'Gray areas' pop up in tax reform plan

LOGAN — Almost a half dozen questions were raised during a recent meeting of the Utah Tax Review Commission that were unresolved or, at worst, unanswerable. All of them were issues that would evolve from the passage of a proposed bifurcated tax system that legislative leaders and Gov. Jon Huntsman Jr. want considered in a September special session.

As proposed, the state would have two income tax systems in what would amount to an overall $70 million tax cut. One would be a 6.9 percent rate with deductions included, while the other would be a flat 5.3 percent rate with no deductions, not even for charitable donations or mortgage interest.

But the new system could potentially make trusts completely tax exempt, and it could encourage people to load up on charitable exemptions one year and claim no exemptions the following year to give them significant tax advantages. There were also concerns from commission members about a volatility in revenue forecasts and the loss of funding for public education.

More significantly, the proposal may lose support of some key advocates of tax reform, including Keith Prescott and Gary Cornia, who helped draft a tax reform plan for former Gov. Olene Walker, because it is not true tax reform.

"I thought this was stabilizing the system" and funding public education, Prescott said. "I didn't realize that it is about tax cuts."

The uncertainties also magnified a problem with special sessions that had two key senators, Lyle Hillyard, R-Logan, and Howard Stephenson, R-Draper, voicing skepticism about passage of the dual system this year. Both said that the issue was complex enough that it should probably be handled during the 45-day general session in 2007.

"What do we gain by doing this during a special session?" Stephenson asked. "Why not wait and be more methodical?"

Hillyard, who is also the Senate budget chairman, characterized the proposal as "93.99 percent tax cut and 1 percent tax reform." Passage of the plan during a special session would mean that the Legislature missed a "golden opportunity" for true reform, and it could prove to be more headache than reward in the future, he said.

"If we rush it through now and make a mistake, we are going to have a lot of problems," he said. "You can't unwind things, so to push something like this during a special session is not a wise decision."

Robert Spendlove, Huntsman's chief economist, said that the proposed system would be actually the first step in significant reform that the state needs to take. Without it, Utah will become less competitive for economic development dollars with other states that have instituted some type of tax reform.

"We've found that relocation decisions by companies are based on what is good for the company and what is good for the executives," he said. "One of the biggest things the executives look at is their personal income tax rates."

The commission did not take a position on the proposed tax plan but chose instead to schedule another meeting prior to Sept. 20, when the special session likely would be called.

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E-mail: jloftin@desnews.com