Huntsman's tax reform proposal
Gov. Huntsman is proposing to expand tax reform by lowering the flat tax rate from 5.35% to 5.0%. Huntsman is also proposing a refundable tax credit targeted towards low and moderate income families.
About 6% of taxpayers will benefit from the rate reduction and about 51% will benefit from the means-tested refundable tax credit.
The governor is to be applauded for continuing to work towards lowering Utah's individual income tax rates. Click [here] to see how states have been lowering their individual income tax rates over the years.
Maximum credits would be as follows:
Per person: $115
The credit is refundable up to 2% of AGI. For a married household, the credit phases out between $30,000 and $90,000.
The Utah Taxpayers Association and other groups have calculated the impact of these changes, and the governor's office agrees that the credit amounts -- which are based on FY2004 Tax Commission data -- will have to be increased in order to get taxpayers to switch to the new system.
The governor anticipates that these two changes will move about 57% of all taxpayers to the (modified) flat tax. This is a good idea, and we hope the Legislature gives it serious consideration.
The purpose of the phased-out tax credit
The refundable phased-out tax credit is a good idea for several reasons.
- By phasing out the tax credit, the governor can lower the flat tax rate even more than if the credit weren't phased out. No matter how big the tax cut ends up being, a phased-out credit will allow for a lower tax rate because the phased-out tax credit consumes less tax cut "headroom" than a credit that isn't phased out.
- Like most states, Utah's state and local tax structure is regressive (low income households pay a higher percent of income in state and local taxes than higher income households), and this is due to sales taxes. Low income households spend a higher percent of income on goods and services subject to sales taxes. A means-tested refundable credit can significantly reduce the regressivity of state and local sales taxes. [Note: some studies overstate the regressivity of state and local taxes. We'll discuss that at a later time.]
Some have referred to Huntsman's means-tested refundable credit as an earned income tax credit (EITC), but it is more accurately described as a sales tax offset.
Some will oppose this approach because it "takes people off the tax rolls", but many low income household are not currently paying state income tax. In tax year 2006, a family of four earning less than $20,000 is not paying Utah state income tax (standard deduction of $10,300 and 4 x 0.75 x $3,300 standard exemption equals $20,200).
Again, the real culprit is the regressive sales tax, and the insistence of the spending lobby to push for additional local boutique sales taxes makes matters worse.
Proposal will be tweaked
As Huntsman's proposal meets the realities of the sausage factory, the proposal will be modified, maybe even significantly. Fortunately, Huntsman has some really sharp people working on this.