Talk of a flat-rate state income tax is gaining momentum on Utah's Capitol Hill, with one expert study group already endorsing it and another taking it under serious consideration.
But as the newly formed Tax Reform Task Force "gets into its heavy work," as one legislative leader put it Thursday, seasoned politicos are warning that significant tax reform is fraught with political land mines.
And Thursday the LDS Church issued a new statement on a flat-rate tax that would eliminate the deduction on charitable contributions saying the deduction should stay under any tax system.
The church rarely takes stands on issues before the Legislature. But when it does, history shows lawmakers more than 80 percent of whom are church members listen.
"We did this, had many recommendations and changes" to the Utah tax code back in the mid-1980s, said Mark Buchi, a longtime tax expert and former state tax commissioner who worked on previous tax reform measures. "But over time, the reform eroded" as many citizens complained to their lawmakers about tax changes.
"And the (reforms) were taken away" by willing Legislatures, he said.
A real question in debating a flat-rate income tax, one in its purest form that has no deductions for home mortgage interest, charitable contributions or minor children, is the stand of the LDS Church.
Faced with huge budget deficits in the 1987 Legislature, lawmakers and then-Gov. Norm Bangerter looked at many tax reform/tax increase alternatives.
The House that year actually passed a pure flat-rate income tax that had no deductions. And a number of GOP and Democratic legislators believed it had a chance of passage in the Senate.
But the then-spokesman for the LDS Church, Jerry Cahill, said church leaders opposed the idea of no charitable deductions, saying they feared it would harm non-church charities, the arts and educational donations.
Days later, Senate leaders announced there was little support for the flat-rate bill.
Asked Thursday if the 1987 statement on a flat-rate tax without charitable deductions still stands, LDS Church spokesman Dale Bills issued the following statement:
"The Church of Jesus Christ of Latter-day Saints acknowledges the thoughtful efforts of many in state government to review Utah's tax structure. For the overall good of the citizenry, the state tax system should continue to provide tax deductions for charitable giving including religious contributions. Charitable contributions help provide for society's poor and needy, education and the arts, and other important social needs."
But supporters of a pure flat-rate income tax say various studies and history itself show that doing away with the mortgage interest deduction doesn't harm housing markets and eliminating the charitable deduction doesn't harm charitable giving, either.
Brigham Young University business professor Gary Cornia, who was part of the tax-reform study group put together last year by former Gov. Olene Walker that recommended a flat-rate tax, told the new Tax Reform Task Force on Thursday that a number of studies from around the world show that doing away with those deductions has little or no impact on how society operates in those areas.
In fact, said Cornia, studies show that economies actually grow when tax systems are reformed to broaden the tax base while lowering the tax rate.
A true flat-rate income tax taxes citizens on their adjusted gross income with no deductions taken explained Cornia. "I know," he said, "people say wait a minute: 'Not allow deductions for home mortgages or charitable giving?' "
But Utah has a warped flat-rate system now, the experts explained. While the rates vary from 2.3 percent to 7 percent, the top rate kicks in for income over $8,626 for a married couple, and so almost all Utahns are in that top 7 percent bracket.
Going to a true flat-rate system will allow that top rate to be cut to around 4 percent and the savings to all taxpayers in money, simplicity and understanding of the income tax system makes up for doing away with the deductions, Cornia and other Walker tax study members said.
The problem, of course, is one of citizen understanding and political impacts.
"Remember," said Utah State Tax Commission member Bruce Johnson, who also sat on the Walker panel, "you would still get the deductions on your federal income tax returns" you just wouldn't get them on your state returns.
Broadening the state sales-tax base to include personal services like haircuts and lawn care and health-care bills would also allow the sales tax rate to be lowered, the experts said.
Paying the sales tax on most services would allow the state's current rate of 4.75 percent to be cut to 3.75 percent, the Walker panel said.
Finally, after the Walker panel noted that low-income Utahns would be exempt from a flat-rate income tax as they
are under the current system, task force member Rep. John Dougall, R-Highland, asked why low-income Utahns should avoid paying "even a small tax." "Aren't we making a welfare program part of a tax system?" he said.
Perhaps, the experts said.
But under the current state tax system, said Johnson, why is it proper that his well-to-do neighbors pay $100 a month to have their lawn cut, paying no sales tax on that service, when the single mother down the street has to pay a sales tax on the milk for her children or a sales tax on tennis shoes so her children can go to school?
Meanwhile, members of the task force's subcommittee on income taxes decided Thursday to get started by having staff come up with a flat rate calculated on gross income if the first $20,000 or so of earnings were exempted.
The calculation won't take into account deductions for charitable contributions, and would be revenue neutral, bringing in as much money as the current income tax structure does now rather than cutting income tax collections.
"My preference is we have a tax cut and that cut come out of personal income," said House Majority Whip Steve Urquhart, R-St. George, who proposed coming up with the calculation. But the entire Legislature should make that decision, he said, not the subcommittee.
Exempting what Utahns need for subsistence from income tax $20,000 for individuals and $40,000 for a couple may alleviate the need to take the sales tax off food, said Sen. Howard Stephenson, R-Draper, the subcommittee chairman.
While subcommittee members agreed they want a flat tax rate, several said they are willing to discuss including deductions for charitable contributions and other expenses before coming up with a final recommendation."I'm looking for simplicity," Urquhart said.
Contributing: Lisa Riley Roche and Josh Loftin