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.
Credit details
Maximum credits would be as follows:
Married: $600
Single: $300
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.
This post indicates that regressivity of Utah's state and local tax structure "is due to sales taxes." This statement is not correct. The Tax Review Commission's report on tax burden unaimously concluded that the major causes of this regressivity were the sales tax on food and the erosion of the state's income tax brackets. The Utah Taxpayers Assoc was a member of this group. Neverthess, it has supported efforts to make the tax system more regressive. A flat income tax structure by its very nature will make the tax system more not less fair to moderate and low income taxpayers. Phasing out the credits rather than keeping brackets is being pushed as a way to make an inequitable system see more fair. But as the article indicates the phase out is intended as a way to cut the tax cut to the middele class while keeping a low single rate that benefits the wealthiest of tax payers. come on you guys--if you are going to push this agenda at least be honest about it.
Posted by
Anonymous |
9:34 AM
Dorothy,
As usual, your comments are long on rhetoric and short on accuracy, honesty, and reason, but we appreciate your comments anyway.
1. A REFUNDABLE means-tested credit reduces regressivity. The governor's proposal would allow for refundability of up to 2% of AGI.
It's obvious you are more concerned about increasing taxes on high income households (or alternatively preventing tax cuts for high income people) than you are about cutting taxes for low income households.
2. Since the "sales tax on food" is part of the sales tax system, saying "the sales tax is regressive" is an accurate statement. Moreover, since the complete removal of the sales tax on food is a long shot, other attempts to reduce regressivity must be taken.
3. Increasing sales tax rates -- and yes that includes food -- makes the system more regressive, and no organization has opposed sales tax increases than the Utah Taxpayers Association. We've fought higher sales tax rates for years -- without any help from you or your allies. Your support for higher taxes in general outweighs your concern for reducing taxes on low income people.
4. Long before anyone was seriously talking about flat taxes, the Utah Taxpayers Association has long advocated for indexing individual income tax brackets, which makes the system less regressive.
5. In case you haven't noticed, Huntsman's proposal for a phased-out, means-tested, refundable credit means that his proposal is not a "true" flat tax which means you can dispense with the rhetoric of "a flat income tax by its very nature will the system less fair".
6. We've supported a targeted refundable credit even before there was any serious talk about a flat or a "flatter" tax. Removing the sales tax on food lowers taxes on all households, not just low income. A means-tested refundable credit, on the other hand, is targeted towards low-income households. The dreaded rich don't receive a benefit from a targeted credit.
Posted by
Utah Taxpayer |
9:58 AM
Dorothy,
You are also wrong is stating that sales taxes are only regressive because of food sales tax. The sales tax burden is regressive even if the sales tax on food were removed.
We've calculated sales tax burdens by income and household size based on the BLS Consumer Expenditure Survey. Our numbers are similar to the Tax Commission's numbers. Our numbers are a little higher than the Tax Commission's because the most recent Tax Commission study was done several years ago when sales tax rates were lower.
For example, the total state/local sales tax burden for most lower income households is in the range of 6% to 9% (yes, a 9% burden means that they are spending more than they are making since the typical sales tax rate in Utah is about 6.5%). By removing the sales tax on food, the sales tax burden decreases by about 1.5 to 2.5 percentage points for *most* low income households.
The total sales tax burden for higher income households is in the 1.5% to 3.0% range. Removing the sales tax on food for higher income households reduces the sales tax burden by about 0.3 percentage points.
So, even after removing the sales tax on food, the sales tax is more regressive.
Posted by
Utah Taxpayer |
10:26 AM
Correction: The last statement should have read "the sales tax is STILL regressive, not MORE regressive."
Posted by
Utah Taxpayer |
10:45 AM