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State & Local Taxes

Lesson 2 – Three Primary Taxes, Income Tax

Taxation in the State of Utah has existed since Utah was a territory. The authority to tax in the State of Utah is founded in Article XIII of the Utah State Constitution adopted November 4, 1895, and became effective January 4, 1896 when Utah was admitted as a state to the Union.

From 1896 to 1931, our state forefathers relied on real and personal property tax assessments to generate revenue. All corporations or individuals in the state paid tax based on real and personal property they owned in Utah.

With the onset of the Great Depression, it became evident in Utah – as it did in many other states – that property tax revenues were rapidly declining as property owners lost their land. About this same time, a concept developed that individual and corporate income tax measured a person's ability to pay taxes more accurately and enhanced the distribution of the overall tax burden between property owning and non-owning taxpayers. In 1931, with these
concepts in mind, the Legislature amended Article XIII, Section 2 to include corporate and individual income tax assessments.

Although the 1931 amendment placed a limitation on the rate of income tax to six percent through December 1936, it also gave the Legislature the power to change the limitation thereafter. The Legislature changed the rate structure in 1935, 1965, 1973, 1975, 1976, 1988, 1989, and 1996.

From 1931 to 1935, tax rates ranged from one to four percent on taxable income from $1,000 to $8,000. The rate range was raised from one to five percent in increments of $1,000 taxable income in 1935 and remained at that rate for the next thirty years. It was not until 1965 that the top bracket exceeded the original limitation of six percent. In that year the top rate went to six and one-half percent. In 1946 a second amendment was approved stipulating that all income tax revenue be allocated to support the public school system.

In 1996 voters approved an amendment during the general election to change Section 12 of Article XIII, Revenue and Taxation. Prior to the amendment this section applied only to public education. The amendment changed the section to apply to public schools and higher education system, and took effect on January 1, 1997. Today's public schools continue to be funded by taxes collected from both corporate and individual income.

In 1976 the top bracket was set at seven and three-quarters percent for net incomes over $7,500, and remained at that rate until 1988. In September of 1988 and 1989, Governor Bangerter called a special session of the Legislature to address revenue surpluses. The Legislature responded by reducing tax rates in both instances. The 1989 change reduced the rate for the top bracket to seven point two percent, and was effective for the 1989 tax year. In 1996 the Legislature lowered the rate again. The top rate is now seven percent.

The standard deduction and personal exemption amounts have also gradually increased over the years. In 1935, taxpayers were allowed $600 for their spouse and $300 per dependent. Twenty years later the dependent exemption was raised to $600, and both remained at that rate until 1975 when they were raised to $750, the same as the federal exemption. The last change to these exemption rates was in 1987, when rates became 75 percent of the federal exemption.

All Utah taxpayers were required to itemize their deductions until 1955, when the Legislature created a standard deduction amount. At the same time, the standard deduction was set at ten percent of gross income after deducting federal taxes. It was not changed again until the Utah Individual Income Tax Act of 1973 adjusted it to fifteen percent of adjusted gross income and set both minimum and maximum limitations. The standard deduction has since been adjusted to use the federal standard deduction amounts.

After the inflation-ridden 1970's and since no additional changes were made to the exemption or tax rates, adjustments to income taxes in Utah became inevitable by the early 1980's. The State Tax Commission studied the problem extensively and published its findings in 1984. As a result, the personal exemption and standard deduction amounts were recalculated and tied directly into their counterparts in the federal income tax system. Since 1987, the exemption amount has been seventy-five percent of the federal exemption amount.

These measures should prevent the problem Utah taxpayers experienced in the 1970's from reoccurring. Most modern income tax rules and regulations are complicated at best, but Utah lawmakers have strived over the years to keep Utah taxes as simple as possible by using established federal rules and regulations as a basis for state income taxation. While federal tax law remains complex, Utah hopes that by allowing its citizens to use figures from the federal form, it has prevented the state system from further complicating matters.

In 2001 the Legislature modified the Individual Income Tax Act by establishing an income level below which a taxpayer is exempt from paying state individual income tax. A taxpayer is exempt from Utah income taxes if the individual's adjusted gross income on the federal income tax return is less than or equal to the sum of the individual's:

• Federal personal exemptions, and
• Standard deduction for their filing status for the taxable year

One hundred percent of income tax revenue goes to fund education in Utah.