Day 8 - Proposed income and sales tax cuts
Rep. John Dougall and Rep. Merlynn Newbold proposed bills in today's House Revenue and Taxation Committee that would cut taxes and slow the growth in government spending. Even with significant tax cuts, taxpayer funding of education and other government functions will continue to increase significantly.
Both bills passed out of committee.
Rep. John Dougall, chair of House Revenue and Taxation Committee, is proposing reductions in individual income tax and the elimination of the remaining state portion of the sales tax on food. Details are:
- Reduce flat tax rate from 5.35% to 4.9%
- Implement non-refundable credit of $475 (4.75% x $10,000)to flat tax
- Reduce top rate on traditional system from 6.98% to 6.9%
- Reduce state sales tax rate on food from 2.75% to 0.0%.
The fiscal note gets a little tricky because there is a one-time retroactive tax cut for tax year 2007 of $43.2 million that occurs in FY08 but not in FY09. Also, there is a transfer from the general fund to the education fund of $70.8 million in FY08 and $84.2 million in FY09. This transfer covers the $475 credit. After the transfers are accounted for, the fiscal impact would be $322.3 million in FY08 and $302.7 million in FY09.
The fiscal impact of removing the remaining state portion of the sales tax on food would be $106 million in FY08 and $110 million in FY09. A middle-income family of four would save about $140 to $150 per year.
Dougall's proposal will undoubtedly be modified, but it is a very good place to start talking about tax cuts. Is the credit too low? Our calculations show that most taxpayers earning under $70,000 will continue to use the existing system, especially if the top marginal rate is reduced from 6.98% to 6.9%.
So far, Governor Huntsman and Rep. Dougall have proposed major tax changes. Tax reform discussions will focus on the following parameters:
- fiscal impact
- flat tax rate
- credit amount
- credit refundability (Huntsman's proposal has refundability. Dougall's does not)
- credit phase-out (Huntsman credit is phased out. Dougall credit is not)
- top marginal tax rate for traditional system
Rep. Newbold's bill would remove local "boutique" sales taxes such as mass transit, roads, and ZAP on unprepared food purchases. The fiscal impact on local governments -- mainly transit districts -- would be approximately $17 million. County-option and city/local-option sales tax rates of 0.25% and 1.0% would not be impacted by this legislation.
In Salt Lake County, for example, sales tax rate on food would be reduced by 0.85 percentage points (0.75 percentage points for transit/roads and 0.10 percentage points for ZAP).
There are two unique provisions to the bill. Counties with rural hospital tax would be held harmless by a state general fund transfer, and resort communities will be allowed to raise their resort communities sales tax rate. Normally, food purchases account for 10% of the sales tax base, but the percentage is higher for the resort communities sales tax since cars and other personal property are already exempt from this tax.
Disclaimer: Like all legislation, HB123 and HB282 may eventually be modified, meaning that the above points may no longer be 100% relevant.