 5, 2007. Online at http://www.leg.state.vt.us/reports/tax/tax.htm.


unchanged set of household types. Tax incidence is comparable because it pertains to the same taxpayers. This is an important advantage to the case study approach that results precisely because households are not representative of the particular demographics or household behavior of each state. This tradeoff focuses more clearly on tax policy itself. Based on income and household type, 154 representative households were strategically selected for this study to reflect a broad cross section of the population in Utah (see Table 4-1). Eleven income levels were chosen to approximate income at each decile point from ten to ninety, plus the 95th and 98th percentiles. These were estimated from the American Community Survey, an annual component of the regular Census Bureau data collection.3 As for household type, fourteen combinations of marital status and family size were chosen.

Table 4-1: Characteristics of Household Profiles Included in Study Percent of Utah Households in Each *

Income (thousands) Household Type Children $16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

<Percentile> 10th 20th 30th 40th 50th 60th 70th 80th 90th 95th 98th --- 21.1%

one 9.2% two 10.4%

three 6.9% four 3.9% five 1.5%

Married

six 0.6% --- 34.0%

one 6.1% two 3.5%

three 1.7% four 0.6% five 0.2%

Single

six 0.1% * Source: Detailed 2005 Utah Tax Return Data. Family size is figured from filing status and number of exemptions. Returns that do not claim any exemptions are omitted from the tally, because these filers are probably included on another household’s return. Note: Values add to 99.8% since families with more than six children are omitted. Taxpayers are assumed to be younger than 65. In terms of age, our study represents the 87% of the adult population in Utah that is under 65 and their children.4 Further research

3 “Table B190001: Household Income in the Past 12 Months” for Utah only, 2006 American Community Survey. The income value at the percentile of interest was estimated by locating the income range into which the given percentile falls. Then, assuming a straight-line distribution within the group, an income amount is calculated in between the low and high boundaries of that income range. 4 “Table B01001: Sex by Age…Total Population” for Utah only, 2006 American Community Survey.


into the tax burden of elderly, considering their different income sources, expenditure patterns, and special tax treatment would likely be revealing. Data Sources and Methods Several conventions are used throughout the study to produce meaningful estimates from a large amount of data from various sources. Whether the item is sales tax rates, itemized deduction amounts, or home values, the study seeks the median value to discover what the household furthest from the high or low extremes would do. The median is the middle observation; if one sorted 100 households by income, lowest to highest, the income of the 50th one would be the median. The average may be much higher than the median if there are very high incomes at the top. The median gives equal weight to each person. When averages are used in the study, they are carefully weighted by population to approximate the median. All amounts used in the study are given in 2008 dollars, and tax estimates are for the entire year of 2008. However, the most recent releases of the data sources that inform the study are generally from 2005 or 2006. Those values are then inflated to 2008 dollars based on the change in the Consumer Price Index (CPI). Historical values of the CPI index are only available up to the present, so we rely on forecasted values for the rest of 2007 and 2008. These forecasted CPI values suggest average annual inflation will be 2.3% for 2007 and 1.7% for 2008. We use actual and forecasted CPI numbers to adjust the income points shown in Table 4-1 from their 2006 source to 2008 dollars. Another example of where adjustments are made for inflation is in the income tax amounts of the standard deduction, personal exemption, and tax brackets, when these are prescribed by law to adjust for inflation each year. Data sources are used extensively to form estimates of the characteristics and behavior of households representative of Utahans, and then to see how other states’ tax policies would affect taxpayers so defined. Amounts for income, itemized deductions, and federal income tax are based on Utah data, as well as the data that suggests whether a given household in our profile is more likely to own a home or to rent, to choose the standard deduction or to itemize. Two important pieces of information—median home values for purposes of property taxes and taxable expenditures for estimating the sales tax—cannot be estimated for Utah alone because there were not enough observations. The alternative is to use regional or nationwide data. Table 4-2 describes data sources.


Table 4-2: Data Sources* Used to Estimate Household Characteristics by Geographic Area the Data Represents

Characteristic Utah Eight Western States

United States

Income 2006 ACS

Itemized Deductions 2005 UT Income Tax Returns

Federal Income Tax 2005 UT Income Tax Returns

Renter or Homeowner 2005 ACS**

Home Values 2006 ACS, detailed data

Home Price Index 2007.2 OFHEO HPI

Expenditures (sales tax) CES 2006, detailed data

Inflation CPI

*Note: Data source abbreviations are explained under “Description of Data Sources” below. **The renter or homeowner determination was made in the early phases of study design, when only 2005 ACS results were available. The 2006 release arrived September 2007.

In the case of home values, data from all eight Western states in the study is used. Based on separate analysis of median home values by state for all household types together, Utah homeowners live in houses worth substantially less than homeowners with similar incomes in Nevada and Arizona. On the other hand Utah homes are worth more than those in Idaho, Montana, and Wyoming (see Table: Median Home Value). For expenditures, data from the entire U.S. is needed to get reliable results. The data shows how much households spend in 760 categories. We assume that once we adjust these results to Utah income amounts, that the amount of sales taxable expenditures of Utahans will be similar to those in other states. This assumption will be reliable if, for example, Utahans spend the same amount of their income on food, health care, or car repairs as do residents of other states. Using data from the entire U.S. is necessary, since not enough data was

Table 4-3: Median Home Value for Homeowners in Eight Western States,

2005 State Value Percent above

or below UtahNevada $264,000 65% above Colorado $199,000 24% above Arizona $166,000 4% above Utah $160,000 Idaho $141,000 12% below Montana $139,000 13% below Wyoming $134,000 15% below New Mexico $132,000 18% below Source: Authors’ analysis of Table B25121: Household Income by Home Value, 2005 American Community Survey (ACS). Home values represent home owners with median income, approximately $48,000 in 2005 based on ACS Table B19001. Values in 2005 dollars, this table only.


collected from each state to allow reasonable estimates by state. We do not have a direct way of estimating how Utah compares to the national average in terms of the composition of expenditures. Description of data sources and their use in this study:

• ACS – annual American Community Survey, U.S. Department of Commerce, Bureau of the Census, http://www.census.gov/acs/www/

o Household income points o Home Values and Rent Amount

• CES – annual Consumer Expenditure Survey, U.S. Department of Labor, Bureau of Labor Statistics, http://www.bls.gov/cex/home.htm

o Taxable expenditures as a percent of income • OFHEO HPI – quarterly House Price Index, U.S. Department of Housing and

Urban Development, Office of Federal Housing Enterprise Oversight, http://www.ofheo.gov/hpi.aspx

o To revise 2006 ACS home values to 2008 values (HPI forecast to 2008.4) • UT income tax returns – tax return dataset from the Utah Tax Commission,

merged with federal income tax returns in groups of three by the Governor’s Office of Budget and Planning, not publicly available

o Household profile prevalence o Itemized deduction information for state income tax o Federal Alternative Minimum Tax

• 2006 Census – Population Estimates for Subcounty Areas, U.S. Department of Commerce, Bureau of the Census, http://www.census.gov/popest/cities/SUB-EST2006-states.html

o Population weights for population weighted sales tax rates • CPI – Consumer Price Index, used throughout study to adjust dollar values for

inflation from 2005 or 2006 to 2008 o for past values: Annual Average CPI, All Urban Consumers (Current

Series), All Items, U.S. Department of Labor, Bureau of Labor Statistics. o for forecasted future values: CPI estimate, June 2007- Actual and

Estimated Economic Indicators: Utah and the U.S., Office of the Legislative Fiscal Analyst, prepared for the Revenue Assumptions Committee

Income: Income tax amounts are estimated for each state for the tax year 2008, referring to taxes to be filed in 2009 for the previous year. The calculations rely on a simple Excel model programmed to generate estimates for each representative taxpayer that incorporate the basic features of each state’s income tax system. The estimations omit items of the income tax that require special assumptions about the taxpayer. We include deductions, exemptions, and credits that can be reliably calculated based on the amount of income, filing status, and number of dependents. An example of each of these calculations is given at the end of this section.


Here we note a potential inconsistency in the definition of “household” amongst our different sources: ACS, CES, Census, and Utah income tax return data. The most apparent inconsistency is that while the ACS and CES responses include all children who live in a household, for purposes of income tax there are more restrictions on who can be considered part of the household (i.e. counted as an exemption). For example, a tax filer must pay more than half of the expenses of a child to count that child as an exemption. We assume that Federal Adjusted Gross Income amounts, the starting point for the state income calculations, are the same as the household income levels that define our representative taxpayers, based on ACS data. See page _ for the definition of FAGI. One important difference between ACS household income and FAGI is that the former includes all welfare income (social security, unemployment, food stamps, etc.), while the latter only includes the taxable portion of these. Thus, in our tax calculations, FAGI is somewhat overstated, especially for low income taxpayers that tend to receive more welfare-type benefits. Another issue is that FAGI clearly includes capital gains, while the ACS only reports some income from trusts and estates. We do not specifically consider households that use the filing status “married filing separately” on their income tax return, since only 1.5% of 2005 state income tax filers chose that status in Utah. All single parents in this study file as “head of household.” For itemized deductions, we use estimates from 2005 Utah state income tax returns. One estimate is for total itemized deductions. Another is for itemized deductions with state and local taxes subtracted out, since several states require that. To decide whether or not each household profile uses the itemized or standard deduction, the majority choice of 2005 Utah tax filers is followed. Depending on household type, most households with incomes of $44,000 and higher itemize (see Table 4-4).

Table 4-4: Standard or Itemized Deduction for all Household Profiles I = itemized deduction, S = standard deduction

Income (thousands) Household Type Children $16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

--- S S S S S I I I I I I One S S S S I I I I I I I Two S S S I I I I I I I I

Three S S S I I I I I I I I Four S S S I I I I I I I I five S S S I I I I I I I I

Married

six S S S I I I I I I I I --- S S S I I I I I I I I

one S S S I I I I I I I I two S S S I I I I I I I I

three S S S S I I I I I I I four S S S S I I I I I I I five S S S S I I I I I I I

Single

six S S S S I I I I I I I * Source: 2005 Utah state income tax returns. Itemize if the over 50% of filers itemize for a given household profile.


For estimating state income tax, the special exemptions for the blind, veterans, elderly, and disabled are excluded. This decision rests on the assumption that taxpayers in this study are under 65 years old and that we are targeting “median” or typical circumstances. Additions and subtractions to FAGI to yield the starting point for finding state taxable income are made for all households based on aggregate values. Unfortunately, most states were not able to provide estimates of the difference between state taxable income and FAGI for different income levels, filing statuses, or family sizes. This data limitation results in the use of average amounts of additions and subtractions to FAGI for all income levels. In reality, some adjustments are more prevalent among high-income taxpayers (e.g. capital gains from within the state). The FAGI to state taxable income adjustment used in this study is implemented as a percentage of income, so it is proportional to income, but it still does not capture differences in adjustments that are disproportional to income. Description of Income Tax Calculation for Each State: The following tables demonstrate how income taxes are calculated for each state. The example chosen for the illustration is of a married couple with two children with the filing status Married Filing Jointly with median Utah income of $54,000. The following amounts are estimated from Utah tax returns, even though they cannot be determined based on income and family size alone: itemized deductions, the Alternative Minimum Tax for Colorado, and one half of the federal tax for Utah. The choice of standard or itemized deduction is based on what the majority of similar 2005 tax filers did. Tax filers are considered to be similar if they are of the same household type and income range as the representative taxpayers of this study. Finally, aggregate data—not available by household type or income, but the same for all our filers—is used to make the adjustment from Federal Adjusted Gross Income (FAGI) to the state income amount used as a basis for calculating taxes. To avoid ad hoc assumptions, other elements of state income tax policy that cannot be determined based on income and family size are omitted. Recall that Nevada and Wyoming have no income tax. Also, note that 2008 income taxes are calculated for Utah based on the graduated bracket system last used in 2006; a separate calculation is done for the single rate system that will take effect in 2008. In all state income tax calculations, amounts that are required by statute to be adjusted for inflation are updated to their expected 2008 values, based on actual and forecasted inflation as measured by the CPI, or in some cases the local CPI.

Table 4-5: Net Subtraction from FAGI

to reach starting point of state income tax calculation

Arizona 2.69% Colorado 2.96% Idaho 6.52% Montana 2.42% New Mexico 6.65% Utah bracket 0.76% Utah single rate 0.51%


Table 4-6: Arizona Income Tax Calculation, 2008

Married Filing Jointly Taxpayer, Two Dependents, Median Income

Federal Adjusted Gross Income (AGI) $54,000 Arizona Adjusted Gross Income (Federal AGI times 97.3077%, based on aggregate tax return data)

$52,546

Minus: Itemized Deduction ($17,430) Personal Exemption (for married with children) ($6,300) Arizona Taxable Income (Arizona AGI minus Deduction and Exemption)

$28,816

Arizona Tax (for income bracket “$50,000 to $100,000”) $772 Family Income Tax Credit Received (limited to households with income less than $23,600)

$0

Arizona Taxes Due (Arizona Tax minus Family Tax Credit) $772

Table 4-7: Colorado Income Tax Calculation, 2008 Married Filing Jointly Taxpayer, Two Dependents, Median Income

Federal Adjusted Gross Income (AGI) $54,000 Minus: Itemized Deduction ($17,430) Personal Exemption ($3,500 times 4) ($14,000) Federal Taxable Income (Federal AGI minus Deduction and Exemption)

$22,570

Colorado Taxable Income (Federal Taxable Income times 97.0422%, based on aggregate tax return data)

$21,903

Colorado Tax (4.63% single rate, tax tables for taxable incomes $21,900 to $21,999)

$1,016

Colorado Alternative Minimum Tax $0 Colorado State Income Taxes Due $1,016 Numbers do not match exactly due to rounding to the nearest dollar in this presentation.

Table 4-8: Idaho Income Tax Calculation, 2008 Married Filing Jointly Taxpayer, Two Dependents, Median Income

Federal Adjusted Gross Income (AGI) $54,000 Idaho Total Adjusted Income (Federal AGI times 93.4816%, based on aggregate tax return data)

$50,480

Minus: Itemized Deduction ($17,050) Personal Exemption ($3,500 times 4) ($14,000) Idaho State Taxable Income (Federal AGI minus Deduction and Exemption)

$19,430

State Income Taxes Due (for income bracket “$19,004 to $50,674”) $1,000


Table 4-9: Montana Income Tax Calculation, 2008 Married Filing Jointly Taxpayer, Two Dependents, Median Income

Federal Adjusted Gross Income (AGI) $54,000 Montana Adjusted Gross Income (Federal AGI times 97.5846%, based on aggregate tax return data)

$52,696

Minus: Itemized Deduction (includes Montana’s Child and Dependent Care Expense Deduction of $3,600)

($20,650)

Personal Exemption ($2,060 times 4) ($8,240) Montana State Taxable Income (Federal AGI minus Deduction and Exemption)

$23,805

State Income Taxes Due (for income bracket “$15,100 and over”) $1,159 Numbers do not match exactly due to rounding to the nearest dollar in this presentation.

Table 4-10: New Mexico Income Tax Calculation, 2008 Married Filing Jointly Taxpayer, Two Dependents, Median Income

Federal Adjusted Gross Income (AGI) $54,000 Montana Adjusted Gross Income (Federal AGI times 93.3496%, based on aggregate tax return data)

$50,409

Minus: Itemized Deduction ($17,430) Personal Exemption ($3,500 times 4) ($14,000) New Mexico Low and Middle Income Tax Exemption ($7,600) New Mexico State Taxable Income (Federal AGI minus the three items above)

$11,379

New Mexico Tax (for income bracket “$24,000 and over”) $243 Low Income Comprehensive Tax Rebate (limited to households with income less than $22,000)

$0

State Income Taxes Due (for income bracket “$24,000 and over”) $243 Numbers do not match exactly due to rounding to the nearest dollar in this presentation.

Table 4-11: Utah Graduated Bracket Income Tax Calculation, 2008

Married Filing Jointly Taxpayer, Two Dependents, Median Income

Federal Adjusted Gross Income (AGI) $54,000 Utah Total Adjusted Income (Federal AGI times 99.2354%, based on aggregate tax return data)

$53,587

Minus: Itemized Deduction ($17,050) Personal Exemption ($2,625 times 4) ($10,500) One Half of Federal Income Tax ($575) Utah State Taxable Income (Federal AGI minus the three items above)

$25,462

State Income Taxes Due (For income bracket “over $11,000”)

$1,489

This tax scenario is based on Utah’s 2006 state income tax policy, except that 2008 values of the standard deduction and personal exemption are used for comparability to other calculations in this study.


Table 4-12: Utah Single Rate Income Tax Calculation, 2008 Married Filing Jointly Taxpayer, Two Dependents, Median Income

Federal Adjusted Gross Income (AGI) $54,000 Utah State Taxable Income (Federal AGI times 99.4875%, based on aggregate tax return data)

$53,723

5% Flat Tax Before Credits $2,686 Itemized Deduction $17,050 Personal Exemption ($2,625 times 4) $10,500 Initial Credit (6% of Deduction plus Exemption) $1,653 Credit Phaseout Beginning Point $24,000 Income in Phaseout Range (Taxable Income minus Beginning Point) $29,723 Credit Phaseout Reduction (1.3% of income in Phaseout Range) $386 Credit with Phaseout Reduction (Initial Credit minus Reduction) $1,267 State Income Taxes Due (Flat Tax minus Credit) $1,420 This tax scenario is based on Utah’s post-reform single rate state income tax policy. Numbers do not add up exactly due to rounding to the nearest dollar in this presentation.

Sales: Sales tax estimates are commonly made using Consumer Expenditure Survey (CES) data to estimate the tax base, or the amount of expenditures that are sales taxable. Beyond simply creating estimates from published CES tables, the statistical program prepared for this study provides specific estimates of taxable expenditures by household type and income. As stated previously, not enough people from Utah were surveyed to allow us to get taxable expenditure estimates for Utah alone, so the nationwide results are used. For this study information is collected on what items are sales taxable from a variety of published materials, including state statute, and from personal contact with many state and local tax officials. Based on this research, we record for seven states (Montana has no sales tax) whether each of 760 expenditure items reported in the CES is sales taxable. In some cases it is assumed that 50 or 75 percent of expenditures of a particular type are taxable. The reason is that for several states—Colorado, Idaho, Montana, and Utah—materials are sales taxable, but labor is not. We make assumptions about the labor versus materials content of repair expenditures if it seems clear that an expenditure item includes a substantial share of both. A few examples of this are repairs to appliances, jewelry, computers, and cars. Several other differences in the tax base exist. Only Utah and Idaho collect any tax from unprepared food: Utah at a special low rate and Idaho at the regular retail rate. Arizona and New Mexico tax basically all services, including professional services, child care services, and labor for the improvement of real property. New Mexico collects tax on the sale of real estate and on out-of-pocket medical expenses, not including insurance premiums. Arizona, New Mexico, and Wyoming charge taxes on consumers’ utility bill at the regular tax rate. Utah applies a special lower rate for gas, electricity, and fuels, though not for telephone service. Idaho taxes certain utilities and not others. Colorado and Nevada do not tax utilities.


The common category in the sales tax bases of these states are generally all tangible personal property. No state taxes prescription drugs. All states tax lodging, short-term rental or leases, restaurant purchases, tobacco, and alcohol, often with an additional excise tax rate besides the sales tax assessment, in which case only the sales tax portion is considered. Using detailed 2005 CES datasets provided for this study by the University of Utah library, the expenditures that are taxable in each state are totaled for each of six household types, and for each of 11 income points. There are only six household types instead of the usual 14 because there are not enough observations to get reliable estimates for families with several children. Thus all married households with three or more children are grouped together. Also, there is just one estimate for all single households with children. The percentage of income spent on sales taxable items is calculated by dividing pre-tax taxable expenditures by income before taxes for each household type and income level. These percentages range widely from about 10% to a little over 100%.5 It is also found that the taxable portion of expenditures ranges from 26% to 47%. The percentages for each household type of income spent on sales taxable items are multiplied by the eleven income levels to produce an estimate of 2008 taxable expenditures. It is assumed that CES income is measured similarly to ACS income, by which the income levels were selected.6 Similar taxes on purchases are not included, namely the use tax and the excise tax. In adding up taxable expenditures, we omit items from the CES that are excise taxable, but not sales taxable, such as gasoline. Items for which both taxes apply—such as lodging, alcohol, and tobacco—are included, but only the sales tax portion of the total tax is considered.

5 The cases where taxable expenditures approach or exceed 100% primarily large families with low incomes ($16,000 or $26,000) that clearly spending more money than the amount they report as income. Besides only a portion of total spending is taxable, generally less than half. 6 For the definition of income in the Consumer Expenditure Survey, see Bureau of Labor Statistics. Consumer Expenditure Survey. “Glossary” Online at http://www.bls.gov/cex/csxgloss.htm. Accessed November 1, 2007. For the definition of income in the American Community Survey, see Webster, Bruce H., Jr. “Evaluation of Median Income and Earnings Estimates: A Comparison of the American Community Survey and the Current Population Survey.” U.S. Census Bureau. Online at http://www.census.gov/acs/www/AdvMeth/Papers/Papers1.htm. Accessed November 1, 2007. Note differences in the inclusion of capital gains income between the CES and ACS.


The next task is to estimate the tax rate. We obtain all cumulative sales tax rates for each city or rural area. In most states these rates include city, county, and state components. There are also occasionally special sales tax districts for designated purposes, such as transportation or to build facilities. We obtain a representative tax rate for the entire state by taking a population weighted average of all the local rates (see Table 4-13). More specifically, each local tax rate is weighted by the percent of the state’s population that lives in that locality. This means that the tax rates of rural areas with low populations do not much affect our representative rate, while tax rates in large cities weigh more heavily. The analysis assumes that current sales tax rates and policies as of mid 2007 persist until 2008, except Utah's changes in the sales tax on food and in the general state rate from 4.75 to 4.65. We did not find any other announced policies that would take effect between mid 2007 and 2008. Expenditures in the CES include the sales taxes in the amounts given; they are after-tax expenditures reported by consumers throughout the U.S. To obtain before-tax expenditures (taxable sales), one would use the adjustment: expenditure amount / (1 + tax rate) = taxable sales. This is not done because the tax rate is not known. The expenditures reported in the CES were made in cities throughout the U.S., at widely varying sales tax rates, sometimes equal to zero in areas where certain items are exempt. And reported after-tax expenditures would include excise taxes where applicable. We use the original expenditure amounts from the survey, even though they are after-tax amounts because ascertaining the amount of the tax is not possible. Thus the expenditure amounts are somewhat overstated, perhaps by four to six percent, if the average tax rate of survey expenditures happens to lie within that range. Based on that four to six percent assumption, and considering that representative sales tax rates vary from 5.4% to 7.8%, the likely impact on sales tax estimates of not taking taxes out of CES expenditures would be between 2.2% and 4.7%. The sales taxable expenditures shown in the tables below are based on the nationwide average. The amounts differ substantially for each state because what is sales taxable varies from state to state.

Table 4-13 Representative Sales Tax Rates

Arizona 7.79%Colorado 6.70%Idaho 6.09%Montana 0.00%Nevada 7.56%New Mexico 6.71%Utah - retail 6.61% - food 3.00% - utilities 3.76%Wyoming 5.39%


Table 4-14: Sales Taxable Expenditures for All Families by State for Incomes $16,000 to $64,000

$16,000 $26,000 $35,000 $44,000 $54,000 $64,000 Arizona $8,300 $11,521 $13,562 $15,576 $18,000 $20,530 Colorado $6,132 $8,953 $10,789 $12,593 $14,746 $16,988 Idaho $7,817 $10,895 $12,719 $14,715 $17,208 $19,820 Montana $0 $0 $0 $0 $0 $0 Nevada $5,500 $8,178 $9,900 $11,609 $13,675 $15,848 New Mexico $8,212 $10,173 $12,349 $13,982 $15,720 $17,538 Utah $9,791 $13,256 $15,282 $17,483 $20,186 $22,971 Wyoming $7,828 $11,024 $12,973 $14,967 $17,321 $19,710 As noted in this chapter, estimates were obtained for six different household types. Only the results for all families are shown in Tables _ A and B to conserve space.

Table 4-15: Sales Taxable Expenditures for All Families by State for Incomes $77,000 to $212,000

$77,000 $96,000 $126,000 $157,000 $212,000 Arizona $23,170 $26,998 $34,590 $39,951 $45,981 Colorado $19,164 $21,955 $28,423 $32,762 $37,309 Idaho $22,368 $25,337 $32,433 $36,901 $41,563 Montana $0 $0 $0 $0 $0 Nevada $17,972 $20,583 $26,888 $31,119 $35,586 New Mexico $20,371 $23,960 $29,804 $34,990 $40,847 Utah $25,774 $29,239 $36,784 $41,536 $46,708 Wyoming $22,182 $25,391 $32,378 $37,117 $42,190

Property: The amount of property taxes paid by our representative households depends on the value of the homes they own, the tax base, and the property tax rates in each state. Those estimates are provided in tables below. A description of how the estimates were obtained follows. Estimating 2008 Home Values and Annual Rent: Home values are chosen as the estimated median home value of people living in the eight Western states with matching characteristics of income and household type. For this study, median home values do not vary from state to state. Using the same home values for all states highlights tax policy differences. This primary goal is achieved by necessarily sacrificing the ability to demonstrating living expense differences between states. In terms of the cost of homes, those differences are significant. For example, a home in Nevada tends to cost much more than a similar home in Montana (see Table 4-15 above).


Using detailed 2006 ACS datasets7, the number of households is found within each of 24 home value ranges, in each of 15 income ranges, for each of 7 household types.8 There are unique estimates for only 7 household types instead of the regular 14 since, owing to the scarcity of observations of households with several children, we were required to group all married households with three to six children, as well as all single-parent households with two to six children.9 We first estimate the median home value for each income range, assuming a perfect, straight-line distribution of home values from the bottom to the top of each range. Once we have the median home value corresponding to each income range, we estimate the median home value at each income point by a straight-line adjustment between the median home values for the two income range midpoints between which a given income point falls. This process is repeated by formula for each household type. Of course not everyone is a homeowner. The determination of which of the representative households rent and which are homeowners is made on the basis of what the majority of Utahans with the same income choose. Based on ACS 2005, most households with incomes equal to $16,000 rent, while most with higher incomes are homeowners.10 The method used to estimate annual rent for taxpayers with an income of $16,000 is similar to that employed to get median home values. The data source is the same. Fortunately, the exact dollar amount of rent is available (in contrast the 24 home value ranges), allowing a simple computation of the median rent for each income group and household type. Then the same straight-line adjustment technique is used to get a rent value that corresponds to the income point of interest. ACS-derived median home values are inflated from the 2006 values estimated from the data to 2008 values based on the average change in home prices estimated in the Office of Federal Housing Oversight’s House Price Index (OFHEO HPI).11 This data source includes all conventional mortgages purchased or securitized by Freddie Mac or Fannie Mae. OFHEO HPI estimates of home value growth tend to be conservative since the dataset is limited to single unit residential houses that have mortgage values below the maximum allowed, which for 2007 is $417,000. The OFHEO HPI calculates the average change in home prices based on the change in sale price of homes that were purchased 7 Public Use Microdata Samples (PUMS) from the American Community Survey 8 ACS 2006 data does not report exact home values, but identifies home value as belonging to one of 24 ranges of dollar values: starting with “less than $10,000” and increasing to “$1,000,000 or more.” For this study, 15 income ranges were created from “less than $10,000” to “$280,000 or more” from the household income variable, HINCP. This allowed a consistent estimation procedure, described in this section, of making straight-line adjustments based on the number of observation in each range of home value or income. 9 This is necessary even though we broaden out to include all observations from the eight Western states in the study. An estimate for Utah alone is preferred, but even fewer household types could be estimated, inhibiting the ability to perform horizontal tax incidence analysis. 10 U.S. Census Bureau. “Table B25118: Tenure by Household Income in the Past 12 Months.” 200X American Consumer Survey. Online at http://factfinder.census.gov. 11 The OFHEO HPI is the data source written into Idaho statute as the measure for indexing for growth the property tax exemption for residential properties.


more than once. Data is available for each state through the second quarter of 2007 with forecasted values through the fourth quarter of 2008. Forecasted values are based on average linear growth in the previous ten years or forty quarters. The population-weighted average is found of the home value indices for the eight states included in this study. We find that home values can be expected to increase by an average of 12.062% from 2006 to 2008. We also adjust our 2006 rent estimates to 2008 dollars using the same OFHEO HPI estimates, since rent amounts are known to follow home values.12 The data sources and methods described produce home value estimates for each representative household for 2008. That amount is considered to be market value for purposes of calculating the income tax.

Table 4-16: Median Annual Gross Rent

$16,000 Income Married, no children $8,472Married, 1 child $8,512Married, 2 children $8,808Married, 3-6 children $10,139Single, no children $7,719Single Parent, 1 child $9,211Single Parent, 2-6 children $9,588All Families $8,216

Table 4-17: Median Home Value by Household Type for Incomes $26,000 to $64,000

$26,000 $35,000 $44,000 $54,000 $64,000 Married, no children $178,551 $193,498 $206,963 $222,445 $238,682Married, 1 child $149,761 $176,023 $193,594 $213,074 $232,110Married, 2 children $154,410 $193,334 $198,589 $222,575 $245,883Married, 3-6 children $170,504 $172,215 $202,181 $226,069 $247,218Single, no children $166,398 $191,881 $210,757 $226,810 $244,079Single Parent, 1 child $142,939 $182,772 $208,617 $226,345 $243,354Single Parent, 2-6 children $158,569 $196,217 $196,912 $224,154 $248,560All Families $167,960 $189,308 $205,336 $223,228 $241,197

12 Other important variables affecting rent amounts are interest rates and property taxes, among other macroeconomic variables. For the moment the role of these variables is set aside, as the adjustment only considers changes in house prices.


Table 4-18: Median Home Value by Household Type for

Incomes $77,000 to $212,000 $77,000 $96,000 $126,000 $157,000 $212,000 Married, no children $260,618 $290,582 $351,007 $408,550 $517,636Married, 1 child $256,233 $292,773 $367,847 $423,242 $533,403Married, 2 children $271,907 $321,769 $389,303 $442,563 $586,971Married, 3-6 children $272,963 $330,607 $426,853 $476,122 $652,194Single, no children $271,088 $315,869 $358,238 $350,966 $434,557Single Parent, 1 child $265,866 $293,936 $349,485 $424,738 $405,042Single Parent, 2-6 children $273,598 $335,843 $372,426 $451,877 $551,941All Families $264,869 $302,379 $366,680 $419,837 $525,666

Estimating State-Wide Property Tax Rates: A representative property tax rate is obtained for each state by dividing total residential property tax revenue in the state by total taxable (or assessed) value of all residential properties. A possible weakness of this approach is that the tax rates of jurisdictions with higher property values may be represented disproportionately, if there is higher residential real estate value per capita in those areas. The ideal measure of a representative tax rate would be based on the number of households: tax rates in individual jurisdictions weighted by the number of homes in that jurisdiction. The difficulty in funding an average weighted by the number of households or people is that property tax jurisdictions often do not match up with census-defined county and city areas for which population figures are available. Also, property tax jurisdictions often overlap, and specific tax rates are not published by some states, in which case each county or sub-county area must be reached to collect the rates.13 In the case of renters, an assumption is needed of what percent of rent constitutes property tax passed down from the homeowner to the renter. Based on a limited survey of sale prices, assessed values, rent charged, and property taxes levied for different types of rental properties in Utah, we settle upon the assumption that property tax would be about 8% of rent, if it is fully passed on to the renter. Our sense is that this figure is a little on the high side for Utah, although a prominent study has adopted a 20%.14 Also, the amount of property tax paid by renters (not directly, but through their owners) would certainly vary from state to state based on the tax rate. To incorporate this element, 8% of annual gross rent is multiplied by each state’s tax rate of market value divided by the average tax rate of market value. 13 Another possible method of estimating a representative tax rate (one that we did not adopt) is to try to pick a “typical” jurisdiction and go with the actual tax rates of a particular populous place, as the DC tax study does. In that situation, it becomes difficult to justify why a particular local property tax rate was chosen to represent the state. 14 “Tax Rates and Tax Burdens in the District of Columbia – A Nationwide Comparison,” page 5.


Suits and Kakwani Indices: Important measures of vertical equity, the Suits and Kakwani indices are based on the share of total taxes paid by each income level and the share of total income received by each income level. Both measures use the same information, but their different forms of presentation make each of them rich for insight. The main difference is that the Kakwani index explicitly shows the income distribution in its graph. We calculate them for all families combined for the income tax alone and for all three taxes together. In this section, we illustrate each measure for Wyoming, the state found to have the most regressive tax system for income, sales and property taxes combined. The result of the Suits Index analysis is a graph and a single number value.15 In the graph, the red 45-degree diagonal line represents a proportional tax system. The more the blue line bows above the straight 45 degree line, the more regressive the tax system is. On the other hand, a curved blue line that reaches far below the straight line before joining it at the top represents a progressive tax system. The single number value should be interpreted as follows: above zero means progressive; equal to zero means proportional; and below zero mean regressive. The further below zero the more regressive. The lowest the Suits Index value could be is negative one, and the highest it could be is positive one. The graph has two lines. The green “cumulative share of income” line shows the income distribution. The further the line bends below the red diagonal line, the more unequal is the distribution of income. In this study, that line is identical in the Kakwani graphs for all states by design, since we used the same income points to evaluate tax equity in each state. The blue “cumulative share of taxes” line shows how regressive or progressive taxes are compared to income. If that curve is above the green line, the distribution of the tax burden is more regressive than the distribution of income. If the blue cumulative share of taxes curve were right on top of the green cumulative share of income curve, we could conclude that the tax is proportional to income. Finally, a blue tax curve reaching below the green income curve would indicate a tax system that is progressive. The Kakwani Index value is interpreted as progressive if it is a positive number, proportional if it is zero, and regressive if it is negative. In general, the closer to zero, the more proportional the tax system is, and the further from zero, the more pronounced is the regressivity or progressivity of the tax system.

15 The Suits Index value is calculated by: 1 – [area under curve] / [area under 45 degree line].


Wyoming Suits Index (- 0.143)Total Income, Sales, and Property Taxes

0%

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Cumulative Share of Income

Cum

ulat

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re o

f Tax

es


Wyoming Kakwani Index ( - 0.135)Total Income, Sales, and Property Taxes

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Cumulative Share of Households

Cum

ulat

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Sha

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ome

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aid

45 degreeCumulative Share of TaxesCumulative Share of Income

The Suits and Kakwani indices calculated in this study to a certain extent reflect the actual population of Utah, because income points selected for this study correspond to decile points (except that the highest one is at the 98th not the 100th percentile). The 95th percentile income observations are omitted because they are not evenly spaced like the others. Normally aggregate data is used to calculate these indices based on the actual income distribution and based on actual taxes paid, generally for income taxes. This study intentionally uses the same income distribution—i.e. the same income points for representative households—to apply the tax policies of each state. We choose not to adjust those income amounts to match the income distribution of Arizona, Nevada, Wyoming, etc. Thus, as used in this study, the Kakwani and Suits index reflect outcomes based on a fixed income distribution, common to all states and tax regimes. The important feature of these indices that is preserved is the relationship of the distribution of taxes given the template distribution of income. For these reasons, the Kakwani and Suits indices are useful in analyzing study results, especially in evaluating the horizontal equity of each state’s tax system. However, these figures are not calculated like Kakwani and Suits indices are in the usual sense, so they are not comparable to standard Kakwani and Suits index values based on actual data for income distributions that vary by state.


S u m m a r y o f T a x I n c i d e n c e A n a l y s i s Utah Income Tax Effective Tax Rates Vertical Equity The following tables show the effective rates for the income tax under the bracket system in effect in 2006 (projected to 2008) and the Single Rate effective in 2008. The income tax under both systems is progressive, with higher income families paying a higher percentage of their income in income taxes than lower income families. For almost every income level, effective tax rates are lower under the Single Rate system. Some single parent households across the income spectrum, as well as married households at the $212,000 income level may experience a slightly higher effective rate.16 It is important to note that, under the Single Rate system, effective rates flatten out at 5% at higher income levels.

Table 4-19: Income Tax (2006 Bracket System) Effective Tax Rates

All Families

AGI ($000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

All Families

1.1% 2.0% 2.9% 3.0% 3.3% 3.5% 3.8% 4.1% 4.3% 4.5% 4.7%

Table 4-20: Income Tax (2008 Single Rate System) Effective Tax Rates

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

All Families

1.2% 1.7% 2.7% 2.8% 3.2% 3.4% 3.7% 4.0% 4.3% 4.5% 4.8%

16 Statistical analysis by the Utah Office of Legislative Research and General Council (OLRGC) applies Single Rate tax policies to recent Utah income tax returns. Charts 3-8 of this March 2007 analysis, “Tax Relief and Reform: What Does it Mean for Taxpayers?” illustrate the mixed impact on effective rates for different household types. This study and OLRGC analysis concur in concluding that the vast majority of 2008 Utah taxpayers will experience a lower effective rate.


The table below (Table 4-21) shows the ratio of the high to the low rate and the difference between the high and low effective rates. The higher the ratio between the high and low effective rate the more progressive the income tax structure. The ratio for the Bracket system is 4.13, greater than the ratio of 4.07 for the Single Rate system, indicating that the Bracket rate system is more progressive on a relative basis. Yet, the difference between the high and low rate is greater for the 2008 Single Rate system (3.6%) than the 2006 Bracket System (3.5%)

Table 4-21: High: Low

High Rate/Low Rate*

High-Low Rate*

2006 (Bracket) 4.13 3.5% 2008 (Single Rate)

4.07 3.6%

* Numbers may not match due to rounding Vertical equity varies with family type. The following table shows the difference between the high and the low effective rates for different family types. For most families with income of $16,000, the effective rate is 0%. As a result, a ratio analysis is not meaningful. For most family types, vertical equity is relatively the same. Vertical equity is least progressive (or the flattest) for single families with no children with a difference between the effective rate for a family earning $212,000 minus the rate of a family earning $16,000 of 2.7% for the 2006 system and 2.9% for the 2008 system. The biggest change in vertically equity between the two systems is for a single head of household with one child. The Bracket system for that family is more progressive than the Single rate system with a difference of 4.3% and 3.6%, respectively. For a single head of household with 3-6 children, the Single Rate system is more progressive.

Table 4-22: Income Tax Effective Rates Effective Rate of $212,000 minus Effective Rate of $16,000

(2006 System) (2008 System) Married, no children

4.9% 4.9%

Married, 1 child

4.7% 4.8%

Married, 2 children

4.6% 4.7%

Married, 3 children

4.5% 4.5%

Married, 4 children

4.2% 4.4%

Married, 5 children

4.1% 4.2%


Married, 6 children

4.0% 4.1%

Single, no children

2.7% 2.9%

Single, 1 child 4.3% 3.6% Single, 2 children

4.5% 4.5%

Single, 3 children

4.7% 5.0%

Single, 4 children

4.7% 4.9%

Single, 5 children

4.6% 4.9%

Single, 6 children

4.5% 4.8%

*Numbers may not match due to rounding Horizontal Equity The following tables show the ratios of the high and low effective tax rates for different family types by income level for the current Bracket system and the Single Rate system. For instance, for families earning $54,000 in 2006, the highest effective rate is 4.2% for a single adult with no children. The lowest effective rate is 1.4% for a married couple with 6 children. The ratio of the highest (4.2%) to the lowest (1.4%) effective rate is 3.1, and the difference between them is 2.9%. For all income levels in 2006 and 2008, the highest effective rates are for single adults with no children and the lowest are for married couples with 6 children. This, of course, is to be expected since the dollar value of personal exemptions increases with family size and standard deductions are greater for married filing joint filing status. However, the ratio of the high to low effective rates and the difference between them varies according to income. Lower ratios and smaller differences are an indication of relative horizontal equity. For 2006, the smallest ratio is 1.3 and the smallest difference is 1.1% for families earning $212,000. Families earning $212,000 have the greatest degree of horizontal equity. For families earning $16,000 and $26,000, the lowest rate is 0%, and consequently, a ratio would be meaningless. The largest ratio is 22.5 and the greatest difference is 4.4% for families earning $35,000. Therefore, the greatest degree of horizontal inequity is for families earning $35,000 in income.


Table 4-23: Income Tax (2006 System) Effective Tax Rates

High: Low

AGI ($000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

High/Low ** ** 22.5 8.9 3.1 2.2 1.8 1.6 1.4 1.3 1.3 High-Low

2.4% 3.9% 4.4% 3.5% 2.9% 2.4% 2.0% 1.7% 1.3% 1.2% 1.1%

**Low Effective Rate=0 Projecting to 2008, the smallest ratio is again 1.3 and the least difference is 1.0% for a family earning $212,000. For families earning $16,000, $26,000 and $35,000, the lowest effective rate is 0%. The greatest difference between the highest effective rate and the lowest is 4.0% for families earning $35,000. For income levels of $64,000 or less, the ratio between the high and the low effective rates is smaller under the Single Rate system, indicating an improvement in horizontal equity for these families earning these income levels. For families earning $77,000 or more, the degree of horizontal equity is essentially unchanged.

Table 4-24: Income Tax (2008 System) Effective Tax Rates

High: Low

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

High/Low ** ** ** 7.9 2.8 2.1 1.8 1.6 1.4 1.3 1.3 High-Low

2.3% 3.2% 4.0% 3.2% 2.5% 2.2% 1.9% 1.7% 1.3% 1.2% 1.0%

**Low Effective Rate=0 Share of Taxes Paid Upper income families pay a greater percentage of the income taxes collected.17 The following table shows the share of income taxes paid (collected) for all families by income level. Families earning $212,000 pay 33.90% of all the income taxes collected under the Bracket system in effect in 2006. 17 The numbers for percentage of income taxes collected (i.e. share of taxes paid) calculated in this study are based not on actual state tax collections, but are derived from the estimated tax payments of representative households at the ten income levels, as a measure of horizontal equity. For example, households with income of $212,000 pay 33.9% of all the taxes paid by the ten households.


Table 4-25: Income Tax (2006 System) Share of Taxes Paid (Collected)

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

All Families

0.6% 1.8% 3.5% 4.5% 6.1% 7.6% 9.9% 13.5% 18.7% 33.9%

Source: Ch.4: Tax Incidence Analysis The table below compares the share of income taxes paid and the share of AGI for all families by income level. Families earning $16,000 pay 0.6% of income taxes paid, but $16,000 is 2.1% of the total AGI. As a result, the share of taxes paid is 0.3 of their share of AGI. In other words, the share of income taxes paid by lower income families is less than their share of AGI. For families earning $96,000 or more, the share of taxes paid is greater than their share of AGI. For instance, the share of income taxes paid for a family earning $96,000 is 13.5% and their share of AGI is 12.8%. The ratio of share of taxes paid to share of AGI for families earning $96,000, therefore, is 1.1.

Table 4-26: Income Tax (2006 System) Share of Total AGI

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

All Families

2.1% 3.5% 4.7% 5.9% 7.20% 8.5%

10.3%

12.8% 16.8% 28.3%

Share of Taxes Paid/Share of AGI

0.3 0.5 0.7 0.8 0.8 0.9 1.0 1.1 1.1 1.2

The tables below show the same analysis for the Single Rate system. Families earning $96,000 or less pay a larger share of the taxes under the Bracket system. Families earning $126,000 or more pay a larger share under the Single rate system.

Table 4-27: Income Tax (2008 System) Share of Taxes Paid (Collected)

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

All Families

0.6% 1.6% 3.3% 4.3% 5.9% 7.4% 9.8% 13.3% 18.8% 35.0%


Since upper income families will pay a greater percentage of the tax burden under the Single Rate system, the ratio of the share of income taxes paid to share of AGI decreases for lower income families and increases for upper income families, indicating a more progressive income tax system according to this measure.

Table 4-28: Income Tax (2008) Share of Total AGI

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

All Families

2.1% 3.5% 4.7% 5.9% 7.20% 8.5%

10.3%

12.8% 16.8% 28.3%


0.3 0.4 0.7 0.7 0.8 0.9 1.0 1.0 1.1 1.2

Suites and Kakwani Indices While the ratio of effective rates is slightly greater for the 2006 system, the difference between the two systems is very small. In addition, the ratio of the high to low effective rate does not take into account the changes in shape of the effective rate curves. The Kakwani and Suits Indices incorporate this feature into an evaluation of equity. The table below compares the Suits and Kakwani Indices for Utah’s Bracket and Single rate system. According to both measures, the Single Rate system appears to be an improvement in equity.

Table 4-29: Suits and Kakwani Indices

Suits Index

Suits Rank: From Most Progressive

to Most Regressive

Kakwani Index

Kakwani Rank: From

Most Progressive

to Most Regressive

Utah 2006 0.107 2 0.101 2Utah 2008 0.123 1 0.114 1


Sales Tax Effective Tax Rates Vertical Equity The table below shows the effective rates for the sales tax for different income levels. For all family sizes, the sales tax is regressive, with lower income families paying a higher percentage of their income in sales taxes.

Table 4-30: Sales Tax Effective Tax Rates

All Families AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

All Families

3.5% 3.0% 2.6% 2.4% 2.3% 2.2% 2.1% 1.9% 1.8% 1.7% 1.4%

The sales tax is regressive to varying degrees according to family type. The table below shows the ratio of the highest effective rate ($16,000 in income) to the lowest effective rate (income of $212,000), and the difference between the highest and lowest effective rate for different family types. The ratio of the highest to lowest effective rate is greatest for a single adult with no children (5.8) and married couples with 3-6 children (4.2). The difference between the high and the low rate is greatest for a married couple with 3-6 children at 5.1%. This indicates that the sales tax is most regressive for both of these family types. It is least regressive for single adult with children and for married couples with 1 child.

Table 4-31: Sales Tax Effective Rates Effective Rate

($16,000) Effective Rate ($212,000)

Ratio of $16,000/$212,000

Difference

Married, no children

4.3% 1.4% 3.1 2.9%

Married, 1 child

3.7% 1.4% 2.7 2.3%

Married, 2 children

5.2% 1.5% 3.4 3.7%

Married, 3-6 children

6.6% 1.6% 4.2 5.1%

Single, no children

4.4% 0.8% 5.8 3.6%

Single, 1-6 children

2.8% 1.0% 2.9 1.8%

*Numbers may not match due to rounding. Horizontal Equity


Horizontal equity measures the degree to which different family types with the same income are treated similarly. While the tax rates on goods and services remain the same, amount and types of expenditures change with different family needs. As a result, tax policy can impact different families differently because the composition and amount of expenditures vary. The following table shows the sales tax effective rate for different family types and income levels. For an income level of $16,000, the highest effective rate (7.5%) is for a married couple with 3-6 children. The lowest rate (3.6%) for families earning $16,000 is more single parents with children. At the medium income of $54,000, the lowest effective rate is 2.3% for a single parent with children.

Table 4-32: Effective Sales Tax Rates By Family Type and Income

AGI (000) $16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212 Married, no children

5.3% 4.1% 3.3% 3.2% 3.0% 2.8% 2.7% 2.5% 2.3% 2.1% 1.8%

Married, 1 child

4.3% 4.2% 4.0% 3.5% 3.1% 2.8% 2.5% 2.4% 2.4% 2.3% 1.8%

Married, 2 children

5.9% 4.7% 3.6% 3.1% 3.0% 3.1% 2.7% 2.5% 2.4% 2.3% 2.0%


7.5% 4.2% 3.9% 3.5% 3.1% 2.8% 2.5% 2.2% 2.5% 2.2% 2.0%

Single, no children

5.1% 4.6% 3.9% 3.5% 3.1% 3.0% 3.2% 3.4% 2.1% 1.6% 1.1%


3.6% 3.1% 2.7% 2.4% 2.3% 2.3% 2.1% 1.9% 1.7% 1.5% 1.3%

The table below shows that the degree of horizontal equity is the greatest for an income level of $64,000. The ratio of the highest effective rate to the lowest was greatest for income levels of $16,000 (2.4) and $212,000 (2.1), indicating the least degree of horizontal equity. It is interesting to note that for income levels below and above $64,000, the ratio increases. For income levels below $64,000, the ratio and the difference between the high and low rates increase as income decreases, an indication that the sales tax is more horizontally inequitable at lower levels of income. While the ratio increases as income increases above $64,000, the difference between the high and low rate is lowest at $157,000 and $212,000 (0.8%), as a result of the low absolute effective rates for those two income levels.


Table 4-33: Effective Sales Tax Rates High: Low

AGI (000) $16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212 High/Low 2.4 1.7 1.6 1.6 1.5 1.4 1.5 1.9 1.6 1.8 2.1 High-Low 3.8% 1.7% 1.2% 1.1% 0.9% 0.8% 0.9% 1.3% 0.8% 0.8% 0.8% While there does seem to be some horizontal inequity in the sales tax, the differences are to be expected. Since the sales tax taxes consumption, it is not a surprise that families with different levels of consumption pay different amounts in taxes. Share of Taxes Paid As discussed in Chapter 1, another aspect of equity is the share of taxes paid by each income group. The following table shows the share of taxes paid by income level. Upper income families pay a greater percentage of the taxes collected than lower income families.

Table 4-34: Sales Tax Share of Taxes Paid (Collected)

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

All Families

3.8% 5.4% 6.3% 7.2% 8.4% 9.6% 10.8% 12.4% 15.7% 20.3%

While upper income families pay a higher percentage of the sales tax collected, it is disproportional to their chare of total AGI. The table below shows the share of AGI for each income level and the share of taxes paid divided by the share of AGI. A ratio of greater than one indicates that families of the specific income group pay a higher share of the taxes than they account for with respect to AGI. The table below shows that lower income families pay a greater percentage of the taxes paid than their share of total AGI. As a result, the sales tax can be described as regressive.


Table 4-35: Sales Tax Share of Total AGI

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

All Families

2.1% 3.5% 4.7% 5.9% 7.20% 8.5%

10.3%

12.8% 16.8% 28.3%


1.8 1.5 1.3 1.2 1.2 1.1 1.1 1.0 0.9 0.7

Property Tax Effective Tax Rates Vertical Equity The property tax is regressive in Utah. The table below shows the effective rate for all families at different income levels. Families and individuals with $16,000 in income are assumed to rent rather than own and pay 3.8% of their income in property taxes included as rent. Families that earn $26,000 (homeowners) pay 4.6% of their income in property taxes, while those earning $212,000 pay 1.8%.

Table 4-36: Property Tax Effective Tax Rates

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

All Families

3.8% 4.6% 3.9% 3.3% 3.0% 2.7% 2.5% 2.2% 2.1% 1.9% 1.8%

Table 4-37 below shows the ratio of the highest effective tax rate to the lowest effective rate and the difference between them. We perform this analysis with respect to the property taxes for homeowners with income of $26,000 of more. Families that earn $26,000 pay the highest percentage of their income in property taxes at 4.6%, and families earning $212,000 pay the lowest at 1.8%. The effective rate for families earning $16,000, therefore, is 2.6 higher than the effective rate for families earning $212,000. The difference in effective rates is 2.8%.



High: Low High/Low ($26/$212) High-Low ($26-$212) All Families 2.6 2.8% The difference between the highest effective rate (for an income level of $26,000) and the lowest effective rate (income of $212,000) by income varies according to family type. The table below shows the ratio between the highest and lowest rate and the difference between the two. The largest ratio is 3.1, for a single adult with 1 child, indicating that the property tax is most regressive for this family type. The smallest is ratio is 2.1, for a married couple with 1 or 2 children, the least regressive for these family types. The largest difference is 3.2% for a married couple with no more children. The smallest difference is 2.3% for a married couple with 1 or 2 children.

Table 4-38: Property Tax Effective Rates Effective Rate

($26,000) Effective Rate ($212,000)

Ratio of $26,000/$212,000

Percent Difference


4.9% 1.7% 2.8 3.2%

Married, 1 child

4.1% 1.8% 2.3 2.3%

Married, 2 children

4.7% 2.0% 2.1 2.3%


4.7% 2.2% 2.1 2.5%

Single, no children

4.6% 1.5% 3.1 3.1%

Single, 1 child 3.9% 1.4% 2.9 2.6% Single, 2-6 children

4.4% 1.9% 2.3 2.5%

*Numbers may not match due to rounding. Horizontal Equity The table below shows the effective tax rates by family type and income level. Again, families earning $16,000 are assumed to rent rather than own a home, while all families earning $26,000 or greater are assumed to be homeowners.


Table 4-39: Effective Property Tax Rates By Family Type and Income

AGI (000) $16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212 Married, no children

4.0% 4.9% 3.9% 3.4% 2.9% 2.7% 2.4% 2.2% 2.0% 1.9% 1.7%

Married, 1 child

4.0% 4.1% 3.6% 3.1% 2.8% 2.6% 2.4% 2.2% 2.1% 1.9% 1.8%

Married, 2 children

4.1% 4.2% 3.9% 3.2% 2.9% 2.7% 2.5% 2.4% 2.2% 2.0% 2.0%


4.7% 4.7% 3.5% 3.3% 3.0% 2.8% 2.5% 2.5% 2.4% 2.2% 2.2%

Single, no children

3.6% 4.6% 3.9% 3.4% 3.0% 2.7% 2.5% 2.3% 2.0% 1.6% 1.5%

Single, 1 child

4.3% 3.9% 3.7% 3.4% 3.0% 2.7% 2.5% 2.2% 2.0% 1.9% 1.4%

Single, 2 children

4.5% 4.4% 4.0% 3.2% 3.0% 2.8% 2.5% 2.5% 2.1% 2.1% 1.9%


4.5% 4.4% 4.0% 3.2% 3.0% 2.8% 2.5% 2.5% 2.1% 2.1% 1.9%

Horizontal equity varies with each income level. The table below shows the highest effective rate divided by the lowest, and the percentage difference between the two. There is not much differentiation in horizontal equity across the income spectrum. Horizontal equity is greatest for middle-income families earning $54,000 to $77,000.

Table 4-40: Effective Property Tax Rates High: Low

AGI ($000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

High/Low 1.3 1.2 1.1 1.1 1.1 1.1 1.1 1.2 1.2 1.4 1.6 High-Low 1.1% 1.0% 0.5% 0.3% 0.2% 0.2% 0.2% 0.3% 0.4% 0.6% 0.8% Share of Taxes Paid As is the case with the sales tax, higher income families pay a greater percentage of the total property taxes collected. The table below illustrates the share of taxes paid for all families by income level.


Table 4-41: Property Tax Share of Taxes Paid (Collected)

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

All Families

3.3% 6.5% 7.4% 8.0% 8.7% 9.4% 10.3% 11.8% 14.3% 20.4%

Lower income families pay a higher share of the total taxes than their share of total AGI. The table below shows that the ratio of the share of taxes paid to share of AGI is the greatest for families earning $26,000 (greater inequity between share of taxes paid and share of AGI) at 1.9. The lowest ratio is 0.7 for families earning $212,000. This means that the share of taxes paid for families earning $26,000 is 1.9 times their share of total AGI. The share of taxes paid for families earning 4212,000 is 0.7 (or 70%) of their share of total AGI. This illustrates the regressive nature of the property tax.

Table 4-42: Property Tax Share of Total AGI

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

All Families

2.1% 3.5% 4.7% 5.9% 7.20% 8.5%

10.3%

12.8% 16.8% 28.3%

Share of Taxes Paid/ Share of AGI

1.6 1.9 1.6 1.4 1.2 1.1 1.0 0.9 0.8 0.7

Total Taxes (Income, Sales and Property Taxes Combined) Effective Tax Rates Vertical Equity While the income tax is progressive, the sales and property taxes are regressive. The following table shows the percentage contribution of each tax in total taxes for all families by income level. For families earning $96,000 or less, over 50% of their total taxes is comprised of the sales and property taxes under the 2006 Bracket system. For families earning $126,000 or more, the income tax comprises the majority of the total taxes that they pay.


Table 4-43: Percent of Total Taxes (2006 Bracket System) All Families

AGI ($000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

Income Tax

13.4% 21.1% 30.9% 34.2% 38.7% 41.4% 45.6% 49.8% 52.6% 55.6% 59.6%

Sales Tax

41.4% 31.2% 28.0% 27.6% 26.8% 26.4% 24.8% 22.9% 22.2% 20.7% 17.9%

Property Tax

45.2% 47.7% 41.1% 38.1% 34.6% 32.2% 29.6% 27.3% 25.2% 23.7% 22.5%

The total tax system is regressive, due to the weight of sales and property taxes. The table below shows the effective rates for all families according to income. Lower income families earning $26,000 pay a higher percentage of their income in total taxes than do upper income families.

Table 4-44: Total Taxes (2006 Bracket System) Effective Tax Rates

All Families

AGI ($000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

All Families

8.5% 9.7% 9.4% 8.7% 8.5% 8.4% 8.3% 8.2% 8.2% 8.1% 7.9%

The table below shows the percent contribution of each tax in total taxes under the Single Rate system. As in the case of the Bracket system, families earning $96,000 or less pay over 50% of their taxes in sales and property taxes.

Table 4-45: Percent of Total Taxes (2008 Single Rate System) All Families

AGI ($000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

Income Tax

13.7% 18.5% 29.3% 33.1% 37.7% 40.7% 44.9% 49.3% 52.5% 55.8% 60.1%

Sales Tax

41.3% 32.2% 28.7% 28.1% 27.2% 26.7% 25.2% 23.2% 22.2% 20.6% 17.7%

Property Tax

45.0% 49.3% 42.0% 38.8% 35.1% 32.6% 30.0% 27.6% 25.3% 23.6% 22.3%


The table below shows the effective rates for all families with respect to total taxes. With respect to vertical equity, total taxes are regressive under the Single Rate system as well.

Table 4-46: Total Taxes (2008) Effective Tax Rates


$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

All Families

8.5% 9.4% 9.2% 8.6% 8.4% 8.3% 8.2% 8.2% 8.2% 8.1% 7.9%

The table below shows the ratio of the high to low effective rate and the percent difference between the high and low effective rates under the Bracket and Single Rate systems. The ratio of the high and the low rate is greater under the Bracket system (1.23) than under the Single Rate system (1.18). In addition, the difference between the two rates is also greater under the Bracket system (1.8%) than the Single Rate system (1.4%). While the difference between the systems with respect to vertical equity is small, the Single Rate system is less regressive with respect to total taxes. Total taxes collected in this study under the Bracket system is $74,968, while taxes collected under the Single Rate system is $74,675.

Table 4-47: Total Taxes All Families High: Low

High Rate/Low Rate ($26/$212)*

High-Low Rate ($26-$212)*

2006 (Bracket) 1.23 1.8% 2008 (Single Rate) 1.18 1.4%

* Numbers may not match due to rounding Vertical equity with respect to total taxes varies with family type. The following table shows the difference between the high and the low effective rates for different family types. The effective rates are the most vertically regressive for single families with no children under both systems, although there is improvement under the Single Rate system. For single parents with 4-6 children, total taxes are actually progressive with a ratio of 0.9 and a negative difference in rates, indicating that effective rates for these families are higher for an income level of $212,000 than for an income level of $26,000.


Table 4-48: Total Tax Effective Rates High: Low

High/Low

$26/$212 (2006)

High-Low Rate* (2006 System)

High/Low $26/$212 (2008)

High-Low Rate* (2008)


1.2 1.7% 1.2 1.5%

Married, 1 child

1.1 0.8% 1.1 0.5%

Married, 2 children

1.1 0.7% 1.0 0.2%

Married, 3 children

1.0 0.3% 1.0 0.0%

Married, 4 children

1.0 0.3% 1.0 0.2%

Married, 5 children

1.1 0.4% 1.0 0.3%

Married, 6 children

1.1 0.5% 1.1 0.4%

Single, no children

1.7 4.9% 1.6 4.1%

Single, 1 child

1.2 1.5% 1.2 1.4%

Single, 2 children

1.1 1.0% 1.1 0.8%

Single, 3 children

1.0 0.2% 1.0 0.0%

Single, 4 children

1.0 -0.2% 0.9 -0.5%

Single, 5 children

0.9 -0.5% 0.9 -0.9%

Single, 6 children

0.9 -0.5% 0.9 -0.8%

*Numbers may not match due to rounding For large married and single head of household families, low-income families earning $16,000 have a higher total tax effective rate than families earning $26,000 under both systems. The table below illustrates the effective rates for these families. Families earning $16,000 are paying a higher portion of their income in total taxes due to the weight of the property and sales taxes.


Table 4-49: Total Tax Effective Rates Large Families earning $16,000 and $26,000

Bracket (2006) Bracket (2006) Single Rate

(2008) Single Rate (2008)

$16,000 $26,000 $16,000 $26,000 Married, 2 children

9.3% 8.8% 9.3% 8.5%

Married, 3 children

11.4% 8.5% 11.4% 8.3%

Married, 4 -6 children

11.4% 8.3% 11.4% 8.3%

Single, 4 children

7.3% 7.3% 7.3% 7.3%

Single, 5 children

7.3% 6.9% 7.3% 6.8%

Single, 6 children

7.3% 6.8% 7.3% 6.8%

Horizontal Equity The Single Rate system exhibits more horizontal equity than the Bracket system. The following tables show the ratio of the high to low effective rates and the percent difference in effective rates for each income level. For families earning $16,000, the degree of horizontal equity is the same under both systems. For all other income levels, different family types are treated more equitably under the Single Rate system. There is more horizontal equity for families earning higher incomes as demonstrated by the smaller percentage differences between the high and low effective rates for each income level. Under both systems, there is more disparity among families earning $26,000 in income.

Table 4-50: Total Taxes (2006 System) Effective Tax Rates

High: Low AGI ($000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

High/Low 1.6 1.8 1.7 1.5 1.5 1.4 1.4 1.3 1.2 1.1 1.2 High-Low

4.1% 5.5% 4.8% 3.5% 3.1% 2.6% 2.5% 2.5% 1.2% 1.0% 1.2%


Table 4-51: Total Taxes (2008 System) Effective Tax Rates

High: Low AGI ($000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

High/Low 1.6 1.7 1.6 1.5 1.4 1.3 1.3 1.4 1.1 1.1 1.2 High-Low

4.1% 4.7% 4.3% 3.1% 2.6% 2.2% 2.4% 2.5% 0.9% 0.8% 1.1%

Share of Taxes Paid The table below shows the share of total taxes paid by al families for each income level under the 2006 Bracket System. Upper income families pay a greater percentage of the taxes collected than lower income families.

Table 4-52: Total Taxes (2006 System) Share of Taxes Paid (Collected)


$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

All Families

2.2% 4.0% 5.3% 6.2% 7.4% 8.6% 10.3% 12.7% 16.7% 26.7%

However, when compared to the share of AGI of each income level, total taxes are regressive. Lower income families pay a higher percentage in total taxes than their share of total AGI than upper income families. Families earning $16,000, it is almost proportional, while the share of total taxes paid for all families earning $26,000 is 1.16 times their share of total AGI. Families earning $96,000 to $212,000 pay a smaller share of total taxes than their share of AGI, indicating that total taxes are regressive.

Table 4-53: Total Taxes (2006 System) Share of Total AGI


$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

All Families

2.1% 3.5% 4.7% 5.9% 7.20% 8.5%

10.3%

12.8% 16.8% 28.3%


1.02 1.16 1.13 1.05 1.03 1.01 1.00 0.99 0.99 0.95


The share of taxes paid is also greater for upper income families under the Single Rate system. The table below shows the share of taxes paid under the Single Rate system. Families earning $96,000 or less pay a slightly smaller share of the total taxes paid under the Single Rate system, while families earning $212,000 pay a larger percentage of the total taxes.

Table 4-54: Total Taxes (2008 System) Share of Taxes Paid (Collected)

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

All Families

2.2% 3.9% 5.2% 6.1% 7.3% 8.5% 10.2% 12.6% 16.7% 27.2%

The table below shows the ratio of the share of taxes paid to the share of AGI for total taxes under the Single Rate system. The share of taxes paid for families earning $54,000 or less is greater than their share of AGI. For families earning $64,000 to $126,000, it is proportional. The share of taxes paid for families earning $212,000 is .96 of their share of AGI, indicating a regressive tax structure.

Table 4-55: Total Taxes (2008 System) Share of Total AGI

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

All Families

2.1% 3.5% 4.7% 5.9% 7.20% 8.5%

10.3%

12.8% 16.8% 28.3%


1.03 1.13 1.11 1.04 1.02 1.00 .99 .99 1.0 .96

Suits and Kakwani Indices The above comparison of the two systems with respect to total taxes reveals that the Bracket system is slightly more regressive than the Single Rate system. The results are supported by the Suits and Kakwani Indices for total taxes illustrated in the table below. The Single rate system is less regressive than the Bracket system


Table 4-56: Suits and Kakwani Indices for Total Tax

Suits Index

Suits Rank: From Most

Progressive to Most

Regressive Kakwani

Index

Kakwani Rank: From Most

Progressive to Most Regressive

Utah 2006 -0.026 2 -0.024 2 Utah 2008 -0.019 1 -0.019 1


Comparison of Western Intermountain States The intent of the tax incidence analysis to evaluate how Utahans would fare if taxed under the different tax codes of each state. Thus, we are not representing that the analysis that follows demonstrates the actual tax incidence in Arizona, for instance, but how Utahans would be taxed under Arizona tax policy. In this way, we isolate the impact of tax policy in each state from each state’s specific demographics. We achieve this by using the same income decile points and household characteristics derived from actual Utah data when available, national data, and average home values for all the states included in the study. Income Tax The table below lists the key features of the income tax systems of the Intermountain Western states. We have included the table in this section for the convenience of the reader as we compare the income tax systems with respect to equity. Nevada and Wyoming do not levy a tax on income. In addition, the analysis includes tax credits that are linked to income such as the Family Tax Credit in Arizona and The Low and Middle Income Tax Exemption and the Low Income Comprehensive Tax Rebate in New Mexico.

Table 4-57: Income Tax Comparison


Utah (Bracket)

Utah Single Rate)

Wyoming

Top Income Bracket (Married Filing Jointly)

$300,001 None $47,928 $14,500 NA $24,000 $11,000 None NA

Range of Rate: bottom to top bracket

2006: 2.73%-4.79% 2007:2.59%-4.54%

4.63% 1.6%-7.8%

1%-6.9% NA 1.7%-5.3%

2.3%-6.98%

Implicit in effective rate

NA

Personal Exemptions

According to filing status and number of dependents. Married filing Jointly, no dependents: $4,200; at least 1 dependent $6,300

Federal (implicit) $3,300

Federal ($3.300)

$1,980 Indexed for inflation

NA Federal $3,300

75% of Federal

75% of federal (3,300)

NA

Taxable Income/FAGI*

66.77% 2005

68.23% 2004

67.12% 2005

69.39% 2005

NA 62.10% 2005

62.90% 2005

73.10% 2005 data

NA


Effective Tax Rates Vertical Equity All the states in the study that tax income do so in a progressive manner. The following table shows the effective rates for all families by income. New Mexico’s income tax system shelters low income from taxation to a greater extent than the other states in the study. The Low and Middle Income Tax Exemption allows for an income exemption of $2,500 for each exemption for single households earning approximately $37,000 or less and married or head of households earning $55,000 or less. There is a phase-out of the exemption amount for households earning more than $20,000 and $30,000, respectively. The Low Income Comprehensive Tax Rebate is refundable, accounting for the negative effective rate of -.2% for families earning $16,000. The rebate is available for families earning less than $22,000 and the amount varies according to income level and number of exemptions. The maximum rebate included in the analysis is $110 for a families with 6 or greater exemption and income of $15,000. Families earning $16,000 in income are taxed the highest under Utah’s Single Rate system and Bracket system. The lowest effective rates at the median income in our study of $54,000 are for New Mexico’s (1.3%) and Arizona’s (1.7%) income tax systems. For families earning $212,000, the highest effective rate is 5.1% for Idaho’s tax system, and the lowest is 2.7% for Arizona’s.

Table 4-58: Income Tax Effective Tax Rates

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

AZ 0.7% 1.5% 1.7% 1.6% 1.7% 1.7% 1.8% 2.0% 2.2% 2.4% 2.7%CO 0.9% 1.6% 2.1% 2.2% 2.3% 2.5% 2.7% 2.9% 3.1% 3.2% 3.4%ID 0.7% 1.6% 2.3% 2.4% 2.8% 3.0% 3.4% 3.9% 4.4% 4.7% 5.1%MT 1.1% 2.2% 3.0% 2.7% 3.0% 3.1% 3.6% 4.0% 4.4% 4.6% 4.9%NV NA NA NA NA NA NA NA NA NA NA NA NM -0.2% 0.6% 1.0% 1.0% 1.3% 1.4% 1.8% 2.3% 2.7% 2.9% 3.2%UT (2006)

1.1% 2.0% 2.9% 3.0% 3.3% 3.5% 3.8% 4.1% 4.3% 4.5% 4.7%

UT(2008) 1.2% 1.7% 2.7% 2.8% 3.2% 3.4% 3.7% 4.0% 4.3% 4.5% 4.8%WY NA NA NA NA NA NA NA NA NA NA NA The following table shows the ratio of the highest effect rate to the lowest effective rate and the percent disparity between the two for each state. In this case, a larger multiple and disparity is an indication of a more progressive income tax structure. Again, New Mexico is the most progressive, followed by Idaho. Idaho, however, has the largest percent difference in effective rates between the high and low effective rates. Colorado has the lowest ratio while Arizona has the lowest difference, an indication that these


states impose the least progressive income tax. Utah’s Single Rate system ranks fourth with respect to a progressive structure.


All Families

AGI (000)

High Rate/Low Rate ($212/$16)

High Rate - Low Rate ($212-$16)

AZ 3.9 2.0% CO 3.6 2.5% ID 7.3 4.4% MT 4.3 3.8% NV NA NA NM -15.2 3.4% UT(2006) 4.1 3.5% UT(2008) 4.1 3.6% WY NA NA

Horizontal Equity The tables below show the ratio between the highest effective rate and the lowest effective rate by family type for each income level and the percent difference between them. At the median income of $54,000, Idaho exhibits the most disparity in effective rates among different family types with a ratio of 18.8 and a difference of 4.1%. Arizona has the least differentiation among family types at the median income with a ratio of 1.5 and a difference of 0.6%.


High/Low

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

AZ ** 1.9 1.6 1.6 1.5 1.4 1.4 1.5 1.4 1.4 1.3 CO ** ** ** 4.7 2.9 2.2 1.9 1.5 1.4 1.3 4.7 ID ** ** ** ** 18.8 5.9 3.3 2.4 1.8 1.6 1.4 MT ** 16.7 4.7 19.0 4.9 2.6 2.1 1.8 1.5 1.4 1.3 NV NA NA NA NA NA NA NA NA NA NA NA NM -0.2 ** ** ** ** ** 25.8 5.2 2.3 1.8 1.4 UT(2006) ** ** 22.5 8.9 3.1 2.2 1.8 1.6 1.4 1.3 1.3 UT(2008) ** ** ** 7.9 2.8 2.1 1.8 1.6 1.4 1.3 1.3 WY NA NA NA NA NA NA NA NA NA NA NA



High -Low

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

AZ 1.5% 1.0% 0.8% 0.7% 0.6% 0.6% 0.7% 0.8% 0.8% 0.9% 0.8% CO 2.0% 2.9% 3.3% 2.9% 2.4% 2.1% 1.8% 1.6% 1.2% 1.1% 0.9% ID 1.5% 3.5% 4.4% 3.9% 4.1% 3.8% 3.4% 3.0% 2.4% 2.1% 1.7% MT 1.8% 3.1% 3.3% 3.6% 3.4% 2.6% 2.3% 2.1% 1.6% 1.5% 1.2% NV NA NA NA NA NA NA NA NA NA NA NA NM 0.8% 1.5% 2.5% 2.2% 2.5% 2.7% 2.8% 2.5% 1.9% 1.5% 1.1% UT(2006) 2.4% 3.9% 4.4% 3.5% 2.9% 2.4% 2.0% 1.7% 1.3% 1.2% 1.1% UT(2008) 2.3% 3.2% 4.0% 3.2% 2.5% 2.2% 1.9% 1.7% 1.3% 1.2% 1.0% WY NA NA NA NA NA NA NA NA NA NA NA Share of Taxes Paid The following table shows the share of taxes paid for all families according to income level for each state. Lower income families pay the least share of taxes in New Mexico and Idaho, -.2% and 0.4%, respectively for income of $16,000. Similarly, families earning $212,000 pay the largest share in New Mexico and Idaho, 41.6% and 38.0% respectively.

Table 4-62: Income Tax Share of Taxes Paid

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

AZ 0.7% 2.4% 3.9% 4.6% 5.9% 7.0% 9.0% 12.4% 17.6% 36.6% CO 0.7% 1.9% 3.5% 4.5% 6.0% 7.5% 9.7% 13.2% 18.5% 34.3% ID 0.4% 1.4% 2.8% 3.7% 5.2% 6.7% 9.2% 13.1% 19.4% 38.0% MT 0.6% 2.0% 3.6% 4.1% 5.5% 6.9% 9.4% 13.1% 18.9% 35.9% NV NA NA NA NA NA NA NA NA NA NA NM -0.2% 1.0% 2.1% 2.8% 4.2% 5.6% 8.6% 13.4% 20.8% 41.6% UT(2006) 0.6% 1.8% 3.5% 4.5% 6.1% 7.6% 9.9% 13.5% 18.7% 33.9% UT(2008) 0.6% 1.6% 3.3% 4.3% 5.9% 7.4% 9.8% 13.3% 18.8% 35.0% WY NA NA NA NA NA NA NA NA NA NA The table below shows the progressiveness of the income tax with respect to share of taxes paid. Lower and middle-income families in all the states in the study pay a smaller share of taxes than their share of AGI. Again, lower income families in New Mexico and Idaho pay the smallest share relative to their share of AGI. Families earning $212,000


pay the largest share relative to their share of AGI in New Mexico and Idaho. Families earning $16,000 and $26,000 pay the largest share of taxes relative to their AGI in Colorado and Arizona, but families in Arizona earning $96,000 pay the smallest.

Table 4-63: Income Tax Share of Taxes Paid/ Share of AGI

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

AZ 0.33 0.70 0.83 0.78 0.81 0.82 0.88 0.97 1.05 1.29 CO 0.34 0.56 0.76 0.77 0.84 0.87 0.95 1.03 1.10 1.21 ID 0.18 0.42 0.60 0.63 0.72 0.79 0.90 1.02 1.15 1.35 MT 0.29 0.57 0.78 0.69 0.76 0.81 0.91 1.02 1.12 1.27 NV NA NA NA NA NA NA NA NA NA NA NM -0.10 .27 0.46 0.48 0.58 0.66 0.84 1.05 1.24 1.47 UT(2006) 0.29 0.52 0.75 0.77 0.84 0.89 0.97 1.05 1.11 1.20 UT(2008) 0.30 0.45 0.70 0.74 0.82 0.87 0.95 1.04 1.12 1.24 WY NA NA NA NA NA NA NA NA NA NA Suits and Kakwani Indices The table below shows the Suits index and the Kakwani Index for each state. While the measurement is an approximation due to the use of representative families rather than actual tax data, it is useful in order to compare the income tax policies of the states in the study. New Mexico is the most progressive income tax structure according to both indices, followed by Idaho. Utah’s Single rate system ranks fourth. Utah’s Bracket system and Colorado’s income tax system are the least progressive according to the Suits and Kakwani indices, although their positions are reversed. The Kakwani index incorporates the distribution of income into the analysis of tax burden.


Table 4-64: Suits and Kakwani Indices for Income Tax

Suits Index


Progressive to Most

Regressive Kakwani

Index


Progressive to Most

Regressive Arizona 0.120 5 0.102 5 Colorado 0.109 6 0.100 7 Idaho 0.167 2 0.150 2 Montana 0.130 3 0.117 3 Nevada - - - - New Mexico 0.232 1 0.207 1 Utah 2006 0.107 7 0.101 6 Utah 2008 0.123 4 0.114 4 Wyoming - - - -

Sales Tax The table below lists the tax base and combined state and local representative rates for each state. Montana does not levy a sales tax.

Table 4-65: Sales Tax Tax Base and Representative Rates AZ CO ID MT NV NM UT WY Taxable Sales/State GDP

46.76% 2006

28.83% 2006

44.13% 2006

NA 41.03% 2006

61.56% 2006

45.83% 2006

52.96% approx. (2007)*

Food Exempt at state level

Food for home consumption exempt at state level, varies locally

Taxed At full rate

NA Exempt

Food for home consumption deduction

Food taxed at lower rate.

Exempt through 6/30/08

Representative Rate

7.79% 6.70% 6.09% NA 7.56% 6.71% 5.81* (approx)

5.39%

*Wyoming doesn’t track taxable sales. Percentage calculated by dividing FY2007 tax by the population-weighted rate of 5.287% for December 200


Effective Tax Rates Vertical Equity The sales tax is regressive in each of the 7 states that levy a general sales tax. Arizona has the highest effective sales tax rates for every income level. While Nevada has the second highest combined rate (7.56%) after Arizona, food is exempt from taxation. As a result, lower income families pay a lesser percentage of their income in Nevada than they do Utah or Idaho, which have lower tax rates, but include food for home consumption in the tax base. Food is included at the full rate in Idaho and is taxed at 3% in Utah, beginning in 2008. Wyoming has relatively low effective rates as a result of a lower representative rate of 5.39% and a food exemption through 6/30/08. Colorado’s tax base is the smallest, and while local rates can be quite high, effective rates are also one of the lowest in the study.


All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

AZ 4.4% 3.7% 3.3% 3.0% 2.8% 2.7% 2.5% 2.4% 2.3% 2.1% 1.8% CO 2.7% 2.5% 2.2% 2.0% 2.0% 1.9% 1.8% 1.6% 1.6% 1.5% 1.3% ID 3.2% 2.7% 2.3% 2.2% 2.1% 2.0% 1.9% 1.7% 1.7% 1.5% 1.3% MT NA NA NA NA NA NA NA NA NA NA NA NV 2.8% 2.6% 2.3% 2.1% 2.1% 2.0% 1.9% 1.7% 1.7% 1.6% 1.4% NM 3.7% 2.8% 2.5% 2.3% 2.1% 2.0% 1.9% 1.8% 1.7% 1.6% 1.4% UT 3.5% 3.0% 2.6% 2.4% 2.3% 2.2% 2.1% 1.9% 1.8% 1.7% 1.4% WY 2.8% 2.4% 2.1% 1.9% 1.8% 1.7% 1.6% 1.5% 1.5% 1.3% 1.1%


The table below shows the ratio of and the difference between the highest effective rates, paid by families earning $16,000 to the lowest effective rate paid by families earning $212,000. New Mexico exhibits the largest ratio (2.7), while Arizona has the largest percentage difference between the high and low effective rates. The sales tax is most regressive in these states. Nevada has the least regressive sales tax with respect to effective rates with a ratio of 2.0 and a difference of 1.4%, followed by Colorado. Colorado and Nevada have the smallest tax bases, 28.83% and 41.03%, respectively. Both exempt food for home consumption at the state level, while some Colorado localities include food in the tax base.

Table 4-67: Sales Tax

Effective Tax Rates All Families

AGI (000)

Ratio of Effective Rate of $16/212

Difference Between High Rate and Low Rate

AZ 2.4 2.5% CO 2.2 1.5% ID 2.5 1.9% MT NA NA NV 2.0 1.4% NM 2.7 2.3% UT 2.5 2.1% WY 2.5 1.6%

*Numbers may not match due to rounding Horizontal Equity The results indicate that the sales tax exhibits relative horizontal equity in all states. This is partly due to the degree of availability of consumption data for different family types. The table below shows the effective sales tax rates for different family types for the median income. Married families with children spend more of their income on sales tax than single parents with children in all the states in the study.


Table 4-68: Sales Tax Effective Tax Rates by Family Type and Size

Median Income: $54,000 AZ CO ID MT NV NM UT WY Married, no children

3.0% 2.1% 2.2% NA 2.2% 2.3% 2.5% 2.0%

Married, 1 child

3.1% 2.2% 2.4% NA 2.3% 2.2% 2.6% 2.0%

Married, 2 children

3.0% 2.1% 2.2% NA 2.2% 2.2% 2.5% 2.0%


3.1% 2.2% 2.5% NA 2.3% 2.3% 2.7% 2.1%

Single, no children

3.1% 2.1% 2.2% NA 2.2% 2.6% 2.5% 2.0%

Single, 1 child

2.3% 1.6% 1.6% NA 1.7% 1.8% 1.8% 1.5%

Single, 2 children

2.3% 1.6% 1.6% NA 1.7% 1.8% 1.8% 1.5%


2.3% 1.6% 1.6% NA 1.7% 1.8% 1.8% 1.5%

The table below compares the degree of horizontal equity at the median income. The differences between states are small. Wyoming and Colorado have the smallest percentage disparities between the high and low effective rates.


Median Income AGI (000)

Ratio of High/LowRate


AZ 1.4 0.9% CO 1.4 0.6% ID 1.6 0.9% MT NA NA NV 1.4 0.7% NM 1.5 0.8% UT 1.5 0.9% WY 1.4 0.6%

*Numbers may not match due to rounding


The degree of horizontal equity varies according to income level, although the variation is also small. We see the greatest differentiation between family types for families earning $16,000 and $212,000. Typically, the disparity is between married couples with children and single parents with children, with married couples paying more of their income in sales tax than single parents. The table below shows the ratio between the high and low effective rates for each income level. New Mexico has the least disparity at the two income extremes while Idaho, Nevada and Colorado exhibit the most disparity.


High /Low

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

AZ 2.1 1.5 1.5 1.5 1.4 1.3 1.5 1.8 1.5 1.5 1.9 CO 2.5 1.6 1.6 1.6 1.4 1.4 1.5 1.8 1.6 1.8 2.1 ID 2.6 1.9 1.7 1.7 1.6 1.5 1.5 1.9 1.7 1.9 2.2 MT NA NA NA NA NA NA NA NA NA NA NA NV 2.6 1.7 1.6 1.6 1.4 1.4 1.5 1.8 1.5 1.8 2.1 NM 1.8 1.4 1.3 1.4 1.5 1.4 1.4 1.3 1.4 1.4 1.7 UT 2.4 1.7 1.6 1.6 1.5 1.4 1.5 1.9 1.6 1.8 2.1 WY 2.3 1.6 1.5 1.5 1.4 1.4 1.4 1.8 1.5 1.7 1.9 The percent difference between the high and low effective rates by income level is shown in the table below. The greatest disparity occurs for families earning $16,000. New Mexico has the smallest percent difference (2.5%), while Utah and Idaho have the largest (3.8%).


High-Low

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

AZ 3.9% 1.6% 1.3% 1.2% 0.9% 0.8% 1.0% 1.5% 0.8% 0.8% 0.9%CO 3.2% 1.3% 1.1% 0.9% 0.6% 0.6% 0.7% 1.1% 0.6% 0.7% 0.7%ID 3.8% 1.8% 1.3% 1.2% 0.9% 0.8% 0.7% 1.2% 0.8% 0.8% 0.8%MT NA NA NA NA NA NA NA NA NA NA NA NV 3.4% 1.4% 1.1% 0.9% 0.7% 0.6% 0.7% 1.2% 0.7% 0.8% 0.8%NM 2.5% 0.9% 0.8% 0.8% 0.8% 0.7% 0.6% 0.5% 0.5% 0.5% 0.6%UT 3.8% 1.7% 1.2% 1.1% 0.9% 0.8% 0.9% 1.3% 0.8% 0.8% 0.8%WY 2.9% 1.1% 0.9% 0.8% 0.6% 0.5% 0.6% 1.0% 0.6% 0.6% 0.6%


Share of Taxes Paid As is the case with respect to the income tax, the share of sales taxes paid increases with income level. The table below shows that the share of taxes paid by those earning $16,000 is lowest in Nevada (3.3%) and greatest in New Mexico (4.3%). Families earning $212,000 pay the greatest share of total sales taxes in Nevada (21.5%) and the lowest in Utah and Idaho (20.3%). At the median income, the share is relatively the same, ranging from 8.1% to 8.4%, for all states.

Table 4-72: Sales Tax

Share of Total Taxes Paid (Collected) All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

AZ 3.8% 5.3% 6.2% 7.1% 8.2% 9.4% 10.6% 12.4% 15.9% 21.1%CO 3.5% 5.1% 6.1% 7.1% 8.3% 9.6% 10.8% 12.4% 16.1% 21.1%ID 3.8% 5.3% 6.2% 7.2% 8.4% 9.7% 10.9% 12.4% 15.8% 20.3%MT NA NA NA NA NA NA NA NA NA NA NV 3.3% 4.9% 6.0% 7.0% 8.3% 9.6% 10.8% 12.4% 16.2% 21.5%NM 4.3% 5.3% 6.4% 7.2% 8.1% 9.1% 10.6% 12.4% 15.4% 21.2%UT 3.8% 5.4% 6.3% 7.2% 8.4% 9.6% 10.8% 12.4% 15.7% 20.3%WY 3.8% 5.4% 6.3% 7.3% 8.4% 9.6% 10.8% 12.3% 15.7% 20.5% While the share of total taxes paid increases with income, the sales tax is regressive with respect to the share of taxes paid divided by the share of total AGI. In all states, lower and middle-income families pay a greater share of taxes paid than their income represents with respect to total income. Families earning $77,000 or less pay a greater share of taxes than their share of AGI, while families earning $96,000 or more pay a smaller share in taxes than their share of AGI.

Table 4-73: Sales Tax Share of Total Taxes Paid/ Share of AGI

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

AZ 1.78 1.52 1.33 1.22 1.55 1.10 1.03 0.97 0.94 0.75 CO 1.62 1.46 1.31 1.21 1.16 1.12 1.05 0.97 0.96 0.75 ID 1.79 1.53 1.33 1.22 1.17 1.13 1.06 0.97 0.94 0.72 MT NA NA NA NA NA NA NA NA NA NA NV 1.56 1.42 1.28 1.19 1.15 1.12 1.06 0.97 0.97 0.76 NM 1.99 1.52 1.37 1.24 1.13 1.07 1.03 0.97 0.92 0.75 UT 1.80 1.54 1.35 1.24 1.17 1.13 1.06 0.97 0.94 0.72 WY 1.78 1.54 1.35 1.24 1.17 1.12 1.05 0.96 0.94 0.72


Property Tax The table below summarizes the assessment ratios and representative property tax rates for each of the states included in the study.

Table 4-74: Property Tax Assessment Ratios and Representative Rates

AZ CO ID MT NV NM UT WY Assessment Residential

assessed value is 10% of market value.

Residential assessed value is 7.96% of market value.

Residential assessed value equals market value minus the smaller of $101,295* or 50% of market value.

Residential assessed value is 1.9866% of market value (3.01% of Mkt. Val Net of 34% Homestead Exemption).

Residential assessed value is 35% of market value (with a 3% cap that is figured in to the representative tax rate).

Residential assessed value is one third of market value minus $2,000.

Residential assessed value is 55% of market value.

Residential assessed value is 9.5% of market value.

Representative Rate

10.740%

7.929%

0.955%

54.594%

1.960%

2.629%

1.298%

6.345%

Effective Tax Rates Vertical Equity The table below shows the effective property tax rate for all families according to income. As will be discussed in more detail in Chapter 4, over 50% of households with income of $16,000 rented rather than owned a home. The property tax is regressive for all of the states included in the study. The effective rate for a family earning $26,000 was highest in Montana (7.0%), followed by Arizona (6.9%) and New Mexico (5.5%). The effective rate for a family with this income level was lowest in Idaho (3.1%), followed by Wyoming (3.9%) and Colorado (4.1%). The effective rate for a family earning $26,000 in Utah was 4.6%. The effective property tax rate is lowest for Idaho for all income levels until $96,000. For an income level of $96,000, Wyoming has the lowest effective rate (1.9%), followed by Idaho and Colorado (2.0% each). Above $96,000, Wyoming has the lowest effective rates, followed by Colorado and Nevada. The effective rate is greatest for Montana and Arizona across all income levels.



All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

AZ 5.8% 6.9% 5.8% 5.0% 4.4% 4.0% 3.7% 3.4% 3.1% 2.9% 2.7% CO 3.4% 4.1% 3.4% 2.9% 2.6% 2.4% 2.2% 2.0% 1.8% 1.7% 1.6% ID 2.6% 3.1% 2.6% 2.3% 2.2% 2.1% 2.0% 2.0% 2.0% 1.9% 1.9% MT 5.8% 7.0% 5.9% 5.1% 4.5% 4.1% 3.7% 3.4% 3.2% 2.9% 2.7% NV 3.7% 4.4% 3.7% 3.2% 2.8% 2.6% 2.4% 2.2% 2.0% 1.8% 1.7% NM 4.5% 5.5% 4.6% 4.0% 3.5% 3.2% 2.9% 2.7% 2.5% 2.3% 2.1% UT 3.8% 4.6% 3.9% 3.3% 3.0% 2.7% 2.5% 2.2% 2.1% 1.9% 1.8% WY 3.2% 3.9% 3.3% 2.8% 2.5% 2.3% 2.1% 1.9% 1.8% 1.6% 1.5% In order to compare how regressive each state is, we divide the effective rate for an income level of $26,000 by the effective rate for an income of $212,000. This shows the ratio of effective rate and illustrates the difference between the top and bottom rates. In addition, we have compared the difference between the high and the low effective tax rate to further shed light on the magnitude of the difference in equity between each state. The table below illustrates this comparison.


All Families

AGI (000)

Ratio of Effective Rates


AZ 2.6 4.3% CO 2.6 2.5% ID 1.6 1.2% MT 2.6 4.3% NV 2.6 2.7% NM 2.5 3.3% UT 2.6 2.8% WY 2.6 2.4%

Idaho clearly has the more equitable property tax system. The ratio of the highest effective rate to the lowest is 1.6, and the difference between the two rates is the lowest at 1.2%. Except for Idaho and New Mexico (ratio of 2.5), the ratio of top to bottom rate (for homeowners) is 2.6 for all states due to the method of analysis. The ratio for Utah is 2.6


and the difference between the high and low effective rates is 2.8%, which places Utah in 5th place with respect to vertical equity. Montana and Arizona exhibit the greatest difference in effective rates at 4.3%. Horizontal Equity The table below shows the effective property tax rates for each family type with $54,000 in income (the medium for the study) for each state. Each state exhibits horizontal equity, partly due to the availability of data for different home values for each family type. It is also possible that, at the medium income, larger families cannot necessarily afford larger homes.

Table 4-77: Property Tax Effective Tax Rates by Family Type and Size

Median Income: $54,000 AZ CO ID MT NV NM UT WY Married, no children

4.4% 2.6% 2.1% 4.5% 2.8% 3.5% 2.9% 2.5%

Married, 1 child

4.2% 2.5% 2.0% 4.3% 2.7% 3.4% 2.8% 2.4%

Married, 2 children

4.4% 2.6% 2.1% 4.5% 2.8% 3.5% 2.9% 2.5%


4.5% 2.6% 2.2% 4.5% 2.9% 3.6% 3.0% 2.5%

Single, no children

4.5% 2.7% 2.2% 4.6% 2.9% 3.6% 3.0% 2.5%

Single, 1 child

4.5% 2.6% 2.2% 4.5% 2.9% 3.6% 3.0% 2.5%

Single, 2 children

4.5% 2.6% 2.2% 4.5% 2.8% 3.5% 3.0% 2.5%


4.5% 2.6% 2.2% 4.5% 2.8% 3.5% 3.0% 2.5%

The table below shows the ratio of the high to the low property tax effective rates for each state according to income. Since we have used the same home values for each state, the difference in actual taxes are due to differences in assessment ratio and representative rates. However, all states except Idaho and New Mexico tax similar home values similarly. Idaho has a homeowner’s exemption that is limited in dollar amount and New Mexico allows for a $2,000 deduction. As a result, the ratio of the high to the low is the same for all, but those two states. Since we round to one decimal place, the difference on New Mexico is not readily evident in the table.



High/Low

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

AZ 1.3 1.2 1.1 1.1 1.1 1.1 1.1 1.2 1.2 1.4 1.6 CO 1.3 1.2 1.1 1.1 1.1 1.1 1.1 1.2 1.2 1.4 1.6 ID 1.3 1.2 1.1 1.1 1.1 1.1 1.1 1.2 1.3 1.5 1.8 MT 1.3 1.2 1.1 1.1 1.1 1.1 1.1 1.2 1.2 1.4 1.6 NV 1.3 1.2 1.1 1.1 1.1 1.1 1.1 1.2 1.2 1.4 1.6 NM 1.3 1.3 1.1 1.1 1.1 1.1 1.1 1.2 1.2 1.4 1.6 UT 1.3 1.2 1.1 1.1 1.1 1.1 1.1 1.2 1.2 1.4 1.6 WY 1.3 1.2 1.1 1.1 1.1 1.1 1.1 1.2 1.2 1.4 1.6 The table below allows a better comparison of horizontal equity. For renters earning $16,000, the greatest percentage disparity in horizontal equity is in Montana and Arizona, 1.7%. The least disparity occurs in Idaho (0.8%). At the median income, the disparity is more or less the same in each state. For families earning $212,000, the greatest disparity is in Montana and Arizona (1.3%), while the smallest disparity occurs between family types in Wyoming and Colorado.


High-Low

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

AZ 1.7% 1.5% 0.7% 0.4% 0.3% 0.3% 0.2% 0.5% 0.7% 0.9% 1.3% CO 1.0% 0.9% 0.4% 0.2% 0.2% 0.2% 0.1% 0.3% 0.4% 0.5% 0.7% ID 0.8% 0.7% 0.3% 0.3% 0.2% 0.2% 0.2% 0.5% 0.6% 0.8% 1.1% MT 1.7% 1.5% 0.7% 0.4% 0.3% 0.3% 0.2% 0.5% 0.7% 0.9% 1.3% NV 1.1% 0.9% 0.5% 0.3% 0.2% 0.2% 0.2% 0.3% 0.4% 0.5% 0.8% NM 1.3% 1.2% 0.6% 0.3% 0.2% 0.2% 0.2% 0.4% 0.5% 0.7% 1.0% UT 1.1% 1.0% 0.5% 0.3% 0.2% 0.2% 0.2% 0.3% 0.4% 0.6% 0.8% WY 1.0% 0.8% 0.4% 0.2% 0.2% 0.2% 0.1% 0.3% 0.4% 0.5% 0.7% Share of Taxes Paid The following table shows the share of taxes paid by income level. For the same reason explained above, the share of taxes paid is the same for all states except Idaho and New Mexico.


Table 4-80: Property Tax Share of Total Taxes Paid (Collected)

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

AZ 3.3% 6.5% 7.4% 8.0% 8.7% 9.4% 10.3% 11.8% 14.3% 20.4%CO 3.3% 6.5% 7.4% 8.0% 8.7% 9.4% 10.3% 11.8% 14.3% 20.4%ID 2.6% 5.1% 5.8% 6.3% 7.4% 8.5% 10.0% 12.2% 16.2% 25.8%MT 3.3% 6.5% 7.4% 8.0% 8.7% 9.4% 10.3% 11.8% 14.3% 20.4%NV 3.3% 6.5% 7.4% 8.0% 8.7% 9.4% 10.3% 11.8% 14.3% 20.4%NM 3.3% 6.4% 7.3% 7.9% 8.6% 9.3% 10.3% 11.8% 14.3% 20.7%UT 3.3% 6.5% 7.4% 8.0% 8.7% 9.4% 10.3% 11.8% 14.3% 20.4%WY 3.3% 6.5% 7.4% 8.0% 8.7% 9.4% 10.3% 11.8% 14.3% 20.4% Since we have used the same income profiles for each state, the share of AGI for each income level is identical. As a result the ratio of share of taxes paid to the share of AGI is the same for all the states except Idaho and New Mexico. For income levels of $64,000 and less, the share of property taxes paid exceeds their share of AGI. For income levels of $77,000 and greater, the share of taxes paid is either proportional to or less than their share of AGI. Idaho is the least regressive since it imposes a cap on the homeowner’s deduction of approximately $101,000 (projected to 2008).

Table 4-81: Property Tax Share of Total Taxes Paid/ Share of AGI

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

AZ 1.57 1.88 1.58 1.36 1.21 1.10 1.00 0.92 0.85 0.72 CO 1.57 1.88 1.58 1.36 1.21 1.10 1.00 0.92 0.85 0.72 ID 1.23 1.48 1.24 1.08 1.03 1.00 0.97 0.96 0.96 0.91 MT 1.57 1.88 1.58 1.36 1.21 1.10 1.00 0.92 0.85 0.72 NV 1.57 1.88 1.58 1.36 1.21 1.10 1.00 0.92 0.85 0.72 NM 1.55 1.86 1.56 1.35 1.20 1.10 1.00 0.92 0.85 0.73 UT 1.57 1.88 1.58 1.36 1.21 1.10 1.00 0.92 0.85 0.72 WY 1.57 1.88 1.58 1.36 1.21 1.10 1.00 0.92 0.85 0.72


Total Taxes (Income, Sales and Property Taxes Combined) Effective Tax Rates Vertical Equity The combined income, sales and property tax burden is regressive in every state, except Idaho. The following table illustrates the effective rates for combined income, sales and property taxes for each state. Low-income families earning $16,000 pay the highest effective rate in Arizona (10.8%), and the lowest in Wyoming (6.0%). These families pay the second highest effective rate in Utah under both systems. At the median income, Arizona’s tax system and Utah’s tax systems impact middle-income families the most. The effective rate for a family earning $54,000 under Arizona’s tax system would pay 8.9% of their income in combined taxes. Utah’s bracket system has the second highest effective rate at 8.5%. Utah’s Single Rate system is third at 8.4%. Upper-income families earning $212,000 pay the highest percentage (8.3%) of their income in taxes under Idaho’s tax system, while those families would be impacted the least in Wyoming.

Table 4-82: Total Tax Effective Tax Rates

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

AZ 10.8% 12.1% 10.8% 9.6% 8.9% 8.5% 8.1% 7.8% 7.6% 7.4% 7.2%CO 7.1% 8.1% 7.7% 7.2% 6.9% 6.7% 6.6% 6.5% 6.5% 6.4% 6.2%ID 6.4% 7.4% 7.2% 6.8% 7.0% 7.1% 7.3% 7.6% 8.1% 8.2% 8.3%MT 7.0% 9.2% 8.9% 7.8% 7.5% 7.2% 7.3% 7.4% 7.5% 7.5% 7.6%NV 6.5% 7.0% 6.0% 5.3% 4.9% 4.6% 4.3% 3.9% 3.7% 3.4% 3.1%NM 8.0% 8.9% 8.1% 7.3% 6.9% 6.6% 6.7% 6.8% 6.9% 6.8% 6.7%UT(2006) 8.5% 9.7% 9.4% 8.7% 8.5% 8.4% 8.3% 8.2% 8.2% 8.1% 7.9%UT(2008) 8.5% 9.4% 9.2% 8.6% 8.4% 8.3% 8.2% 8.2% 8.2% 8.1% 7.9%WY 6.0% 6.3% 5.4% 4.7% 4.3% 4.0% 3.7% 3.4% 3.2% 3.0% 2.6% The following table shows that Idaho’s combined system is the only one in the study with a progressive total tax structure. Idaho exhibits a ratio of 0.9 and a difference between the high ($26,000 income) and low rate ($212,000) of -0.9%. Utah’s Single Rate system is second, and Montana is third. According to this measure, these are the least regressive combined systems in the study. Wyoming and Nevada, the two states that do not levy an income tax are the most regressive.



All Families

AGI (000)

High Rate/Low Rate

High Rate - Low Rate

AZ 1.7 4.9% CO 1.3 1.9% ID 0.9 -0.9% MT 1.2 1.6% NV 2.3 3.9% NM 1.3 2.1% UT(2006) 1.2 1.8% UT(2008) 1.2 1.4% WY 2.4 3.7%

Horizontal Equity With respect to horizontal equity, the disparity for families earning the median income for both the ratio and the percent difference is the smallest in Wyoming, Nevada and Arizona. The tables below show that the disparity is greatest at the median income in Idaho. For families earning $16,000, the disparity is relatively similar across states with Idaho having the largest ratio (1.8) and Arizona the greatest percent difference (4.5%). For families earning $212,000, the ratio largest in Nevada (1.7) and the percent difference is greatest in Arizona (1.9%). Montana has the lowest ratio of 1.1 and the smallest percent difference of 0.9% at this income level. Utah is right in the middle at all three income levels with respect to horizontal equity.


High/Low

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

AZ 1.4 1.3 1.2 1.2 1.2 1.1 1.2 1.3 1.2 1.1 1.3 CO 1.6 1.7 1.7 1.6 1.5 1.4 1.4 1.4 1.2 1.1 1.2 ID 1.8 2.0 2.2 1.9 1.9 1.7 1.7 1.6 1.2 1.1 1.1 MT 1.2 1.5 1.6 1.7 1.6 1.4 1.4 1.3 1.1 1.1 1.1 NV 1.6 1.3 1.2 1.2 1.2 1.2 1.2 1.4 1.3 1.5 1.7 NM 1.4 1.4 1.4 1.6 1.6 1.6 1.6 1.5 1.2 1.1 1.2 UT(2006) 1.6 1.8 1.7 1.5 1.5 1.4 1.4 1.3 1.2 1.1 1.2 UT(2008) 1.6 1.7 1.6 1.5 1.4 1.3 1.3 1.4 1.1 1.1 1.2 WY 1.6 1.3 1.2 1.2 1.2 1.2 1.2 1.4 1.3 1.5 1.7



High-Low

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $157 $212

AZ 4.5% 3.2% 2.2% 1.8% 1.4% 1.1% 1.6% 2.2% 1.3% 0.9% 1.9%CO 3.4% 4.3% 4.0% 3.0% 2.6% 2.1% 2.3% 2.4% 0.9% 0.8% 0.9%ID 4.1% 4.9% 5.4% 4.1% 4.0% 3.6% 3.6% 3.6% 1.4% 0.9% 1.1%MT 1.1% 3.2% 3.9% 3.7% 3.4% 2.6% 2.3% 1.9% 1.0% 0.8% 0.9%NV 3.8% 1.8% 1.2% 1.1% 0.7% 0.7% 0.8% 1.4% 1.1% 1.3% 1.5%NM 2.9% 2.8% 3.0% 3.3% 3.4% 3.3% 3.1% 2.5% 1.4% 0.9% 1.2%UT(2006) 4.1% 5.5% 4.8% 3.5% 3.1% 2.6% 2.5% 2.5% 1.2% 1.0% 1.2%UT(2008) 4.1% 4.7% 4.3% 3.1% 2.6% 2.2% 2.4% 2.5% 0.9% 0.8% 1.1%WY 3.2% 1.5% 1.0% 0.9% 0.6% 0.6% 0.6% 1.1% 0.9% 1.1% 1.2% Share of Taxes Paid The next table shows that families earning the median income pay the largest share of taxes in Wyoming and Nevada, 8.6% and 8.5%, respectively. Families in Idaho at the median income level pay the lowest share of taxes at 6.5%. Utah is 4th (2008) and 5th (2006) when ranking from lowest to highest effective rates at this income level. Families earning $16,000 in Wyoming pay 3.3% of the taxes collected, while those in Idaho pay 1.8%. Utah is 3rd (2008) and 4th (2006) behind Idaho and Montana in having the least impact on families earning $16,000. Families earning $212,000 in Idaho pay the largest share, 30.6%. Those earning $212,000 pay the lowest share of total taxes collected in Wyoming (20.5%).

Table 4-86: Total Tax Share of Taxes Paid

All Families

AGI (000)

$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

AZ 2.8% 5.1% 6.1% 6.9% 7.8% 8.8% 10.1% 12.1% 15.6% 24.7% CO 2.3% 4.2% 5.4% 6.3% 7.5% 8.6% 10.2% 12.5% 16.5% 26.5% ID 1.8% 3.3% 4.4% 5.2% 6.5% 7.9% 9.8% 12.7% 17.7% 30.6% MT 2.0% 4.2% 5.5% 6.0% 7.0% 8.1% 9.8% 12.4% 16.6% 28.3% NV 3.3% 5.8% 6.8% 7.6% 8.5% 9.5% 10.5% 12.0% 15.1% 20.9% NM 2.5% 4.4% 5.4% 6.1% 7.1% 8.1% 9.8% 12.5% 16.6% 27.4% UT(2006) 2.2% 4.0% 5.3% 6.2% 7.4% 8.6% 10.3% 12.7% 16.7% 26.7% UT(2008) 2.2% 3.9% 5.2% 6.1% 7.3% 8.5% 10.2% 12.6% 16.7% 27.2% WY 3.5% 6.0% 6.9% 7.7% 8.6% 9.5% 10.5% 12.0% 14.9% 20.5%


The table below shows again that Idaho has the only progressive tax structure with respect to combined taxes. In all the other states in the study, the combined tax structure is regressive, but to varying degrees. Montana is the least regressive. Wyoming, Nevada and Arizona appear to be the most regressive.

Table 4-87: Total Tax Share of Paid/Share of AGI


$16 $26 $35 $44 $54 $64 $77 $96 $126 $212

AZ 1.32 1.48 1.31 1.17 1.09 1.03 0.98 0.94 0.93 0.87 CO 1.06 1.22 1.16 1.07 1.04 1.01 0.99 0.98 0.98 0.94 ID 0.84 0.96 0.94 0.89 0.91 0.92 0.96 0.99 1.05 1.08 MT 0.92 1.21 1.17 1.02 0.98 0.95 0.96 0.97 0.99 1.00 NV 1.56 1.68 1.45 1.29 1.18 1.11 1.03 0.94 0.90 0.74 NM 1.15 1.27 1.17 1.05 0.99 0.95 0.96 0.97 0.99 0.97 UT(2006) 1.02 1.16 1.13 1.05 1.03 1.01 1.00 0.99 0.99 0.95 UT(2008) 1.03 1.13 1.11 1.04 1.02 1.00 0.99 0.99 1.00 0.96 WY 1.66 1.74 1.48 1.31 1.19 1.11 1.02 0.94 0.89 0.72


Suits and Kakwani Indices The following table lists the Suits and Kakwani Indices for each state and their rank. A value greater than zero indicates a progressive system. A value of zero shows a proportional system and a negative number indicates a regressive system. The further below zero, the more regressive the tax system. Idaho is progressive, followed by Montana as the least regressive. Utah (2008) is 3rd and New Mexico is 4th. While Utah (2008) was second according to the ratio of and the difference between the high and low effective rates, their position is reversed when evaluated according to both indices. Wyoming and Nevada are the most regressive with respect to combined taxes.

Table 4-88: Suits and Kakwani Indices for Total Tax

Suits Index


Progressive to Most

Regressive Kakwani

Index


Progressive to Most Regressive

Arizona -0.074 7 -0.073 7 Colorado -0.033 6 -0.032 6 Idaho 0.039 1 0.033 1 Montana -0.009 2 -0.012 2 Nevada -0.134 8 -0.125 8 New Mexico -0.024 4 -0.027 4 Utah 2006 -0.026 5 -0.024 5 Utah 2008 -0.019 3 -0.019 3 Wyoming -0.143 9 -0.135 9

Conclusion New Mexico, Idaho and Montana have the most progressive income tax systems in the study. Utah’s Single Rate ranks number four within the study with respect to progressiveness. New Mexico’s income tax system shelters those with low income from taxation through refundable tax credits and has the largest net subtraction from FAGI (6.65%). Idaho’s net subtraction from FAGI is 6.52%. Both New Mexico and Idaho tax income according to an income bracket, graduated rate structure. New Mexico’s top income bracket for married, filing joint status is $24,000 and the top rate is 5.3% (2006). Idaho’s top bracket for the same filing status is $47,928, but the top rate is 7.8% (2006). Colorado income tax system and Utah’s Bracket system are the least progressive. Colorado taxes income at a flat 4.64% rate. While Utah’s Bracket system is a graduated rate system, the top income bracket is $11,000 for married filing joint filing status and the top rate is 6.98% (2006).


The sales tax is regressive for all states. Effective tax rates are determined by the level of taxable expenditures and representative tax rates (please refer to the Methodology section for the comparison of taxable expenditures by state and income level). New Mexico and Arizona are the most regressive. Effective rates are highest in Arizona across the income spectrum due to a representative population weighted average rate of 7.79%, the highest in the study, and the inclusion of food in the base in some localities. New Mexico’s sales tax is a gross receipts tax. The representative tax rate 6.71% and food for home consumption is exempt. Nevada and Colorado have the least regressive sales tax policies. While Nevada’s representative rate is the second highest in the study, 7.56%, food for home consumption is exempt. Colorado also exempts food at the state level (although it also varies locally) and the representative rate is 6.69%. Effective rates are lowest in Wyoming as the representative rate is the lowest in the study at 5.39%. Excluding renters earning $16,000, the property tax is also regressive in each state. Idaho has the least regressive system, primarily due to the limit on the homeowner’s exemption. Idaho allows a 50% exemption, limited to a specific dollar amount (approximately $101,000 projected in 2008). As a result, more expensive homes receive a smaller percentage exemption than lower valued homes. This creates a less regressive property tax structure. Property tax effective rates are highest in Arizona and Montana and the most regressive. The shape of the total tax effective rate curve is determined by the effective rate of each tax and the percentage contribution of each tax at each income level. Except for Idaho, which has a proportional to slightly progressive total tax system, total taxes are regressive for all states. Combined tax effective rates are highest in Arizona and Utah’s Bracket system, followed by Utah’s Single rate system. For lower income families, property and sales taxes comprise the larger portion of total taxes. For upper income families, the income tax constitutes the greater portion. Montana has the least regressive total tax structure, followed by Utah’s Single Bracket system. The following graph shows the effective rate curves for total taxes for each state.


Effective Tax Rates

0%

2%

4%

6%

8%

10%

12%

$16

$26

$35

$44

$54

$64

$77

$96

$126

$157

$212

Income Level (thousands)

Effe

ctiv

e Ta

x R

ate

.

AZCOIDMTNVNMUT bracketUT single rateWY

Total of Income, Sales and Property TaxesAll Representative Household Types

The table below can be used to further understand the results of the tax incidence study with respect to total taxes. Idaho receives 51.3% from the income tax, a progressive tax. Similarly, Montana receives 52.9% from the income tax. The high proportion of the income tax in total taxes offsets the regressive sales and property taxes.

Table 4-89: Aggregate Total Taxes

% Income Tax % Sales Tax % Property tax AZ 26.5 29.6 43.9 CO 43.5 25.0 31.5 ID 51.3 22.2 26.6 MT 52.9 0.0 47.1 NV 0.0 43.8 56.2 NM 33.2 26.0 40.8 UT (06) 48.5 23.0 28.5 UT (08) 48.3 23.1 28.6 WY 0.0 43.3 56.7

A comparison of the impact on equity of the different tax systems would not be complete without a comparison of the amount of revenue raised under each. The following table shows the amount of total taxes collected in our representative study. Again, this is not the actual tax burden in each state, but only a comparative tool to be used within the


study to compare the different systems under the assumptions used in the study. Since total FAGI is the same for every state, the cumulative effective rate illustrates the difference in tax burden between states in the study for all families of all incomes. Of course, the lowest tax burdens occur under the tax systems of Wyoming and Nevada, states that do not tax income and which are the most regressive. Interestingly, the two most progressive tax systems, Idaho and Montana, do not have the greatest tax burdens. Idaho’s tax burden is 7.8% and Montana’s is 7.6%. Utah’s Bracket system has the highest tax burden, followed by the Single Rate system.

Table 4-90: Aggregate Total Taxes All Households

Total

Income Taxes

Total Sales Taxes

Total Property Taxes

Aggregate Total Taxes

Total Aggregate. Taxes /Total Aggregate. FAGI

Arizona $19,398 $21,677 $32,139 $73,214 8.1% Colorado $26,118 $14,999 $18,887 $60,004 6.6% Idaho $36,139 $15,617 $18,722 $70,478 7.8% Montana $36,447 $ 0 $32,455 $68,901 7.6% Nevada $ 0 $16,017 $20,528 $36,545 4.0% New Mexico

$20,906 $16,329 $25,671 $62,907 6.9%

Utah (2006)

$36,326 $17,279 $21,363 $74,968 8.3%

Utah (2008)

$36,033 $17,279 $21,363 $74,675 8.2%

Wyoming $ 0 $13,799 $18,038 $31,837 3.5% Note: Total FAGI is the $907,000 for each state


Chapter 5 Conclusion The amount of tax revenue collected is a function of tax policies and the demographics specific to each state. In Chapters 2 and 3, we examined actual state tax revenue data from 2000 to 2006 in order to evaluate and compare the Intermountain states according to the policy principles of simplicity, transparency, neutrality, stability and sufficiency, balance and competitiveness. In Chapter 4, we isolated the tax policies in effect in each state from their specific demographic circumstances. We evaluated the tax policies of the states in our study with respect to the tax policy principle of equity using the same representative household profiles and income points for each state. In this way, we looked at the tax incidence for representative Utah households under each tax system. This chapter will focus on the best practices in tax policy. The best practices were derived by linking different elements of tax policy to the performance of the states according to the policy principles. Income Tax The income systems that performed the best with respect to simplicity are also among the top performers with respect to neutrality, stability and sufficiency. Utah’s Single Rate system and Colorado have several things in common. Utah’s Single Rate system’s top rate is 5% and Colorado taxes income according to a flat rate of 4.63%. Only Arizona has a lower top tax rate. Both have the smallest number of additions and subtractions and capture a larger percentage of the tax base. Colorado’s income tax system and Utah’s income tax systems also perform the best with respect to sufficiency. Best practices with respect to the principles of simplicity, neutrality, stability and sufficiency of the income tax system include a broad base (fewer addition and subtractions) and a relatively uniform and low tax rate across all income levels. New Mexico also performed well with respect to simplicity, stability, competitiveness and equity. While New Mexico employs an income bracket, graduated rate structure, the top bracket is only $24,000 and the top rate is 5.3%. New Mexico, however, does not capture as large a portion of the tax base as Utah’s Single rate system or Colorado’s, and consequently, does not perform as well with respect to neutrality. However, New Mexico achieves the most progressive income tax system as a result of the availability of the Low and Middle-Income Tax Exemption and the Low Income Comprehensive Tax Rebate (please see Appendix 1-New Mexico for details). These provisions lower taxes for low and middle-income taxpayers, which makes the income tax system more competitive, but less economically neutral or sufficient. A best practice with respect to equity is to shelter low-income households from a tax on income. Combining the best practices described in the previous paragraph with a low-income tax credit can balance the performance of an income tax system with respect to neutrality, stability, sufficiency, and equity. This type of income tax system would include fewer additions and subtractions from FAGI (i.e., a broad tax base), low and relatively uniform tax rates, and a low-income tax credit that


could be refundable or non-refundable, depending on preferences with respect to equity versus sufficiency. Sales Tax The sales tax findings illustrated how policy principles can be in conflict with each other. Idaho performs the best with respect to simplicity and transparency, primarily due to the uniformity of the sales tax rates across the state. While none of the sales tax systems are economically neutral, Idaho and Utah perform the best with respect to neutrality, also due to the uniformity of their tax rates. New Mexico’s Gross Receipts Tax captures the greatest tax base, 61.56%, but the range of tax rates is greater. Idaho and Utah also perform well with respect to the balance between the income tax and state sales tax. Colorado, however, performs the best with respect with respect to stability of state sales tax revenues as a result of its small tax base (28.83%), a detriment for neutrality. Bruce and Fox (2005) concluded in their report that a small sales tax base contributed to stability relative to personal income. Wyoming’s sales tax revenue was the most volatile and the tax base is the second largest. Utah ranks second with respect to both neutrality and stability, indicating a balance between these two principles. With a tax base of 45.83%, and a range of tax rates of 5.75% to 6%, Utah may not be the best performer with respect to these two principles, but perhaps the best at achieving a balance between the two. Utah is second with respect to sufficiency as well, while Colorado is last in sufficiency with respect to the state sales tax. Neutrality and equity can also be in conflict. Nevada and Colorado have the least regressive sales taxes, but also the smallest tax bases. Food is exempt at the state level in both states and Colorado taxes only 14 services while Nevada taxes 19 services. Typically, upper income families spend a greater portion of their income on services than low-income families. New Mexico, with the largest tax base and a 6.71% representative sales tax rate, performs in the top three with respect to neutrality (and sufficiency at the local level), but is also one of the most regressive. Best practices with respect to the sales tax include a broad base, low uniform rates, an exemption for food for home consumption and the inclusion of services in the tax base. Low uniform rates will enhance stability and neutrality. A broad base will promote neutrality and sufficiency. An exemption for food, the inclusion of services and a low rate will add a measure of equity to the sales tax system. Balance between these principles will result in a sales tax system that may not be the best performer with respect to any one of these principles, but one that best achieves balance between them. Another point to consider is the stability and composition of the underlying economic base. The stability of the underlying economic base may impact the degree of flexibility in achieving the desired balance.


One issue that must be addressed with respect to uniformity is local autonomy. Local governments rely on local sales taxes to fund their budgets. A single uniform rate leaves little room for localities to determine their own budgetary needs. Questions of whether municipalities should have the right to determine the level of taxation that meets their specific needs are not inconsequential. Colorado is an example of a decentralized sales tax system with local autonomy. Colorado has a low state rate (2.9%), but local rates can be quite high. The sales tax is a sufficient source of local financing in Colorado, but as a result the local sales tax is far from neutral. Property Tax Idaho is one of the best performers with respect to simplicity, neutrality, competitiveness (for lower home values), and equity. While Idaho performs well with respect to the sufficiency of the property tax as a local funding source for public education, it is important to keep in mind that Idaho cities do not levy a sales tax. The characteristics of Idaho’s property tax system includes uniform assessment ratio with only a homeowner’s exemption that is limited in dollar amount. This adds equity to an otherwise inherently regressive tax system. Idaho does require that property tax revenue not exceed an increase of 3% over the prior three years, which can be overridden by a 2/3-voter approval. Property tax relief in Idaho is limited to a Circuit Breaker designed to help low--income taxpayers who are over 65, blind, disabled or a veteran. Utah also performs well with respect to neutrality. After Idaho, Utah has the largest tax base (all property, except residential is assessed at 100%) and a lower range of average property tax rates from county to county. While Utah does not impose a revenue cap anymore, the Truth and Taxation laws require public hearing if rates or revenues are to be increased. New Mexico performs best with respect to balance between the local sales and property tax and has the second least regressive property tax system. New Mexico allows with a head of household exemption in addition to the 33% assessment ratio. Arizona and Montana are the worst performers with respect to competitiveness and equity. Both states have the highest effective rates and the most regressive property tax systems. Arizona’s property tax system is the most complex. Property tax revenues fund public education in all states. Local revenue accounts for 50% of Colorado’s funding for public education, 79% of which comes from property tax revenues. Colorado ranks third in competitiveness and is second in per pupil funding. Arizona’s local revenue accounts for 44% of public education funding, 76% of which is property tax revenues. However, Arizona is second to last in competitiveness. Idaho’s local revenue is 32% of public education funding (second to last in front of New Mexico), but 87% comes from the property tax. Yet, Idaho is the most competitive. One can see that there is conflict between sufficiency and competitiveness with respect to the property taxes. Thirty five percent of Utah’s public education funding comes from local revenue, 84% of which is the property tax. Utah ranks fifth with respect to competitiveness. Most of the states require a property tax revenue or rate cap. Colorado’s Gallagher Amendment attempts to maintain stability between the share of residential and non-


residential properties in the tax base (See Appendix 1-Colorado). As home values in the Intermountain west increase relative to other property values, this is an interesting approach to assessment. States that limit increases in assessment of residential properties to the rate of inflation, such as New Mexico, also attempt to adjust for rapidly rising home values. In Montana, all properties are centrally assessed and reappraised values can be phased in over 5 years. Nevada includes a “hold harmless” provision that states that a property tax rate cannot be less than that of the previous year. As is the case with the income and sales tax systems, best practices include a broad tax base and low, uniform tax rates. Each state must strike a balance between sufficiency and competitiveness based on their particular demographic characteristics. In the case of Idaho neutrality, simplicity, and equity need not be in conflict. Tax relief for those with lower home can create a more equitable system while maintaining a large base. Idaho’s homeowner’s exemption is an example of this. Additional tax relief programs, such as the Circuit Breaker, can protect those whose homes appreciate beyond the owner’s means to pay for the increases in property taxes. Best practices should also include a mechanism to protect homeowners from rapidly rising home values. Limiting increases in assessment to the rate of inflation or using an average for assessment of a set number of prior years can protect homeowners whose increases home values are rising faster than their income. Combined Income, Sales and Property Taxes While many speak of the three-legged stool of the income tax, sales tax and property tax, this is only accurate when considering combined state and local revenue. State and local governments, however, are not funded together. The income and sales tax fund state government, while local sales and property taxes fund local government. Nonetheless, income tax, state and local sales tax, and property tax are the predominant taxes that impact households. As a result, it is important to consider the balance, or lack thereof, of these combined taxes and their impact on households. The income tax is a tax on current income, the sales tax, a tax on consumption and the property tax, a tax on wealth. In this way, balance between these three taxes should result in both a diversified revenue system and in a tax system that does not discriminate between current income, consumption or wealth. One should keep in mind that while the property tax is a tax on wealth, some who are not wealthy might experience home appreciation beyond their ability to pay the increase in property taxes out of their current income. Tax relief programs are important for this reason as well. Balance and equity go hand in hand when there is balance between the income tax on one hand and the sales and property tax combined on the other. Idaho performs well with respect to balance and equity because approximately half of total household taxes come from the income tax and the other half from sales and property taxes combined. The same is true for Utah. The opposite is true for Arizona. Arizona’s total tax system is regressive because total household taxes are predominated by property taxes, accounting for over half of the total representative household tax burden. Montana’s household taxes


are divided between the income and property tax, but their income tax system is one of the most progressive. As a result, Montana performs well with respect to equity, but not with respect to balance. Similarly, while New Mexico’s income tax system is the most progressive, it ranks fourth with respect to total tax equity because the sales and property taxes predominate with respect to total household taxes. New Mexico only performs well with respect to balance of local tax revenue (sales and property tax), but does not perform well with respect to combined state and local revenue when all three taxes are considered. State and Local Tax Revenue In evaluating whether or not a state or local tax system is sufficient, several issues arise. In the case of Utah, state tax revenue accounts for less than 50%, on average, of state direct expenditures, the lowest of the states in the study. Federal revenue in Utah is a significant source of funds. In Wyoming, other taxes (such as those on natural resource extraction) and federal government revenue play an important part in funding state government. In Nevada, selective sales taxes (which were not evaluated in this study) are significant. Thus, the sufficiency and adequacy of the tax systems depend on each state’s other resources that can also generate revenue for state and local government. These other revenue sources should also be evaluated for their reliability in different economic conditions. In addition, one must examine the restrictions on revenue growth and expenditures. Colorado, for instance, performs relatively well with respect to sufficiency of the income, local sales and property taxes. However, Colorado’s TABOR laws (see Appendix 1-Colorado) restrict the level of revenue and expenditures. Thus, while Colorado’s income, local sales and property taxes are “sufficient” in funding the given level of expenditures, one cannot infer that, on a needs basis, that the taxes are adequate. It was not our intent in this study to evaluate the adequacy of expenditures relative to needs. Yet, it is important to make this distinction. In this context, best practices include a broader view of public finance. It is important to design tax policies that impact households taking into account other sources of revenue, such as tourism or natural resources. In this way, appropriate state tax policy is specific to the circumstances, including the demographic characteristics, of each state. Yet, in designing tax policy, for any given level of revenue, the principles of simplicity, transparency, neutrality, stability, sufficiency (in the context of the state’s particular circumstances), balance, equity and competitiveness provide a sound template for a well-rounded and viable public finance system. Whenever these principles conflict, striking a balance between them results in the best outcome overall. A predominant theme throughout the study is that broad tax bases and low, relatively uniform rates provide the foundation for sound tax policy.


Appendix 1 Description of Tax Policies of the Intermountain Western States The following description of the tax policies with respect to the income, sales and property taxes of Arizona, Colorado, Idaho, Montana, Nevada, New Mexico and Wyoming draw from a variety of sources. Tax and revenue data included in this appendix are as reported by the respective tax commissions or departments of revenue. As a result, some number may differ from those reported by the U.S. Census that were used in Chapter 3. Arizona Individual Income Tax Filing Requirements The following table shows Arizona’s filing requirements.

Arizona Filing Requirements 2006 Filing Status If Arizona AGI is at least: Or if gross income is at

least: Single $5,500 $15,000 Married filing jointly $11,000 $15,000 Married filing separate $5,500 $15,000 Head of Household $5,500 $15,000 Source: 2006 Personal Income Tax Form 140A: http://www.azdor.gov/Forms/2006/140A instructions 2D.pdf Income Tax Threshold Taxpayers with gross income less than the threshold shown in the table below have to file income tax returns, but are exempt from the income tax. Those who use this chart must claim the family Tax Credit if they are eligible. Dependents Single Married Filing

Separate Head of Household

Married Filing Joint

0 $7,846 $7,846 NA 15,643 1 10,000 10,000 17,943 20,000 2 10,965 12,015 20,135 23,600 3 13,265 14,315 23,800 27,300 4 15,565 16,615 25,200 31,000 5 17,865 18,915 26,575 31,000 Source: Arizona Department of Revenue


Tax Rates The State of Arizona levies an income tax based on a graduated rate, bracket system. House Bill 2876, an Omnibus tax relief act lowers the income tax rates for 2006 and 2007. The following table illustrates the tax brackets and rates in effect for 2005, 2006, and 2007.

Income Tax Brackets and Rates Single/Married Filing Separate Income Bracket

2005 Tax Rate 2006 Tax Rate 2007 Tax Rate

$0-$10,000 2.87% 2.73% 2.59% $10,001-$25,000 3.20% 3.04% 2.88% $25,001-$50,000 3.74% 3.55% 3.36% $50,001-$150,000 4.72% 4.48% 4.25% $150,001 and over 5.04% 4.79% 4.54% Source: Arizona Department of Revenue For taxpayers with filing statuses of Married Filing Jointly and Head of Household the income tax brackets are double, but the tax rates are the same. Deductions and Exemptions For 2006, the standard deductions and personal exemptions are as follows:

2006 Standard Deductions Filing Status Standard Deduction Single $4,247 Married filing separately $4,247 Married Filing Jointly $8,494 Head of Household $8,494 Source: 2006 Personal Income Tax Form 140A: http://www.azdor.gov/Forms/2006/140A instructions 2D.pdf

2006 Personal Exemptions Filing Status Exemption Single $2,100 Married filing joint: no dependents $4,200 Married filing joint: at least 1 dependent $6,300 Head of Household: not married $4,200 Head of Household: married $3,150 Married filing separate: no dependents $2,100 Married filing separate: at least 1 dependent

$3,150

Source: 2006 Personal Income Tax Form 140A: http://www.azdor.gov/Forms/2006/140A instructions 2D.pdf


Taxpayers in Arizona determine their state taxable income beginning with Federal Adjusted Gross Income. The taxpayer makes the following additions and subtractions to FAGI to arrive at Arizona Adjusted Gross Income: Additions:

• Non-Arizona municipal interest • Early withdrawal of Arizona Retirement System contributions not included on your

federal return • Ordinary income portion of lump-sum distributions excluded on your federal return • Total federal depreciation • Medical savings account (MSA) distributions • I.R.C. §179 expense in excess of allowable amount • A variety of other additions

Subtractions:

• Exemptions o Age 65 or over o Blind o Dependents o Qualifying parents and ancestors of your parents.

• Interest on U.S. obligations such as U.S. savings bonds and treasury bills • Exclusion for federal, Arizona state or local government pensions (up to $2,500 per

taxpayer) • Arizona state lottery winnings included as income on your federal return (up to

$5,000 only) • U.S. Social Security or Railroad Retirement Act benefits included as income on

your federal return (the taxable amount) • Recalculated Arizona depreciation • Certain wages of American Indians • Income tax refund from other states • Deposits and employer contributions into MSAs. • Construction of an energy efficient residence. • Active duty military pay (including combat pay) that you included in federal

adjusted gross income • A variety of other subtractions

The taxpayer then subtracts their standard or itemized deduction and personal exemptions from Arizona AGI to determine Arizona taxable income. Using the tax tables derived from the income tax bracket and graduated rate table above, the taxpayer calculates their amount of income tax accordingly. Tax Credits Arizona allows a variety of income tax credits. There are 27 (check this for 2006) potential nonrefundable individual tax credits. The major tax credits are the family


income tax credit, income taxes paid to other states, donations to charities for the working poor, increased excise taxes paid, private school STO (Private school tuition organizations, property tax, and public school extra curricular, and research and development. The Family Income Tax Credit is a nonrefundable tax credit available for families that meet the income threshold for the tax credit for different numbers of dependents. If the taxpayer’s Arizona Adjusted Income (less exemptions for blind, over 65, dependents, and qualifying parents) is less than the income thresholds below, the taxpayer is eligible for the credit. The following tables illustrate the income thresholds for the Family Income Tax Credit.

Family Income Tax Credit: Income Thresholds Dependents Married filing joint Head of Household Single or Married

filing Separate 0 or 1(single or married filing separate- 0 or more)

$20,000 $20,000 $10,000

2 $23,600 $20,135 3 $27,300 $23,800 4 (married filing joint-4 or more)

$31,000 $25,200

5 or more $26,575 Source: 2006 Personal Income Tax Form 140A: http://www.azdor.gov/Forms/2006/140A instructions 2D.pdf The amount of the credit is equal to $40 for each person whom a personal or dependent exemption is allowed with respect to the taxpayer pursuant to section 43-1043 and 43-1023, subsection B, paragraph 1, but not to exceed $240 in the case of a married couple filing a joint return or a single person who is a head of a household or $120 in the case of a single person or a married couple filing separately (Arizona Tax Code Title 43-1073) Transaction Privilege Use Tax (TPT) Arizona imposes a tax similar to the gross receipts tax called the Transaction Privilege, Use and Severance Tax. We will exclude severance taxes for the purpose of this study and focus on the privilege and use tax. Unlike sales taxes that are imposed on the consumer, the transaction privilege tax is imposed on the privilege of doing business in the state and is levied directly against the seller. Tax Rates The current state tax rate for most activities is 5.6%. County and Local governments may also impose their own privilege tax. The total of transaction privilege and rental occupancy taxes creates a tax base that is divided into the distribution base and the non-shared base. The distribution base is divided among municipalities (25%), counties (40.51%) and the state general fund (34.49%). The non-shared base is deposited into the


general fund. A 5% use tax is imposed on the purchase price of tangible personal property if a TPT equal to or greater than the Arizona rate was not paid. Use taxes are deposited into the general fund. The following table illustrates the state TPT for taxable activities for FY2005-2006.

State Transaction Privilege, Use Tax Rates FY2005-2006 Taxable Activity

Distribution Base

Non-shared Base

Education Total State Tax

Transporting and Towing

1.0% 4.0% 0.6% 5.6%

Mining, Oil and gas Production

1.0% 2.125% 0.0% 3.125%

Utilities 1.0% 4.0% 0.6% 5.6% Communications 1.0% 4.0% 0.6% 5.6% Railroads and Aircraft

1.0% 4.0% 0.6% 5.6%

Private Car/Pipelines

1.0% 4.0% 0.6% 5.6%

Publishing 1.0% 4.0% 0.6% 5.6% Printing 1.0% 4.0% 0.6% 5.6% Restaurants and Bars

2.0% 3.0% 0.6% 5.6%

Amusements 2.0% 3.0% 0.6% 5.6% Personal Property Rentals

2.0% 3.0% 0.6% 5.6%

Contracting 1.0% 4.0% 0.6% 5.6% Retail 2.0% 3.0% 0.6% 5.6% Hotel/Motel Tax 2.75% 2.75% 0.0% 5.5% Rental Occupancy Tax

2.0% 1.0% 0.0% 3.0%

Use and Use Inventory tax

0.0% 5.0% 0.6% 5.6%

Membership Camping

2.0% 3.0% 0.6% 5.6%

Jet Fuel (per gallon)

$0.0122 $0.0183 $0 $0.0305

Jet Fuel Use (per gallon)

$0 $0.0305 $0 $0.0305

Source: 2006 Arizona Department of Revenue Annual Report Of the 15 counties in Arizona, 14 levy county additional taxes or surcharges. The following table shows the range of the average combined state, county and local taxes by county for selected activities as of September 2007.


Taxable Activity Range Retail 5.85%-6.725% Communications 5.85%-6.725% Restaurant and Bars 5.85%-6.725% Amusement 5.85%-6.725% Source: Arizona Department of Revenue Municipalities impose Privilege Taxes at varying rates, ranging from 1.5% to 4.0%. Transaction Privilege Tax Base The categories of transactions and business activities listed above form the TPT state tax base. Net taxable sales, (including $1,219,984,252 mining severance taxes and $ 6,155,958,934 Use tax), for FY2005-2006 were $108,696,842,570. The following table shows total collections for FY2005-2006.

Transaction Privilege, Use Collection FY2005-2006* Class Collections Distribution Base $1,742,272,992 Non shared Base 3,350,808,572 Total $5,093081,564 Source: 2006 Arizona Department of Revenue Annual Report *Excludes severance taxes The TPT tax base is similar across counties but not identical. Most include utilities, telecommunications, restaurants and Bars, Rentals of Personal Property, Contracting, retail, Hotel/Motel as well as other taxable activities. Some include amusement and publishing, while other counties do not. Exemptions As of 2003, Arizona had over 100 exemptions to the Transaction Privilege Tax. While food is exempt from the state TPT base, it is included in many cities and towns. State exemptions include professional services, business-to-business services, personal services, environmental products, economic development, nonprofits, food and medicine (prescription drugs). Estimates of state revenue foregone as a result of exemptions in 2003 were $440 million (Jarzynka, 2003). Revenue The following tables shows gross collections for the state, county and local TPT. 2005-06 Revenue State TPT $5,093,081,564 Municipal $551,992,962


Property Tax The property tax in Arizona is calculated from two separate bases. The full cash value (market value) base is used to calculate tax rates to pay for voter-initiated bonds, overrides, and special district levies. The limited value base is value that is determined by statute and cannot exceed the cash value. Taxes based on limited value are used to fund basic operations of the state, county and city governments, schools, and other public entities. Taxes calculated on the limited value are called primary taxes and taxes calculated on the cash value are called secondary taxes (Arizona Department of Revenue, 2006). With respect to secondary taxes, there is no limit on the amount of taxes or the growth rate of assessed values. Conversely, primary value is limited in the amount that it may increase each year. The primary value may increase either 10% of the previous year’s value or 25% of the difference between current year’s secondary value and the previous year’s primary value. This excludes new construction and primary value may increase more due to new growth. The Arizona Constitution mandates the limit on primary value increases and the amount of total primary taxes that a county, city or community college district can levy. The amount of primary tax levy is limited to an annual 2% increase plus new growth. Additionally, there is a limit with respect to owner-occupied residences. The combined primary tax from all jurisdictions may not exceed 1% of cash value ($10 cap on $100 assessed value). If the tax exceeds that amount, school district primary taxes are reduced and the state will provide the difference between the overall primary tax rate and the $10 rate cap. (Arizona Tax Research Association, 2006) Property Tax Rates Primary taxes and secondary taxes are added together to determine the total annual tax bill. The following table shows the average primary and secondary property rates per $100 of assessed valuation for 2006.

2006 Average Property Tax Rates Per $100 of Assessed Value Primary Secondary Total School Districts $4.16 $2.01 $6.17 Counties $1.69 $0.56 $2.25 State $0.02 $0.00 $.020 Cities $0.38 $0.52 $0.90 Community Colleges

$0.97 $0.18 $1.15

Special Districts $0.00 $0.48 $0.48 Total $7.24* $3.75 $10.99* Source: Arizona Department of Revenue FY2006 Annual Report *Figures may not add due to rounding Assessment


County assessors are responsible for assessing and collecting property taxes. The Department of Revenue is responsible for assessing centrally valued properties such as airlines, electric and gas, mines, pipelines, railroads, telecommunications and water utilities. Different classes of property are also assessed at different rates. The following table illustrates the assessment rates for 2006.

Assessment Ratios by Property Type

Classification Assessment Ratio Mines, Utilities, Commercial Real, Producing Oil and Gas Property

25%*

Commercial Personal 1st $53,266 exempt; 25% on remainder Agricultural Real: Vacant Land 16% Agricultural Personal 1st $53,266 exempt; 16% on remainder Residential 10% Rental Residential 10% Railroads, Airlines, Historic Property, Foreign Trade Zones, Enterprise Zones, Qualifies Environmental Technology Facilities

5%

Commercial Historic Combination 1% and 25% Rental Residential Historic Combination 1% and 10% Improvements on Government Property 1% Source: Arizona Department of Revenue FY2006 Annual Report *Starting in tax year 2006, the assessment rate is reduced 0.5% each year over the next 10 years Equalization Sales ratio studies are conducted to determine the equality of assessments within a neighborhood or market area. The studies are conducted several times a year by county, property type, and area. The Department of Revenue evaluates county assessors’ performance according to the sales ratio study. Tax Relief and Exemptions Arizona does not tax household property or intangibles. In addition, the state pays 35% of the school district primary tax rate for owner-occupied residences. Other property tax exemptions include:

• Disabled persons • Widows and widowers of Arizona residents

Eligibility is restricted to those with income below a certain threshold. The maximum exemption is limited to $3,000 if assessment does not exceed $20,000 (adjusted for inflation) (Arizona Tax Research Association, 2006).


Disabled veterans are available for an exemption. The exemption has no income test and the amount varies with disability and total assessment. Property tax deferrals are allowed for persons over the age of 69. Residents 65 years or older can apply to freeze the full cash value of their primary residents for up to 3 years if their income is below an established threshold of 400% of the Supplemental Security Income (SSI) benefit rate for one owner and 500% for more than one (Arizona Tax Research Association, 2006). Revenue Revenue from Arizona property taxes totaled $5,704,270,225 in 2006. The primary assessed taxable base was $50,641,124,400 and the secondary assessed taxable base was $54,394,761,521. The following table shows the property taxes levied in 2006 by taxing entity.

2006 Property Tax Levies by Entity Primary Secondary Total State $12,230,174 $0 $12,230,174 County $858,302,680 $305,160,317 $1,163,462,997 Cities and Towns $194,955,401 $282,710,873 $477,666,274 Community Colleges

$492,388,907 $95,520,226 $587,909,133

Schools $2,106,426,926 $1,093,228,070 $3,199,654,996 All Other $0 $263,346,651 $263,346,651 Total $3,664,304,087 $2,039,966,138 $5,704,270,225

Source: Arizona Department of Revenue FY2006 Annual Report Colorado A significant aspect of Colorado’s Tax Policy is the Taxpayer’s Bill of Rights, or TABOR. Passed in 1992, TABOR is a set of constitutional amendments designed to limit revenue growth for state and local governments in Colorado. It requires that any tax increase by any taxing jurisdiction (i.e. state, county, municipal, school or special service district) beyond a certain limit be voter approved (National Council of State Legislators). TABOR requires advance voter approval of “ any new tax, tax rate increase, mill levy beyond that for the prior year, valuation for assessment ratio increase for a property class, extension of an expiring tax or a tax policy change directly causing a net tax revenue gain” (The Bell Policy Center, 2003). TABOR limits the growth in state revenue to population growth and inflation. Local revenue cannot grow faster than the value of net new construction and inflation. Increases in school district revenues are limited to the change in enrollment and inflation. Revenue collected beyond these limits must be rebated to the taxpayer. TABOR also limits the kinds of taxes that can be imposed. It


prohibits new real estate transfer taxes, local income taxes, and state property taxes. Any state income tax change must have a single rate (The Bell Policy Center, 2003). Income Tax Filing Requirements Colorado residents, part-year residents who earn income during the part of the year that they were a resident, and nonresidents with Colorado source income that are required to file a federal return must file a Colorado income tax return. Deductions and Exemptions Since Colorado begins the calculation of state taxable income using federal taxable income, Colorado taxpayers receive the full benefit implicitly of the federal standard or itemized deductions and personal exemptions. Tax Calculation Colorado imposes a flat 4.63% tax on Colorado taxable income. Colorado taxable income is federal taxable income adjusted for certain additions and subtractions. Additions include:

• State income tax included in federal itemized deductions • Bond interest from states other than Colorado • Certain lump sum distribution from a pensions or profit sharing plan not

included in federal taxable income • The smaller of line 8 from federal form 8814 or $850 in the taxpayer

reports a child’s income on the federal return. • Federal charitable contributions deduction on which a Colorado gross

conservation easement credit was also claimed • Fiduciary or partnership modifications that increases federal taxable

income. Subtractions from federal taxable income include:

• State income tax refund reported as federal income • U.S. Government bond interest • Certain pension and annuity income included in federal taxable income • Colorado source capital gain • Payments or contributions made to a qualified state tuition program

included in federal taxable income • Certain qualifying charitable contributions • Railroad retirement benefits • Medical savings account contribution not deducted on federal return • Fiduciary or partnership modifications that decreases federal taxable

income


• Previously taxed PERA (Public Employment Retirement Association) or School District #1 benefits from 1984-1986

The tax liability is calculated by multiplying Colorado taxable income by 4.63%. Tax Credits Colorado allows that following tax credits that reduce the taxpayer’s tax liability.

• Personal Credits • Alternative Fuel Credits • Gross Conservation Easement Credits • Enterprise Zone Credits • Child care Credit

Sales and Use Tax Tax Rates The State of Colorado imposes a sales and use tax of 2.90% of taxable value. The tax is imposed upon retail sales of tangible personal property, lodging, telephone service, restaurant food and drink sales, rental autos and similar item (Colorado Department of revenue, 2006) Cities and counties can also impose their own sales and use taxes on purchases made within their jurisdictions. The state collects sales tax on behalf of more than 175 cities and counties. All counties that impose a sales tax have the tax collected by the state. The cities and counties whose sales tax is collected by the state are called “state collected.” Some cities have enacted a “home rule” charter and have elected to administer and collect sales and use taxes on their own. These cities are called “self collected” jurisdictions (Colorado Department of Revenue, 2006) The following table shows the range of sales and use taxes imposed by the “state collected” and “self-collected cities and counties.

Local Sales Tax Rates 2006 Jurisdiction Range of Sales Tax Rate Imposed State Collected Counties 0.25%-5.0% State Collected Cities 1.0%-4.5% Self Collected Cities 1.50%-5.0% (additional rates may also be

levied ranging from 0.20%-7.50% Source: Colorado Department of Revenue. Colorado Sales/Use Tax Rates


In addition to state, county and city sales and use taxes, taxpayers may be subject to Special Districts may impose state sales and use taxes in some jurisdictions. The following table illustrates the major special district taxes.

Special District Taxes District 2006 Tax Rate Regional Transportation District 1.0% Football Stadium District 0.1% Scientific and Cultural Facilities District 0.1% Local Improvement District 0.5% Local Marketing District 1.5%-4.0% Mass Transit District 0.50%-0. 75% Rural Transportation District 0.20%-1.0% Source: Colorado Department Of Revenue. Colorado Sales/Use Tax Rates Other local sales and use taxes include a short-term rental tax of 1.0%, a county lodging tax ranging from 0.90% to 4% and a Multi-jurisdictional Housing Authority tax of 0.125%. Tax Base Exemptions and Exclusions The following transactions represent the major exclusions to the state sales tax base:

• Sales of services • Wholesale sales • Interstate commerce sales • Sales to governments, religious, or charitable organizations • Admissions • Lodging over 30 days • Gasoline • Cigarettes • Food for home consumption • Prescription drugs and prosthetics • Certain machinery and machine tools • Livestock and livestock feed • Seed • Newspapers • Residential fuel used for light, heat and power

With respect to the state sales tax, gross Sales for 2006 was $157,152,857,000. Net taxable sales totaled $65,342,490,000 or 42% of gross sales (Colorado Department of Revenue, 2006)


For state collected cities and counties, the goods that are included in the state sales tax base are also included in the local sales tax base. However, some goods that are exempt from state sales tax may be subject to a local or county sales tax. These include food for home consumption, electricity, and gas and fuel for residential use. Self-collected jurisdictions establish their own regulations as to what is included and exempted from the sales tax base (Colorado Department of Revenue). Property Tax Every year, each taxing jurisdiction (county, city, school district, special service district) holds budget hearings to determine how much revenue will be needed for the following year’s operations. The required revenue is divided by the assessed value to determine the mill levy ($ per $1000 of assessed value) Colorado law puts limitation on the amount that revenue can be increased year to year. The limitation is the lesser of:

• Local growth and inflation • Inflation • 5.5% increase of prior year’s revenue

Voters can approve increases above these limits (Douglas County Assessor’s Office). Revenue The property tax in Colorado provides revenue for local government. 51% is used to support schools, 25.26% funds county governments, 17.36% funds special districts, 5.26% for municipal governments and 1.12% is used to finance junior colleges (Colorado Department of Local Affairs). The following table shows property tax revenue by taxing jurisdiction for 2006.

2006 Property Tax Revenue Jurisdiction Revenue County $1,382,715,757 Municipal $ 287,721,022 General School $2,853,006,858 Special Districts $ 950,250,654 Total $5,473,694,291 Source: Division of Local Affairs. Property Tax Division. 2006 Annual Report


Tax Rates Counties, Cities, school districts and special service districts can impose property taxes within their jurisdiction. The table below presents the average and range of mill levies ($ per $1000 of assessed value) for the state of Colorado.

2006 Property Tax Rates Jurisdiction Average Mill Levy ($ per $1000 assessed

value) County 18.563 (Range 7.602- 42.73) Municipal 7.768 (Range 0.982- 51.20) General School 37.46 (Range 7.316- 53.50) Special Districts 2.775 (Range 0.834- 5.716) Total Average County 73.48 (Range 21.10- 101.49) Source: Division of Local Affairs. Property Tax Division. 2006 Annual Report As the table suggest, property tax rates vary greatly within and between counties. Assessment Assessment and valuation is the responsibility of county assessors, except for centrally assessed property that is handled by the Colorado Department of Revenue. Centrally assessed property includes all public utilities, rail transportation companies, and airlines conducting business in Colorado. In 1982, a law was passed, called the Gallagher Amendment, which stabilizes the share of residential real property as a percentage of the tax base. Due to increases in residential property values relative to non-residential property, the share of residential property increased from 29% in 1958 to 44% in 1982. The Amendment requires a biennial adjustment of the residential assessment rate in order to stabilize the share of residential property tax revenue as a percentage of total property tax revenue, excluding new construction, destroyed property and changes in production volumes of natural resource property. The 2006 residential assessment rate is 7.98% of assessed value (7.96% for 2007 and 2008). Assessment rates for most classes of non-residential property are fixed at 29%. The current residential target percentage is 47.22%. However, the Constitution prohibits an increase in the rate without statewide voter approval (Colorado Department of Local Affairs). Equalization The State Board of Equalization has responsibility to supervise the valuation and assessment of taxable property and the levying of property taxes. The Board reviews the findings of a valuation annual study and can order reappraisals in counties found to be noncompliant with standardized procedures and statistical measurements. The purpose is to ensure that county assessors use the same methods for valuing property and the study is the primary means of achieving equalization throughout the state. This is particularly


important due to the relationship between property value and state aid in finding schools. Since state aid will supplement local property taxes in the financing of schools, differences in valuation may either under or over-state the amount of state aid that is needed (Colorado Department of Local Affairs). Exemptions and Tax Relief Colorado exempts certain property of the federal government, state government, county and political subdivision government, religious entities, and charitable organizations. However, Colorado does tax “possessory interests.” A possessory interest is defined as a private property interest in government-owned property for the purpose of conducting business for profit (Colorado Department of Local Affairs). In addition, Colorado allows for the following property tax exemptions and relief:

Property Tax Exemptions

Exemption Eligibility Amount Revenue Senior Citizen Taxpayer must be 65

years or older, and lived in the property for 10 consecutive years.

50% of the 1st $200,000 of actual value, $100,000 maximum.

$74,231,508

Disabled Veterans 100% permanent and total disability and who have owned and occupied primary residence since January 1

Same as Senior Citizen

Agricultural Timberland

Parcel of land, at least 40 acres, subject to forest management plans, primary purpose is monetary benefit

Source: Department of Local Affairs. Division of Property Taxation. 2006 Annual Report


Idaho Income Tax Idaho taxes personal income using a progressive rate, income tax bracket system. Idaho residents are taxed on their total income, even if earned outside of Idaho. Filing Requirements For full year residents, filing requirements are a function of gross income. Gross income includes all income that is not exempt from tax, before subtracting allowable deduction. The following table illustrates the filing requirements according to filing status.

2006 Filing Requirements Status Gross Income Threshold Married, filing separate $ 3,300 Married, filing jointly, under 65 $16,900 Married, filing jointly, 1 spouse 65 or older $17,900 Married, filing jointly, 2 spouses 65 or older

$18,900

Head of Household, under 65 $10,850 Head of Household, 65 or older $12,100 Single, under 65 $ 8,450 Single, 65 or older $ 9,700 Qualifying Widow(er) with dependent child, under 65

$13,600

Qualifying Widow(er) with dependent child, 65 or older

$14,600

Source: Idaho State Tax Commission. 2006 Individual Income Tax Instructions Calculation of State Taxable Income The starting point for calculation taxable income in Idaho is Federal Adjusted Gross Income. The taxpayer is required to make certain additions and subtractions to federal AGI. Additions include:

• Federal Net Operating Loss Carryover • Capital Loss Carryover • Non-Idaho State and Local Bond Interest • Idaho College Savings Account Withdrawal • Bonus Depreciation • Retirement Plan Lump Sum Distributions • Partner and Shareholder Additions • Idaho Medical Savings Account Withdrawals


Subtractions to federal AGI include: • Idaho Net Operating Loss Carryover and Carryback • State Income Tax Refund • U.S. Government Obligation Interest • Insulation of an Idaho Residence Deduction • Alternative Energy Device Deduction • Child and Dependent Care Deduction • Social Security and Railroad Benefits • Retirement Benefits Deduction • Technological Equipment Donation • Idaho Capital Gains Deduction • Military Pay Earned Outside of Idaho • Adoption Expenses • Idaho Medical Savings Account Contributions and Interest • Idaho College Savings Program • Deduction for Maintaining a Home For Aged and/or Developmentally

Disabled • Idaho Lottery Winnings less than $600 • Income Earned on a Reservation by an American Indian • Health Insurance Premiums • Long-term Care Insurance • Worker’s Compensation Insurance • Bonus Depreciation

Total adjusted gross income is calculated by making the adjustments above to federal AGI. The following table shows the standard deductions for Idaho taxpayers:

2006 Idaho Standard Deduction Status Standard Deduction Single or Married, filing separately $ 5,150 Head of Household $ 7,550 Married, filing jointly or qualifying widow(er)

$10,300

Source: Idaho State Tax Commission. 2006 Individual Income Tax Form 40 Idaho taxpayers are allowed a personal exemption of $3,300 for 2006 multiplied by the number of dependents. Federal limits on personal exemptions apply to Idaho returns (Idaho State Tax Commission),


Total taxable income is derived by subtracting the standard or itemized deductions from total gross income. To compute the tax, taxpayers can look up their tax on a tax table provided by the tax commission. Income brackets are indexed for inflation. The following table shows the income brackets and rates for 2006.

2006 Income Tax Brackets and Rates Single or Married, filing separately

Income Bracket Rate $0-$1,198 1.6% $1,199-$2,396 3.6% $2,397-$3,594 4.1% $3,595-$4,793 5.1% $4,794-$5,991 6.1% $5,992-$8,986 7.1% $8,987-$23,963 7.4% Greater than $23,964 7.8%

Source: Tax Foundation For head of household taxpayers and married taxpayers, filing jointly, the income brackets are double. Tax Credits Idaho allows a number of tax credits that reduce the amount of taxes owed. The following is a list of the available credits;

• Income taxes paid to other states • Credit for Contributions to Idaho Educational Entities • Credit for Contribution to Idaho Youth and Rehabilitation Facilities • Business Income Tax Credits • Grocery Credit ($20 for each dependent, an additional $15 for each person

over 65) • Development Disability (if deduction not claimed) • Fuels tax refund

Revenue Idaho collected $1,425.77 million in individual income taxes in FY2006. Sales Tax Tax Rates The state of Idaho levies a 6% sales tax statewide. Counties and cities may levy their own sales tax. Currently 9 Idaho cities levy a sales tax for sales made within their jurisdiction.


Tax Base and Exemptions The sales tax is applied to the sale, rental, or lease of tangible personal property and some services. Services that are included in the sales tax base are hotels and lodging, amusement and recreation and admissions. Food is taxed, but prescription drugs are not. The state, state departments, agencies, and all state political subdivisions are exempt from the Idaho sales and use tax. Sales to hospitals, health related entities, educational institutions, and non-profit charitable organizations are also exempt. There are approximately 71 sales tax exemptions for goods and uses and 15 services not included in the sales tax base (State of Idaho, FY2008). Revenue Total state and local sales tax revenue for 2006 was $1,064 million. (1,071???) Property Tax Counties, cities, school and special service districts levy property taxes and personal and personal property in Idaho. Property taxes in Idaho are calculated as a “residual amount” according to Idaho law. The taxing district determines how much revenue other from property taxes it expects to receive and subtracts that amount from its budget. The “residual” amount is the amount of property taxes needed. The property tax portion of the revenue needed cannot increase more the 3% of the highest of the last 3 year’s property tax revenue. This 3% cap may be overridden by 2/3 voter approval. Revenue In 2006, estimated property tax revenue statewide totaled $1,097,682,934 .

2006 Property Tax Revenue Taxing Entity 2006 Taxes ($million) County $284.9 City $293.9 School $332.2 Highway $72.6 All other $104.1 Total $1,097.7 Source: Idaho State Tax Commission Property Tax Rates For 2006, the statewide average county urban rate was 1.205%, with a range of 0.46% to 2.39%. The statewide average county rural rate was 0.784% with a range of 0.39% to 1.25%. The total statewide average county rate was 1.025% with a range of 0.44% to 1.88%. The highest property tax rate was in Rockland City (Power County) with a rate of


2.87% and the lowest in an area of Custer County where the rate was 0.197% (Idaho Tax Commission). Some taxing authorities are subject to maximum statutory levy rates. Assessment and Exemptions Counties are responsible for property assessment, except for centrally assessed properties that are the responsibility of the Idaho State Tax Commission. Centrally assessed properties include utilities (electric, water, oil and gas), telecommunications, and railroad Homeowners are allowed a 50% exemption (subject to a maximum amount) for owner-occupied homes and manufactured homes and up to one acre of land. For 2006, the maximum exemption allowed was $75,000 and for 2007, $89,325 (Idaho State Tax Commission). Property Tax Relief Idaho allows property tax relief through its Property Tax Reduction Program (Circuit Breaker). Eligibility is based on the following criteria:

• Own and live in a home that is a primary residence • Income of $28,000 or less in 2006 • Meet one or more of the following:

o Age 65 or older o Widow(er) o Blind o Fatherless or motherless child under 18 years old o Former prisoner of war o Veteran disability o Disabled

If a taxpayer is eligible, up to $1,320 in tax reduction may be available based on income level. Anyone who is granted property tax relief under the Property Tax Reduction program may also apply for a tax deferral for the same year. For 2006, approximately $15.35 million in circuit breaker benefits were granted. 80% of claimants were taxpayers 65 years or older.(tax commission)


Montana Income Tax Filing Requirements Residents, non-residents or part-year residents must file a Montana individual income tax return if they have Montana source income and if federal gross income, excluding unemployment compensation, is equal or greater than the amount shown in the chart below.

2006 Filing Requirements Filing Status Eligibility Federal Gross Income

equal or greater than: Single or married filing separately

Under 65 65 or older

$3,630 $5,610

Head of Household Under 65 65 or older

$7,260 $9,240

Married filing jointly Both under 65 One spouse over 65 Both souses over 65

$7,260 $9,240 $11,220

Source: Montana Department of Revenue: 2006 Individual Income Tax Booklet Tax Rates Montana taxes income according to a progressive income tax bracket and graduated rate schedule. The following table shows the income tax brackets and rates for all filing statuses for 2006.

2006 Income Tax Brackets and Rates Income Bracket Tax Less $0-$2,400 1% of taxable income $2,400-$4,300 2% of taxable income $24 $4,300-$6,500 3% of taxable income $67 $6,500-$8,800 4% of taxable income $132 $8,800-$11,300 5% of taxable income $220 $11,300-$14,500 6% of taxable income $333 $14,500 and over 6.9% of taxable income $464 Source: Montana Department of Revenue


Tax Calculation The starting point for calculating Montana income taxes is federal adjusted gross income. Certain adjustments are made to determine Montana adjusted gross income. Additions to income include:

• Non-Montana Interest and Mutual Fund Dividends • Dividends not included in FAGI • Taxable federal refunds • Federal Taxable Social Security/Railroad retirement • Additions for Spouse Filing Joint Federal Return • Sole Proprietor’s Allocation of Compensation to Spouse • Medical Care Savings Account Non-Qualified Withdrawals • First-Time Home Buyer Savings Account Non-Qualified Withdrawal • Dependent care Assistance Credit Adjustment • Smaller Federal Estate and Trust Taxable Distribution • Share of Federal Income Taxes paid by S. Corporation • Title Plant Depreciation or Amortization • Other Additions

Subtractions include:

• U.S. Government bonds exempt interest • Exempt tribal income • Exempt unemployment compensation • Exempt worker’s compensation benefits • Exempt capital gains and dividends from small business investment companies • State tax refunds • Recoveries from prior years • Exempt military salary • Exempt life insurance premium for National Guard • Partial pension and annuity income • Partial interest from taxpayers 65 or older • Partial Retirement Disability income for taxpayers under 65 • Certain tips and gratuities • Certain child income taxed to parent • Certain health insurance premiums taxed to employee • Student loan repayment taxed to employee • Student loan repayments taxed to health care professionals • Exempt Medical care savings account deposits and earnings • Exempt Fist Time Home Buyer Savings account deposits and earnings • Exempt family education Savings Account Deposits and Earnings • Exempt Farm and ranch Risk Management Account Deposits • Certain Federal Taxable Social Security/Tier 1 Railroad benefits • Subtractions for Spouse filing jointly • Subtraction of Sole Proprietor for allocation of compensation to spouse


• 40% capital gain exclusion for pre-1987 installment sales • Business related expensed for purchasing recycled materials • Sales of land to beginning farmers • Larger feral estate and trust taxable distribution • Wage deduction reduced by Federal Targeted Jobs Credit • Certain gains recognized by Federal targeted Jobs Credit • Other subtraction

Once the above adjustment have been made to FAGI and Montana adjusted gross income is determined, the taxpayer deducts their standard or itemized deductions and personal exemptions to arrive at Montana taxable income. (Montana department of revenue) For 2006, personal exemption amount was $1,980. The standard deduction is 20% of Montana Adjusted Gross income subject to a maximum and minimum amount. The following table illustrates the maximum and minimum standard deduction amounts for different filing statuses.

2006 Standard Deduction Maximum and Minimum Filing Status Maximum Minimum Single $3,710 $1,650 Married filing jointly or head of household

$7,420 $3,300

Source: Montana Department of Revenue Personal exemptions, standard deductions, and rate schedules are indexed for inflation. Federal itemized deductions are subject to a $5,000 limitation for single taxpayers, head of households and married taxpayers filing separately. Taxpayers that are married and filing jointly can claim $10,000 in itemized deductions (Montana Department of Revenue) Tax Credits Montana allows a number of non-refundable and refundable tax credits. The following is a list of nonrefundable tax credits with no carry-over potential available to Montana taxpayers:

• 1% capital Gains Credit • Income Tax paid to another state • College Contribution Credit • Qualified Endowment Credit • Energy Conservation Installment Credit • Alternative Fuel Credit • Rural Physicians Credit • Health Insurance for Uninsured Montanans Credit • Elderly Care Credit • Development Disability Account Contribution Credit • Recycle Credit


• Oil Seed Crushing and Biodiesel Production Facility Credit The following is a list of credits that include a carry-over provision:

• Contractor’s Gross Receipts Tax Credit • Geothermal Systems Tax Credit • Alternative Energy Systems Tax Credit • Dependent Care Assistance Credit • Historical Property Preservation Credit • Montana Capital Company Credit • Infrastructure user’s Fee Credit • Empowerment Zone Credit • Research Activities Credit • Mineral Exploration Incentive Credit

The following are the non-refundable credits allowed:

• Elderly Homeowner/Renter Credit • Film Employment Production Credit • Film Qualified Expenditure Credit

Sales and Use, Corporate License Tax

Montana does not levy a sales tax. However, there is a Lodging Facility Use tax of 4% of the total lodging charge and a Lodging Facility Sales and Use tax on accommodations and campgrounds of 3% in addition to the Lodging facility use tax. Sales to any U.S. government or agency is exempt. In addition, local communities under 5,500 in population can impose a local option resort tax on the retail value of goods and services sold by lodging and camping facilities, restaurants, bars, destination recreational facilities, and establishments that sell luxury items. The rate is locally set and is subject to a 3% maximum. Montana also levies a rental vehicle sales tax of 4% (Montana Department of Revenue).

Property Tax

The Department of Revenue has responsibility for appraisal, assessment and equalization of all property in the state of Montana. The Department of Revenue certifies the taxable value of all properties for each taxing jurisdiction or school district. The “tax rate” or assessment rate on the various classes of property is set by the legislature. Local governments determine the mill levy for each local taxing jurisdiction, including the state mill levy for the general fund and universities. The counties have the responsibility of billing and collection (Montana Department of Revenue).


Revenue

Montana collected a total of $968 million in property taxes for Fiscal Year 2006 and over $1 billion in Fiscal Year 2007. The following table illustrates the property tax revenue by taxing districts for fiscal years 2006 and 2007.

Property Tax Revenue by Taxing Jurisdiction Jurisdiction FY 2006 FY 2007 State $188,790,493 $199,630,768 County $223,689,501 $248,187,830 Local Schools $354,138,313 $361,081,113 Countywide Schools $ 77,532,337 $ 80,968,653 Cities and Towns $ 93,322,050 $100,693,666 Fire and Misc. Districts $ 30,882,506 $ 36,139,812 Total Property tax $968,355,199 $1,026,701,842 Source: Montana Department of Revenue: 2005-6 Biennial Report Homestead Exemptions

Property taxes are determined by first multiplying the market value by the “tax rate” or assessment rate to determine taxable value. The taxable value times the mill levy set by each taxing jurisdiction gives the taxpayer the actual property tax due. However, for residential and commercial property, the market value is first reduced by a homestead exemption.

Property Tax Homestead Exemptions Residential land and Building

32.60% for 2006; 33.20% for 2007; 34% 2008

Commercial Industrial Land and Building (class 4)

14.2%, 2006; 14.6%, 2007; 15%, 2008

Source: Montana Department of Revenue: Understanding Property Taxes 2007 In addition, reappraisal values are allowed to be phased-in over a 5-year period. For example, a phased-in appraisal of $80,000 market value will be adjusted by the 32.60% homestead exemption for 2006. The taxable market value is .674 times $80,000 or $53,920. The taxable market value is then multiplied by the assessment ratio (3.14% for residential property in 2006) to determine the taxable value. The mill levy is applied against the taxable value.


Assessment There are 12 different classes of property. The following table shows the assessment ratios or “tax rates” for the different classes.

Property Class Tax Rate

Class 1: Net proceeds of mines 100% Class 2: Gross proceeds of metal mines 3% of annual gross

proceeds Class 3: Agricultural Land Non qualified Agricultural

3.14% 21.98%

Class 4: Residential land and Building

3.14%, 2006; 3.07%, 2007; 3.01% ,2008

Class 4: Commercial Industrial Land and Building (class 4)

3.14%, 2006; 3.07%, 2007; 3.01% ,2008

Class 5: Air and Water pollution control, electric and telephone coops, real and personal property of new industry, research and development firms, used in production of gasohol

3.0%

Class 7: Non-centrally assessed utilities 8.0% Class 8: Business Equipment 3.0% Class 9: Pipelines 12.0% Class 10: Forestland 0.35% Class 12: Railroads and Airlines 3.55% for 2006 Class 13: Utilities, telecommunications, electric 6.0% Class 14: Commercial wind generation facilities 3.0% Source: Montana Department of Revenue. 2005-6 Biennial Report

Tax Rates Mill levies are determined by the local taxing jurisdiction by dividing the necessary budget by the taxable value. For all property, the statewide average effective tax rate for tax year 2006 was 1.82% and the statewide average mill levy was 526.84. The following table shows the mill levies for each taxing jurisdiction for Tax year 2006.

Tax Year 2006 Average County Tax Rates by Jurisdiction Jurisdiction Average Mill Levy State Assessed 101.13 (Range 101.0- 102.5) County Assessed 127.45 (Range 34.18- 302.03) Local Schools 185.42 (Range 0- 293.93) Countywide Schools 41.58 (Range 0- 63.15) Fire and Misc. 18.56 (Range 1.5- 78.03) Total Rural 464.87 (Range 218.57- 690.36) Total City 139.78 (Range 18.71 – 335.48)

Source: Montana Department of Revenue. 2005-6 Biennial Report


Property Tax Relief Montana has five programs that provide tax relief for residential property owners. The following table illustrates the eligibility requirements and the credit available.

Property Tax Relief Programs Programs Eligibility Amount Elderly Homeowners/Renter Credit

62 yrs or older, gross income less that $45,000, resident for 9 mos.

Max $1,000 depending on income, refundable against income tax liability

Property Tax Assistance Program (PTAP)

Reside in property for 7 mos., less than $24,249 in gross income

20%, 50%, 70% of normal tax rate depending on income

Extended Property Tax Assistance Program (EPTAP)

Residential properties that increase 24% in 2003, tax liability of $250 or more, income less than $75,000

Taxable value cap from 24%,30%,36% based on income.

Disabled American Veterans (DAV)

100% disabled, primary residence, surviving spouse

Reduction in tax rate (20-50%) based on income schedule

Reverse Annuity Mortgage Loan Program

Owner-occupied single family, 68 yrs or older, income not exceeding Montana Board of Housing income limits.

Loan in amount of up to 80% of FHA value, max $100,000

Source: Montana Department of Revenue: 2005-6 Biennial Report


Nevada Income Tax Nevada does not levy an income tax. Sales Tax The Sales and Use tax represents 78% of Nevada total tax revenue in 2006. Nevada levies a statewide minimum sale tax of 6.5%. In addition local counties and cities levy sales taxes within their jurisdictions. Tax Rates The following tables shows the statewide and local sales and use taxes.

Statewide Tax Rates Sales Tax 2.00% Local School Support Tax 2.25% Basic City-County Relief Tax .50% Supplemental City-County Relief Tax 1.75% Minimum Statewide Tax Rate 6.5%

Source: Nevada Department of Taxation: 2006 Annual Report

Local Option Tax Rates Tax Rate Tourism 0.25% Public Mass Transit 0.50% Public Swimming Pool 0.50% Flood Control 0.25% Infrastructure 0.25 Infrastructure 0.125% Maintenance 0.125% Local Gov’t Tax Act 0.25% Tri-county Railway 0.25% Washoe Railroad Grade Project

0.125%

Carson City Open Space 0.255 Douglas County Sales Tax 0.25%



While all counties impose the statewide minimum sales tax rate, only some counties levy local option taxes. The following table shows the total sales tax rates by county.

Sales Tax Rates by County County Total Tax rate Washoe 7.375% Storey 7.25% Carson 7.125% Douglas 6.75% Lyon 6.5% Humboldt 6.5% Pershing 6.5% Churchill 7.25% Mineral 6.5% Esmeralda 6.5% Lander 6,75% Eureka 6.5% Nye 6.75% Elko 6.5% White Pine 7.375% Lincoln 6.75% Clark 7.75% Source: Nevada Department of Taxation: 2006 Annual Report Revenue The following table shows the 2006 revenue for each of the statewide taxes.

2006 State Tax Revenue Sales Tax $984,963,434 Local School Support Tax $1,089,312,186 Basic City-County Relief Tax $242,077,670 Supplemental City-County Relief Tax $ 847,240,463


The Local Option Sales and Use Tax raised $499,145,620 in 2006 (Nevada Department of Taxation, 2006). Sales Tax Base Educational, religious, and charitable organizations are exempt from the sales tax. Business inputs and purchases for resale are also exempt. Taxable sales for FY2005-06 totaled $48,402,487,257.


Property Tax Nevada levies a property tax on real and personal property. The property tax is used to partially fund local government and for the State’s bond redemption. Property Tax Caps While the State Constitution caps the property tax at $5.00 per $100 of assessed value, the legislature lowered the cap by statute to $3.65 per $100 of assessed value. In addition, the property tax bill for owner-occupied single-family residence is capped at an annual increase of 3%, excluding increases in valuation due to improvements. Residential rental property is also subject to the 3% cap if the rent does not exceed fair market rent as published by the U.S. Department of Housing and Urban Development. The cap does not apply to hotels, motels, or transient lodging. For all other property, including centrally assessed property, the e annual cap is calculated in two steps. The first step is to calculate the lesser of the average percentage change in the countywide assessed value over the previous nine years and 8%. The lesser of these two is then compared to twice the increase in the CPI from the previous year. The greater of the percentages is the cap in increase in property tax over the previous year. Exceptions to the cap include property imposed by the Legislature, ballot approved property taxes, taxes necessary to pay general obligation bonds, subdivided property (subject to “other Property” cap), and a property that has decreased more than 15% from its taxable value (Nevada Taxpayers Association, 2005). Local government is limited by statute to increases in revenue from the prior year’s maximum revenue allowed of 6%, excluding new construction. Local governments are required to obtain voter approval in order to levy a tax for any long-term debt or operating overrides. Nevada also provides for a “hold harmless” scenario, in which the new property tax rate cannot be less that the previous year’s rate. Assessment Ratio All property tax in Nevada is assessed at 35% of its taxable value. For real property, taxable value is market value. The assessment of real property is limited to full cash value of the land, and if improved, the full cash value plus replacement cost new less depreciation (depreciation set by statute at 1.5% over 50 years). Assessed value is 35% of the taxable value. Tax rates are applied against the assessed value. Centrally assessed property included utilities, mines and net proceeds of minerals. Centrally assessed property is the responsibility of the Division of Assessment Standards of the Nevada Tax Commission. County Assessors determines the taxable value of all real and personal property in the county, except for those that are the responsibility of the Department of Taxation.


Tax Rates Tax rates are determined through the local government budget process. As mentioned earlier, local governments are limited to a 6% increase in revenues. The budget is divided by the assessed value of the taxing jurisdiction to determine the property tax rate. Counties must publish an ad in the paper that identifies any property tax increases and the time and place of budget hearings. The Nevada Tax Commission must approve local governments budgets and property tax rates. Local governments cannot increase the property tax above the rate approved by the Tax Commission. As a result of the caps on property taxes, local governments may need to add an additional tax in order to pay down any outstanding debt obligations secured by the property tax. Any increase in rate must appear separately on the tax bill (Nevada Taxpayer’s Association, 2005). The following table shows the components of the property tax rate.

Components of the Property Tax Rate Jurisdiction Rate State Debt Rate $0.15 per $100 assessed value included in

statutory cap. $0.02 outside cap School Operating Rate $0.75 per $100 assessed value General and Special Improvement Districts various Legislatively Approved Overrides $0.015 per $100 assessed value; $0.01 per

$100 assessed value Voter Approved Overrides various Source: Nevada Tax Commission: Understanding Property Taxes The average countywide property tax rate was 3.1471% for FY 2006-7. For FY 2007-8, the rate is 3.1526%. The following table shows the average countywide property taxes for FY 2006-7.

Average County Wide Tax Rate County FY 2006-07 Tax Rate

(Percentage) FY 2007-08 Tax Rate (Percentage)

Carson City 3.0004 2.9936 Churchill 2.9341 3.0364 Clark 3.1029 3.1141 Douglas 2.9742 2.9831 Elko 3.0040 3.0003 Esmeralda 3.0195 3.0195 Eureka 1.9429 1.9421 Humboldt 2.8988 2.7135 Lander 3.3675 3.3657 Lincoln 3.0766 3.0726 Lyon 3.0316 3.0320 Mineral 3.6600 3.6600 Nye 3.2151 3.1322


Pershing 3.1077 3.1533 Storey 3.4903 3.4930 Washoe 3.5554 3.5607 White Pine 3.6600 3.660 Statewide County Average 3.1471 3.1526 Source: Nevada Tax Commission: 2006-07 Redbook Equalization The Nevada Tax Commission conducts an annual ratio study to determine whether property values are equalized among counties (Nevada Tax Commission). The Tax Commission may take action to correct any mistakes in valuation. The State Board of Equalization hears appeals of the decisions of the County Boards of Equalization. The County Board of Equalization may change valuations of the county assessor. Exemptions and Tax Relief Full exemptions are granted to federal government property. In addition, the following property receives a full exemption from property taxes:

• State lands • Property of political subdivisions for the state • Property of school districts and charter schools • Business inventories and consumables • Household goods and furniture • Irrigation systems • Property used for pollution control • Qualifying low-income housing projects • Churches and chapels

Partial exemptions are granted to the following taxpayers:

• Property of surviving spouses • Property of blind persons • Veterans exemptions • Property of lodges and other charitable organizations

The amount of the exemption varies depending on the taxing district. The value of the exemption is indexed for inflation (Nevada Taxpayers Association, 2005). For FY 2004-5, the exempt value of all full and partial exemptions was $120,648,845. (Nevada Tax Commission) In addition, Nevada has a circuit breaker program for senior citizens. The Senior Citizen Tax Assistance/Rental Rebate program is available to taxpayers 62 years and older whose annual income is equal to less than $25,304 for 2005. The income threshold is indexed for inflation (Nevada Taxpayers Association, 2005).


Revenues It is projected that property tax revenue for FY2007-08 will be $4,232,360,130. The following table illustrates projected revenues by taxing jurisdiction.

Projected Property Tax Revenue Taxing Jurisdiction Amount FY2006-07 Amount FY2007-08 Schools $1,448,580,988 $1,700,697,812 Counties $ 910,456,361 $1,068,305,967 Cities $ 446,067,770 $ 513,793,455 Towns $ 95,223,982 $ 115,871,891 Special Districts $ 508,388,611 $ 615,466,253 State $ 194,648,581 $ 228,224,752 Total $3,603,366,293 $4,232,360,130 Source: Nevada Tax Commission: FY 2006-07 and 2007-08 Redbooks


New Mexico Income Tax New Mexico income tax system employs income brackets and graduated rates. Filing Requirement All residents are required to file individual income tax returns if they are required to file a federal return. Non-residents with New Mexico source income or losses who file a federal return are required to file a state return in New Mexico. Income Tax Exemptions New Mexico exempts some income from taxation for certain low and middle income taxpayers. The maximum amount of the exemption is $2,500 and varies according to filing status, income and number of exemptions. The following table shows the income thresholds according to filing status for the New Mexico Low-and Middle-Income Tax Exemption.

New Mexico Low-and Middle-Income Tax Exemption 2006 Filing Status Income equal or less than: Single $27,110 Married filing Separate $20,333 Married filing joint or Head of Household $40,667 Source: New Mexico Personal Income Tax Form (PIT) Taxable Income Calculation New Mexico begins the calculation of taxable income using federal adjusted gross income as the starting point. In order to determine taxable income, New Mexico allows certain additions and subtractions to federal adjusted gross income (New Mexico Tax and Revenue Department). Addition to FAGI include:

• Interest and Dividends from Federal Tax-Exempt Bonds • Federal Net Operating Loss carry-forward or Back • Certain contribution refunded or rolled out from a New Mexico Section 529

college savings plan Subtractions from FAGI include:

• New Mexico Tax-Exempt Interest and Dividends • New Mexico Net Operating Loss carry forward • Interest from U.S. Government Obligations


• Certain railroad Retirement act Annuities and Benefits/Unemployment Insurance Act Sick pay

• Income of an Indian • Exemption of an Income for Person Over 100 years • Exemption for Persons 65 years or older or blind • Exemption for Adoption of Special Needs Children • Exemption for New Mexico Medical care Savings Account • Deduction for Contributions to a New Mexico-approved Section 529 college

savings plan • Net Capital Gains Deduction • Nonresident Military Wages or Salary • Medical care expense exemptions for persons 65years or older or blind • Deduction for organ donation expenses • National Guard Member’s Life Insurance Reimbursements exemption • Exemption of income tax rebate included in federal income

Deductions and Exemptions New Mexico uses the same dollar amounts for standard deductions, personal exemptions and itemized deductions as the federal government. Tax Rates The following table shows the tax rates and income brackets according to filing status for 2007. Income tax Brackets and Tax Rates for 2007

Filing Status Income Bracket Tax Single Not over $5,500 1.7% of taxable income Over $5,500 to $11,000 $93.50 plus 3.2% over

$5,500 Over $ 11,000 but not over $

16,000 $ 269.50 plus 4.7% of excess over $ 11,000

Over $ 16,000

$ 504.50 plus 5.3% of excess over $ 16,000.

Head of Household and Married filing jointly

Not over $8,000 1.7% of taxable income

Over $ 8,000 but not over $ 16,000

$ 136 plus 3.2% of excess over $ 8,000



Over $ 24,000 $ 768 plus 5.3% of excess over $ 24,000.

Married filing separate Not over $4,000 1.7% of taxable income


Source: New Mexico Taxation and Revenue Department For 2008, the top rate will be reduced from 5.3% to 4.9%. Tax Rebates and Credits New Mexico offers refundable and nonrefundable income tax credits and rebates. To qualify for refundable credits, the taxpayer must be a resident, physically present in New Mexico for 6 months of the tax year (except for Child day Care Credit), and not an inmate of a public institution for more than six months of the tax year (New Mexico Tax and Revenue Department). Low Income Comprehensive Tax Rebate

• Modified gross income of $22,000 or less • Rebate varies according to modified gross income (separate calculation)

and number of exemptions • Maximum rebate of $320 for 2006

Property Tax Rebate

• 65 years or older • Modified Gross Income $16,00o or less • Maximum rebate of $250 ($125 for married filing separate) • Non available if property not subject to property tax

Low Income Property Tax Rebate for Los Alamos County Residents Only

• Modified income of $24,000 or less • Rebate of up to 75% of property tax liability depending on modified gross

income. • Maximum rebate of $350 ($175 for married filing separate) • Do not have to be 65 years or older

Child Day Care Credit

• Modified Gross Income of $21,424 or less • Maximum credit of $1,200 ($600 married filing separate) • Must be “gainfully” employed • Not a recipient of public assistance under TANF


$ 68.00 plus 3.2% of excess over $ 4,000



Over $ 12,000 $ 384 plus 5.3% of excess over $ 12,000.


Refundable Medical Care Credit for persons 65 years or older

• Paid Un-reimbursed and uncompensated medical care expenses of $28,000 or more

• Credit of $2,800 allowed Film Production Tax Credit

• 25% of direct production expenses subject to state taxation for films made in New Mexico. For tax year beginning and after January 1, 2009, the credit is 20%. Nonrefundable Land Conservation Incentives Credit

• Persons who donate land to conservation agencies may claim 50% of the fair market value of the land up to $100,000 Affordable Housing Tax Credit

• Mortgage Finance Authority (MFA) issues vouchers to persons who invest in affordable housing projects. The vouchers may be applied as a credit against personal income taxes Solar Market Development Tax Credit

• 30% of the purchase cost of a qualified photovoltaic or solar thermal system in a residence, not to exceed $9,000.

• Credit for taxes paid to another State Gross Receipts Tax New Mexico does not levy a sales and use tax, but does impose a gross receipts tax on the privilege of doing business in the state of New Mexico. Tax Rates The state of New Mexico imposes a gross receipts tax of 5%. County and municipal government may also impose a gross receipts tax. State law determines the state portion of the tax. The county commissioner determines the county’s tax. The county rate can go up to 3.75%. Municipal councils determine the municipal rate and can go as high as 3.5625% (New Mexico Taxation and Revenue Department ). The combined state and local tax rate ranges from 5.125% to 7.875% effective July 1, 2007 (New Mexico Taxation and Revenue Department). The total gross receipts tax is paid to the state and the local portion is distributed to the counties and municipalities.


Tax Base Four kinds of transactions are subject to the gross receipts tax:

• Sale of property located in New Mexico • Leasing or licensing property employed in New Mexico • Performances of services in New Mexico, including construction activities • Performance of services outside of New Mexico, the product of research

and development services out of state when initial use of the product is in New Mexico All transactions are presumed to be taxable unless statute provides for an exemption or deduction (New Mexico Taxation and Revenue Department). New Mexico has a government gross receipts tax of 5% on certain state government activities, entertainment events, sales of tangible personal property from facilities open to the general public, refuse collection or disposal, sewage services, and the sale of water by government owned utilities. The tax is passed on to the consumer. Exemptions and Deductions Exemptions from the Gross Receipts Tax include:

• 501(c)(3) organizations • Tribes • Sales of livestock or horses • Food Stamps • Federal Government receipts, or State of New Mexico (certain receipts of the

state may be subject to the governmental gross receipts tax), or political subdivisions • Receipts from instrumentalities of the Armed Forces • Insurance Company and Bail Bondsman receipts • Interest and Dividends • Interstate Telecommunications Services • Isolated or occasional sales • Mobile Telecommunications Services • Municipal Event Center Surcharges • Certain Oil, Natural gas and Mineral Exemptions • Racetracks • Stadium • Textbook • Receipts from the sale vehicle, boats and fuels subject to excise taxes • Wages of employees

New Mexico also allows certain deductions from the gross receipts tax. There are approximately 32 deductions from the tax, including a food deduction for food for home consumption (New Mexico Taxation and Revenue Department).


Property Tax Property Tax Rates Property in New Mexico is classified as residential or non-residential and is taxed at different rates. Counties and municipalities may impose property tax rates within their jurisdictions. Statewide weighted average rates (total obligations/total net taxable value) averaged 26.294 mills for residential rates and 30.173 for traditional, non-residential, non-oil and gas rates. The highest weighted average county rate for 2006 for residential properties was 35.23 mills and the lowest rate was 12.78 mills. The highest weighted average county traditional rate was 42.046 mills and the lowest traditional rate was 12.856 mills. For tax year 2006, the average rate for all properties was 26.264 mills (New Mexico Taxation and Revenue Department). Rate Caps: Yield Control Limitations Required by Statute The yield control statute was developed to prevent extraordinary tax increases in response to reassessment. It limits tax increases from reassessment to approximately the rate of inflation (New Mexico Taxation And Revenue Department, 2006). The following maximum rate caps apply to non-voter approved rates:

• Municipal Operating Rate: 7.65 mills • Counties Operating Rate: 11.85 mills • School District Operating Rate: .5 mills • Municipal Flood Control: 5 mills • Municipal Parking District: 6 mills • Special Hospital District: 4.25 mills • County Hospitals O&M: 6.5 mills • County Hospitals: 4.25-6.5 mills • County Flood Control: 1.5 mills • Community Service District: 10 mills • Small Counties Assistance: 8.85 mills • Economic Advancement Districts: 2 mills • Low-Income Property Tax Rebates-County Option: 1 mill • College District Operation: 5 mills • Public School Capital Improvement: 2 mills • Public School Buildings:10 mills • Flood Control Districts: 2 mill


Assessment All property in New Mexico is assessed at 1/3 of market value. Exemptions and Tax Relief New Mexico allows for a $2,000 Head of Household exemption and a $4,000 Veterans exemption. The exemptions reduce the taxable value of the property. For tax year 2006, Head of Household exemptions totaled $525,017,011 and Veterans exemption totaled $358,562,302. In addition, disability waivers totaled $163, 498,448 (New Mexico Taxation and Revenue Department, 2006). As mentioned in the income tax section, New Mexico provides for property tax rebates for low-income individuals and taxpayers over 65 years old. Wyoming Income Tax Wyoming does not impose an income tax. Sales Tax Tax Rates The State of Wyoming levies a 4% sales tax statewide. With voter approval, counties may levy up to 1% for general purposes and up to 2% for specific purposes, but the combined rate cannot exceed 2%. Cities, towns and counties may impose a tax rate of up to 4% on lodging with voter approval. Resort districts may levy up to 1% for general purposes (Wyoming Taxpayers Association, 2006). The county sales tax ranges from 4% to 6% (Wyoming Department of Revenue, 2007). Tax Base The tax base for the state and local taxes is the same. The state and local sales tax is levied of gross receipts of sales of personal tangible property and selected services including receipts by public utilities, some interstate carriers, food services, lodging, entertainment facilities, cigarettes and tobacco products, and alcoholic beverages. Exemptions The following sales are exempt from the sales tax:

• Food for home consumption • Prescription Drugs • Sales to U.S. and Wyoming state and local government


• Charitable organizations • Sales of components and packaging used in the production of new articles • Certain agricultural purchases • Certain medical supplies • Recreational services • Interstate transport

(Taxpayers Assoc) Revenue For FY 2006, state sales tax collections totaled $557,332,729. Local taxes were $176,360,823. Property Tax Revenue Property taxes are the primary source of funds for local and county governments, school districts, and special agencies. The following table shows the amount of taxes levied for 2006 by taxing jurisdiction. Property Taxes Levied 2006 Taxing Jurisdiction All Taxes Levied County $245,426,871 Municipal $16,191,853 Special District $89,250,890 Education (Total) $980,132,486 Total $1,331,002,100 Assessment The Property tax is based on assessed or taxable value. Taxable value equals the market value multiplied by the assessment percentage. The following is the assessment rates for 2006:

• Gross product of minerals and mine products: 100% • Property used for industrial purposes: 11.5% • All other property, real and personal: 9.5%

County assessors determine taxable value for most property within their counties, except for state assessed property. State assessed property mines and mining claims, pipeline. Telephone and telegraph companies, and electric utilities and railroad and rail car companies. (Property Tax System)


Tax Rates Tax rates are set by the political entities, such as counties, school districts, cities and towns, and special taxing districts, within their jurisdictions. Once the taxing entity has adopted its budget and tax rate, the tax rate cannot be appealed. (Taxation of Residential Property) The following table shows the tax rates in effect for tax year 2006. Taxing Jurisdiction Mills Grand Total Average Levy 63.446 Average County Levy for all Purposes (except Municipal Levies)

62.674

Average Tax Levy for Municipalities 70.713 Foundation Program Levy 12.00 Average County Levy 11.699 Average Municipal Levy 7.064 Average School Levy 34.72 Average Special District Levy 4.254 Source: Wyoming Department of Revenue: 2006 Annual Report Rate Caps Taxpayers in Wyoming are protected against increasing property tax rates. With respect to county revenue, the residential property tax rate cannot exceed 12 mills (or 1.2%) of assessed value. For cities and towns, the rate limit is 8 mills (Wyoming Department of Revenue). Equalization The State Board of Equalization may take corrective action if county assessors do not meet valuation standards to ensure uniform property valuation. Tax Exemptions and Relief Property held for personal use is exempt. Inventory held for resale, pollution control equipment. Cash, stock, bonds and accounts receivables are exempt. Property used for religious, educational, governmental or charitable purposes are exempt, as are improvement for handicapped access.


The following tax relief programs are also available to Wyoming taxpayers: • Veterans Exemptions: Exemption of $2,000 of assessed value available to

qualifying veterans who are residents, and their surviving spouses. • Homeowners Tax Credit: Credit is available only when the Legislature allocates

funds. Homes valued below $41,052 (market value) receive the highest tax credit. Homes worth over $61,579 are not eligible.

• Property Tax Deferrals (County Option): available to elderly, disables and low-income homeowners. Program will allow a deferral of up to one half of property taxes.

• Property Tax Relief program: Available for taxpayers that have household income less than the greater of ½ county or state median household income. Household assets less than $21,120 per adult household member. Taxpayer must have been a resident for past 5 years. The amount of relief is the lesser of up to ½ median residential property tax bill or ½ of property tax bill.

• Tax Rebate to Elderly and Disabled Program: Refund on property tax, utilities and sales tax. Amount range from $100-$800 if single, $100-$900 if married, depending on income.


Appendix 2 Census Definitions The following are excerpts from the U.S. Census’s 2006 Government Finance and employment Classification Manual. The 2006 manual applies to FY2005 data and later. The 1992 Classification Manual, which applies to Fiscal years 1988 to 2004, was checked for consistency. Revenue Definition Revenue is defined as all amounts of money received by a government from external sources (i.e., those originating from “outside the government”), net of refunds and other correcting transactions, proceeds from issuance of debt, the sale of investments, agency or private trust transactions, and intra-governmental transfers. Coverage Issues: Revenue Revenue comprises amounts received by all agencies, boards, commissions, or other organizations categorized as dependent on the government concerned (see Chapter 1). Stated in terms of the accounting procedures from which these data originate, revenue covers receipts from all accounting funds of a government, other than intragovernmental service (revolving), agency, and private trust funds. Exclusions from the Revenue Definition The definition used for revenue, in combination with coverage and measurement issues, leaves certain types of government revenue to be out-of-scope for Census Bureau surveys. The following types of receipts are excluded from revenue: • Taxes and other amounts paid under protest and held in suspense accounts subject to possible refund. Such amounts are not reported as revenue unless and until the protest is decided in the government’s favor (see Section 3.11.1). • Proceeds from borrowing, whether short- or long-term, except contingent loans and advances that are reported as intergovernmental revenues (see Section 3.7.1). • Recoveries or refunds of amounts spent in the same fiscal year, which are deducted from expenditures (see Section 3.10.4). • Proceeds from the sale of investments and the repayment of loans, except for contingent loans as mentioned above. Any recorded profit or loss from the sale of investments, however, is reported as revenue or expenditure, respectively. • Transfers from agencies or funds of the same government (see Section 3.9).


• Agency or private trust transactions, where the government is acting on behalf of others (see Section 3.10). An exception exists for Net Lottery Revenue; code U95, for which the costs of prizes are deducted from gross receipts. See Section 4.9 and the explanation of code U95 for details. • Noncash transactions, such as receipt of technical services, commodities, property, noncash gifts or bequests, and other “receipts-in-kind.” The Four Sectors of Government – Revenue Issues All government finance statistics, including revenue, are categorized within the four basic sectors of government, as explained in Chapter 2. As a result, there are four basic categories of revenue, as shown below with their subcategories (referred to as type of revenue in Census Bureau statistics): • General Revenue – pertains to the general government sector and is classified by Type Taxes:

Intergovernmental Revenue; Current Charges; Miscellaneous General Revenue GENERAL REVENUE BY TYPE: TAXES In Census Bureau statistics on government finances, taxes are compulsory contributions exacted by a government for public purposes, other than from special assessments for capital improvements and from employee and employer contributions or “taxes” for retirement and social insurance systems. Comprises amounts received (including interest and penalties) from taxes (1) imposed by a government and collected by that government or (2) collected on its behalf by another government serving as its agent. See Section 4.3.1 for additional explanations. Excludes protested amounts and discounts; special assessments for property improvements (use Special Assessments, code U01); compulsory contributions to social insurance systems even if labeled a tax – e.g., Federal Social Security tax, unemployment insurance and workers’ compensation payroll taxes, etc. (report at appropriate Insurance Trust Revenue code); taxes collected by a government as an agent for another government which actually imposed the tax (agency transaction) except amounts retained as a fee or shared tax. Refunds of taxes paid are deducted from gross tax receipts even if they were reported as tax revenue in a prior fiscal year. Taxes are classified according to the type of tax imposed. Unlike most other Census


Bureau finance statistics, they are not categorized along any functional lines. Property Taxes Taxes imposed on ownership of property and measured by its value. Definition: Three types of property taxes, all having in common the use of value as a basis for the tax: • General property taxes, relating to property as a whole, taxed at a single rate or at classified rates according to the class of property. Property refers to real property (e.g., land and structures) as well as personal property; personal property can be either tangible (e.g., automobiles and boats) or intangible (e.g., bank accounts and stocks and bonds). • Special property taxes levied on selected types of property (e.g., oil and gas properties, house trailers, motor vehicles, and intangibles) and subject to rates not directly related to general property tax rates. • Taxes based on income produced by property as a measure of its value on the assessment date. Includes: Penalties and interest on delinquent property taxes; proceeds of tax sales and tax redemptions, up to the amount of taxes due plus penalties and interest (report any excess receipts as follows: report amounts retained by the taxing government at Miscellaneous General Revenue, NEC, code U99, and exclude any amounts held for or returned to original property owner(s)). For governments collecting taxes as agents for another includes any commissions, fees, or other items representing collection expenses retained from tax proceeds. Excludes: • Discounts to taxpayers for prompt payment of their tax bill. • Taxes or other charges on property measured by any basis other than its value, such as area, front footage, or other “special assessments” (use Special Assessments, code U01) as well as such measures as corporate stock, bank deposits, or “per head” taxes (see description under License Taxes, codes T20 – T29). • Taxes measured by taxpayer’s income from intangible property (report at Income Taxes, codes T40 and T41). • Taxes paid in protest and held by government in a suspense fund (report as property tax revenue if dispute is settled in government’s favor; do not report as tax revenue any amounts returned to taxpayer). See Section 3.11.1. • Taxes from utility owned by the taxing government. • Payments-in-lieu-of-taxes (if paid by another government, report at Intergovernmental Revenue; if paid by a private organization, use Miscellaneous General Revenue, NEC, code U99; and if paid by another agency or utility of the same government, exclude entirely from revenue).


General Sales and Gross Receipts Taxes Definition: Taxes applicable with only specified exceptions (e.g., food and prescribed medicines) to sales of all types of goods and services or to all gross receipts, whether at a single rate or at classified rates; and sales use taxes. Includes: This includes sales or gross receipts taxes on the purchase or lease of motor vehicles, if there is no specific and separate tax law covering this activity. Excludes: Taxes imposed distinctively on sales of or gross receipts from selected commodities, services, or businesses (report at appropriate Selective Sales and Gross Receipts Taxes, codes T10 - T19). If a sales tax on vehicles is authorized by a law distinctly separate from a general sales tax law, use Other Selective Sales and Gross Receipts, code T19. Individual Income Taxes Definition: Taxes on individuals measured by net income and taxes on special types of income (e.g., interest, dividends, income from intangible property, etc.). Includes: For local governments, includes wages, salaries, and other compensation earned by both residents and nonresidents, that are subject to tax collections by the reporting government. Excludes: Taxes using income from intangible property as a measure of its value as of assessment date (report at Property Taxes, code T01); income taxes on unincorporated businesses (report at Corporation Net Income, code T41); payroll taxes to finance insurance trusts programs, such as Social Security taxes (report at appropriate Social Insurance Trust Revenue code); and city gross earnings taxes (report at Taxes, NEC, code T99). Direct expenditure comprises all final expenditures paid to current employees, former employees (retirees) and to private sector entities outside of the government itself (e.g. all expenditure other than intergovernmental expenditure). Types of direct expenditure are noted in Chart 5.A above, with fully detailed definitions and explanations contained in Table 5.1. Summary definitions of the types of direct expenditure follow: Current Operations: Direct expenditure for compensation of own officers and employees and for supplies, materials, and contractual services except any amounts for capital outlay (i.e., for personal services or other objects used in contract construction or government employee construction of permanent structures and for acquisition of property and equipment).


Interest on Debt: Amounts paid for the use of borrowed money. Assistance and Subsidies: Direct cash assistance to foreign governments, private individuals, and nongovernmental organizations (e.g., foreign aid, agricultural supports, public welfare, veteran bonuses, and cash grants for tuition and scholarships) neither in return for goods and services nor in repayment of debt and other claims against the government. Capital Outlay: Direct expenditure for purchase or construction, by contract or government employee, construction of buildings and other improvements; for purchase of land, equipment, and existing structures; and for payments on capital leases. Construction: Production, additions, replacements, or major structural alterations to fixed works, undertaken either on a contractual basis by private contractors or through a government’s own staff. Purchase of Land and Existing Structures: Acquisition of these assets as such by outright purchase; payments on capital lease-purchase agreements or installment purchase contracts; costs associated with eminent domain (including purchase of rights-of-way); and tax or special assessment foreclosure. Purchase of Equipment: Purchase and installation of apparatus, furnishings, motor vehicles, office equipment, and the like having a life expectancy of more than five years. Other Than Construction: This object category represents the combined definitions for “Purchase of Land and Existing Structures” plus “Purchase of Equipment.”


REFERENCES Chapter 1: Tax Policy Principles David Brunori , “State Tax Policy, A Political Perspective, The Urban Institute Press, Wash., D.C.,2001 James A. Dorn ,“The Principles and Politics of Tax Reform”, Cato Journal, vol.5 No.2 (Fall 1985) Cato Institute The Heartland Institute, Legislative principles Series, “Ten Principles of State Fiscal Policy”, Number 2, Institute on Tax and Economic Policy, Policy Brief , “Tax Principles: Building Blocks of a Sound Tax System”. Wash., D.C., 2005http://www.itepnet.org/pb9princ.pdf Kenneth Nichols. “Tax Policy and the Principles Underlying a Good Tax,” Maine Policy Review, Winter 2005. The Tax Foundation, “Countdown to Tax Reform,” October 7, 2005. Governor Olene S. Walker, “Recommendations on a Tax Structure for Utah’s Future., November 2004 Marylin P. Watkins, PhD., “Reforming Washington’s Tax System: Where Do we Go From Here?’, Economic Opportunity Institute, January 2005. Richard K. Vedder and Lowell E. Gallaway , “Understanding the Tax Reform Debate: Background, Criteria, and Questions”, September 2005. “Some Underlying Principles of Tax Policy”, Prepared for the Joint Economic Committee, United States Government Accountability Office, Sept. 1998 Chapter 2: Utah’s Tax System: Donald Bruce, William F. Fox, and M.H. Tuttle, “Tax Base Elasticities: A Multi-State Analysis of Long Run and Short-Run Dynamics, Southern Economic Journal 2006,73(2), 315-341. Janis Dubno and Levi Pace, “Utah’s Tax System”, CPPA Policy Perspectives, May 2007. Federal Tax Administrator, 2004 Survey of State taxation of Services, 2005 Issue of Tax Administrators News.


National Conference of State Legislatures, “A Guide to Property Taxes: The Role of Property Taxes in State and Local Finances”, August 2004. National Conference of State Legislators, by Fiscal Affairs Program “Tax Policy Handbook for State Legislators”, Second Edition, April 2003. Office of Legislative Research and General Counsel, Utah State Legislature, “An Overview of Utah’s State and Local Tax System.” Pre-session Legislator Orientation, , December 2006 Office of Legislative Research and General Counsel, Utah State Legislature “School Facility Funding”, May 2007 Office of Legislative Research and Counsel, Utah State Legislature; 2005 Municipal Finance Presentation Office of Utah Legislative Fiscal Analyst, Utah State Legislature, “Issue Brief-Property Taxes and the State”, January 9, 2007 Property Tax Division , Utah State Tax Commission Website, “Historical Overview of Utah’s Property Tax”: http://propertytax.utah.gov/about/pttaxguide/taxguide.pdf Property Tax Division, Utah State Tax Commission “2005 Utah Property Tax Annual Statistical Report ”, August 1, 2006 Property Tax Division, Utah State Tax Commission “2006 Utah Property Tax Annual Statistical Report ” August 1, 2007 Property Tax Division, Utah State Tax Commission website, “Tax Relief and Abatement Standards of Practice”, Revised April, 2007: http://propertytax.utah.gov/standards/standard03.pdf U.S. Census Bureau, “Public Education Finances, 2005”, Issued April 2007 U.S. Census, State and Local Government Finances, 2000-2006 U.S. Census, State Government Tax Collections, 2000-2006 Utah Governor’s Office of Planning and Budget, Budget and Policy Analysis, Budget Summary: FY2008, 2007, 2005. http://governor.utah.gov/gopb/budgetsummary08.html Utah Governor’s Office of Planning and Budget, “Tax Reform: Methods, Models and Documentation” April 2007. Utah State Tax Commission website: Sales Tax publication-25: Sales and Use Tax General Information: http://www.tax.utah.gov/forms/pubs/pub-25.pdf


Utah Tax Commission, 2006 Annual Report. Utah Tax Commission, Utah 2006 Income Tax Instruction. http://tax.utah.gov/forms/current/tc-40inst.pdf Utah Uniform Code 59-12-103 Governor Olene S. Walker, “Recommendations on a Tax Structure for Utah’s Future”, November 2004 Appendix 1: Description of Intermountain Western States Tax Policies Arizona Arizona Department of Revenue, FY 2006 Annual Report Arizona Individual Income Tax Forms and Instructions: http://www.azdor.gov/Forms/2006/140 instructions 2D.pdf Arizona Tax Code Title 43-1073: Family income tax credit: http://www.azleg.state.az.us/FormatDocument.asp?inDoc=/ars/43/01073.htm&Title=43&DocType=ARS Arizona Tax Research Association, “An Explanation of Arizona Property Taxes 2006”, http://www.arizonatax.org/propertytax.html Greater Phoenix Economic Council: Transaction Privilege Tax: www.gpec.org Dana Jarzynka, Linda Hallman, Elizabeth Hudgins, “Transaction Privilege Tax Guiding Principles”, August 1,2003, www.azcfrc.az.gov League of Arizona Cities and Towns, Model City Tax Rates, Tax Tables http://www.modelcitytaxcode.org/Tax_rate/Tax_rate.htm http://www.modelcitytaxcode.org/pdf/0407CombinedRateSheet.pdf


Colorado The Bell Policy Center , “Ten Years of TABOR: A Study of Colorado’s Taxpayer Bill of Right”, Denver, Colorado, 2003. http://www.thebell.org/PUBS/annual/2003/TABOR10.pdf Center for Colorado Policy Studies, “Colorado State and Local Tax Structure: An Overview”. http://web.uccs.edu/ccps/pdf/Tax Overview Article.PDF Colorado Department of Local Affairs, Division Of Property Taxation, 2006 Annual Report, hhttp://www.dola.state.co.us/dpt/publications/docs/2006_annual report/ Colorado Department of Revenue, 2006 Annual Report Colorado Department of Revenue. 2006 Income Tax Instructions: http://www.revenue.state.co.us/PDF/06104inst.pdf Colorado Department of Revenue, Colorado Sales/Use Tax Rates http://www.revenue.state.co.us/PDF/drp1002.pdf Colorado Department of Revenue, General Information about Colorado Taxes http://www.revenue.state.co.us/TPS_Dir/wrap.asp?incl=generalinfotaxes Douglas County Assessors Office, “Understanding Property Taxes In Colorado”, http://www.co.douglas.co.us/assessor/documents/Understanding_Property_Tax_001.pdf National Council of State Legislators, “Talking Points on TABOR”. http://www.ncsl.org/programs/fiscal/taborpts.htm Idaho John Hancock, Explanation of Property Taxes in Idaho: 2005 Property Tax Interim Committee materials , Legislative Services Office, Idaho State Legislature http://ww,w.legislature.idaho.gov/sessioninfo/2005/interim/propertytax.pdf Dan John, Tax Policy Manager, “Idaho Property Taxes and Idaho Tax Structure”, IdahoStateTaxCommission:http://www.legislature.idaho.gov/sessioninfo/2005/interim/proptaxstructure.pdf Idaho State Tax Commission. 2006 Annual Report Idaho State Tax Commission: 2006 Individual Income Tax Instructions http://www.tax.idaho.gov/forms_indiv_06.htm


Idaho State Tax Commission. 2006 Idaho Individual Income Tax Return. http://tax.idaho.gov/pdf/EPB00033_2006AnnualReport_web.pdf Idaho State Tax Commission, “Property Tax for Homeowners” http://tax.idaho.gov/propertytax/PTpdfs/EBR00062_PropTaxForHomeowners WEB 6-28-06_zap.pdf Idaho State Tax Commission, Tax Information for Idaho Newcomers http://tax.idaho.gov/pdf/EBR00220_newcomers_10-03-06.pdf State of Idaho, Division of Financial Management website. General Fund Revenue Book FY2008, http://dfm.idaho.gov/Publications/EAB/GFRB/GFRBIndex.html Tax Foundation, State Individual Income Tax Rates, 2006 http://www.taxfoundation.org/taxdata/show/228.html Montana Montana Department of Revenue, 2005-6 Biennial Report. Montana Department of Revenue, Calculation of Individual Income Taxes http://mt.gov/revenue/forindividuals/individualincome/calculationiit.asp Montana Department of Revenue, 2006 Individual Income Tax Booklet: http://mt.gov/revenue/formsandresources/06forms/2006_IIT_booklet.pdf Montana Department of Revenue, Understanding Property Taxes 2007 Nevada Nevada Department of Taxation, 2006 Annual Report http://tax.state.nv.us/documents/AnnualReport2006.PDF Nevada Department Of Taxation, How Property Taxes Are Calculated http://tax.state.nv.us/DOAS Property Taxes/PART III - How Property Taxes are Calculated.pdf Nevada Department of Taxation, Property Tax Rates for Nevada Local Governments, Fiscal Year 2006-07, Division of Assessment Standards, Local Government Finance Section: http://tax.state.nv.us/DOAS_FORMS/LGF Redbook 2006-07.pdf Nevada Department of Taxation, Property Tax Rates for Nevada Local Governments, Fiscal Year 2007-08, Division of Assessment Standards, Local Government Finance Section


Nevada Taxpayers Association, “Understanding Nevada’s Property Tax System”, 2005 edition: http://www.nevadataxpayers.org/ New Mexico Legislative Council Service, New Mexico Legislature, Index to Revenue Sources of New Mexico, http://legis.state.nm.us/lcs/misc/Index to Revenue Sources.pdf New Mexico Taxation and Revenue Department, Information for New Residents, http://www.tax.state.nm.us/pubs/fyi-101.pdf New Mexico Taxation and Revenue Department, 2006 Personal Income Tax Form (PIT-1) New Mexico Taxation and Revenue Department, 2006 Personal Income Tax Form Instructions (PIT-1): Error! Hyperlink reference not valid. New Mexico Taxation and Revenue Department, 2006 Property Tax Facts: http://www.tax.state.nm.us/pubs/TaxreseStat/2006propertytaxfacts.pdf New Mexico Taxation and Revenue Department, Instructions for 2006 PIT-ADJ Schedule of Additions and Deductions/Exemptions: http://www.tax.state.nm.us/forms/year06/2006PITADJINST.pdf New Mexico Taxation and Revenue Department, Instructions for 2006 PIT-RC Schedule: New Mexico Rebate and Credit Schedule: http://www.tax.state.nm.us/forms/year06/2006PITRCINST.pdf New Mexico Taxation and Revenue Department, “Gross Receipts and Compensating Taxes: An Overview”. July 1,2006-June 30,2007 http://www.tax.state.nm.us/pubs/fyi-105.pdf New Mexico Taxation and Revenue Department, “What is A Gross Receipts Tax”, http://www.tax.state.nm.us/pubs/WhatIsGrossReceipts98.pdf Wyoming Wyoming Department of Revenue: 2006 Annual Report Wyoming Department of Revenue, “Current Property Tax Relief/Credit/Deferral Programs” Last Revised May, 2007: http://revenue.state.wy.us/PortalVBVS/uploads/current property tax relief programs07.pdf Wyoming Department of Revenue, Master Tax Rate Chart, 7/01/07


http://revenue.state.wy.us/PortalVBVS/uploads/MASTERTAXRATECHART_7-1-07_Final.pdf Wyoming Department of Revenue, Property Tax Exemptions and Relief, http://revenue.state.wy.us/PortalVBVS/uploads/propertytaxexemptionsandrelief.pdf Wyoming Department of Revenue, “Property Tax System”, http://revenue.state.wy.us/PortalVBVS/uploads/propertytaxsystem.pdf Wyoming Department of Revenue, Sales and Use Tax Rates effective 7/01/07 http://revenue.state.wy.us/PortalVBVS/uploads/SalesAndUseTaxRatesByZipCodeForWyomingCiteiesAndTowns07.01.07.pdf Wyoming Department of Revenue, “Taxation of Residential Property”, http://revenue.state.wy.us/PortalVBVS/uploads/taxationofresidentialproperty.pdf Wyoming Taxpayers Association: Wyoming Tax Summary 2006.

Authors: Ms. Janis Dubno, MBA, is a consultant for the Center for Public Policy and Administration. Mr. Levi Pace, MBA, is a Research Assistant for the Center for Public Policy and Administration, and a Research Assistant for the Office of Legislative Research and General Counsel, State of Utah. Acknowledgments: With Special Acknowledgement to Bryant Howe and Phil Dean of the Office of Legislative Research and General Counsel, and David Stringfellow of the Governor’s Office of Planning and Budget, for their assistance and guidance. Assistants: Melinda Frandsen, Graduate Assistant, Center for Public Policy and Administration. Email: [email protected] Web: www.cppa.utah.edu

an evaluation of utah’s tax system and a comparison of

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