How much will the recently passed federal tax reform impact the Utah economy? A panel of tax experts last week expressed uncertainty and, in some cases, skepticism that it will help much.
Juliette Tennert, chief economist at the University of Utah’s Kem C. Gardner Policy Institute, said the legislation might result in a $3 billion tax cut for Utahns on a $160 billion economy.
“It’s not insignificant, but it’s not incredibly large,” Tennert said at the institute’s January Newmaker Breakfast. “We think that the injection of economic activity spurred by the tax plan will basically keep us moving along for the next year. It likely won’t accelerate growth in the state of Utah but certainly won’t decelerate it.”
The reform package will result in $1.5 trillion in U.S. tax cuts over 10 years. Among the business elements are a cut in the top corporate income tax rate from 35 percent to 21 percent and the allowance of a 20-percent deduction for business pass-through income.
Tennert said the U.S. economy is at full employment, leading to a very tight labor market that is even tighter in Utah. The state’s job growth has moderated from 3.5 percent in 2016 to an expected 3 percent last year and could fall to 2.8 percent in 2018.
“As we’re analyzing the impacts of tax reform on Utah specifically, the question is, does it give a boost to this projection of 2.8 percent job growth in 2018?” she asked. “We’re uncertain. We’re not sure that it will necessarily be enough of an impact to the economy to really bump this number up.”
Likewise, national GDP growth is expected to be anywhere from 2.5 percent and 3 percent, but no one is sure how that will roll into the Utah economy, she said.
“The bill clearly is designed for businesses, right?” said Bruce Johnson, a former Utah state tax commissioner who called the corporate income tax rate reduction “huge.” “It’s not designed for wage-earners very much. They put in enough to help wage-earners so they could keep a straight face, but it was clearly designed to help businesses.”
Johnson said the corporate income tax rate cut still leaves the U.S. in the top three highest rates among G20 nations. “The difference has narrowed considerably, but as opposed to a 39 percent rate, we go to about 10 percent below that as far as an effective rate goes, but that varies dramatically by company. … There is no doubt that we were out of step,” he said.
But Johnson said he doubts that the repatriation — getting American companies to bring operations back to the U.S. — intended by the legislation will become reality.
“The repatriation is basically a transition, and after that transition, income earned by consolidated foreign corporations is going to be taxed at the lower rate internationally and there won’t be any repatriation. So, to suggest that that is somehow going to spur investment in the United States, I think, is questionable,” he said.
He took the same tack when answering an audience question about whether the reforms will cause more people to move up into the working middle class.
“The proponents of the bill would argue that the repatriation and the ease of repatriating income earned overseas is going to create a pool of capital that many of those corporations will choose to invest in the United States,” Johnson said. “If they do that, that should generate jobs and increase opportunities for the working middle class. … I’m skeptical.”
What is usually considered strong tax reform simplifies the system, broadens the base of taxpayers and lowers overall tax rates. Johnson said the newly passed reform bill missed the mark regarding those targets.
“From my point of view, this was a lost opportunity,” he said. “If you’re going to increase the deficit by as much as they’re increasing the deficit and lower that top rate by as much as they lowered it, you ought to be getting significant base-broadening and you ought to be doing a lot to equalize the tax burden among various taxpayers and across industries, and they didn’t do that. I think, from that point of view, it was an opportunity that was squandered.”
Asked to pick winners and losers resulting from the bill, Tennert said large businesses and high-income earners are winners. Lower-wage earners also could benefit “as it spins through the economy.” Johnson said those benefiting include multinational corporations, the self-employed and businesses with pass-through income. Because the bill will increase the federal deficit and likely prompt Fed rate increases, “the real losers may be our children and our grandchildren,” he added.
Jonathan Ball, director of the fiscal analyst office at the Utah Legislature, said his office is trying to determine the impacts of the tax reform on Utah’s state budget. Some won’t be known until October of 2019, he said.