How to know if tax reform will help or hurt

This session, the governor and the state Legislature promise to "get serious" about tax reform in Utah. Such reform is a rare event with repercussions long after the legislative session adjourns. Detailed tax studies have identified fundamental problems in the Utah tax system. The state is heavily reliant on taxes that are volatile and whose core base is declining due to a shift in spending from taxable goods to nontaxable services; increasing nontaxable Internet sales; and a variety of tax loopholes.

As a result, the existing tax system can't count on economic growth to fund future public and higher education needs along with Utah's other financial obligations. Furthermore, the existing state and local tax structure does not distribute the tax burden proportionately among all taxpayers. Instead the tax burden has shifted to lower- and middle-income taxpayers who carry a higher percentage of their income going to taxes.

In assessing the numerous competing proposals for tax reform, how is one to know if change will solve or create problems in the future? Asking the following questions can help:

1. Does the proposal provide long-term structural changes to promote a more equitable, stable and growing tax base, or is it a short-term politically motivated tax cut? Proposals that simply cut taxes without identifying a realistic compensating revenue source or that simply rely on "growth" do not address the state's eroding tax base. Proposals that do not annually adjust tax calculations for inflation provide short-term tax relief that eventually disappears. Utah currently has six income tax brackets, but the lack of indexing has pushed 82 percent of Utahns into the top bracket.

2. Does the proposal promote fairness and equity in the tax system? The major factors behind the inequity in the current tax system are the sales tax on food and the erosion of the state's income tax brackets. Proposals with a single income tax rate frequently offset the lower rate by taxing income below the federal poverty level. This tax shift benefits the wealthiest taxpayers while increasing the tax burden for low- and moderate-income taxpayers.

Often "flat" income tax proposals reduce or eliminate current household and personal tax deductions, creating an income tax system that is unfair to families. Such proposals assess a single-person household the same amount of tax as a family household with the same income. This ignores a family's greater costs for basic necessities. So-called "flatter" tax proposals try to address this inequity by reducing taxes for low-income households while maintaining the inequity for everyone else.