A political compromise is in the works on Utah's personal income tax, and come next year you may be able to choose between the current 7 percent state system or switch to a new "flatter, fairer" system with a 5 percent rate for all but fewer exemptions.
"This is a great chance for the state to move to a progressive tax system," said Rep. Wayne Harper, R-West Jordan, on Monday.
After a House GOP caucus last month a caucus that showed that Huntsman's so-called "H3" flatter-rate tax reform plan was "deader than a fried chicken," as one House Republican put it Huntsman and GOP legislative leaders started looking for a compromise.
All 75 House seats are up for re-election this November. And since the 2006 Legislature adopted a $70 million income-tax cut this year but failed to adopt a plan on how to return that money, there is political pressure to reach some kind of compromise so the $70 million cut can become law by Election Day.
Harper, who co-chaired an exhaustive tax-reform task force last year, said the bifurcated plan "just makes sense."
Huntsman deputy chief of staff Mike Mower said Monday night that the new compromise "moves us a great distance to our goal of a more competitive tax system and one that secures education funding."
However, Mower said the governor was not yet ready to call a special legislative session to enact the compromise. "This compromise is receiving great interest," Mower said. "We are very pleased with it." Huntsman isn't going to call a special session until the votes are lined up, several legislators said.
"I think the dual system has real merit," said House Speaker Greg Curtis, R-Sandy, who added he believes there could be 38 votes, a majority, in his GOP House caucus alone enough to secure passage even if Democrats don't agree.
But Senate Minority Leader Mike Dmitrich, D-Price, said he hopes to get "at least half of the Democrats (in the Legislature) to support this. It's a fair compromise, can really help some lower-income Utahns" by giving them a chance to pick a tax system that will save them money.
As one House Republican, who asked not to be identified, said Saturday during the Salt Lake County GOP convention: "This is a political win-win for everyone how can you object to a compromise where every Utahn can decide which tax system he pays?"
But Senate President John Valentine, R-Orem, said such a two-prong system could be confusing to operate and difficult for state budgeters to determine how much income tax will actually come in.
"I'm not totally opposed" to the new compromise, said Valentine, who is a tax attorney. "I'm asking our fiscal analysts and the Tax Commission to come up with some numbers" on how the two-prong approach will actually work.
Tax Commission spokesman Charlie Roberts said commissioners are aware of the proposed compromise. It could be a real headache to run two personal income-tax systems at the same time. "But it could be done," he added.
"I'm not very supportive" of the compromise, said Sen. Curt Bramble, R-Provo, who co-chaired last year's tax-reform task force. Having a dual system "creates a complexity, and if you are locked in and can't change, we're just facing discontentment year after year" as a filer's financial situations change and he can't quickly move to the other, more beneficial, system, Bramble said.
Harper points out, however, that in 2005 the Legislature allowed Utah corporations to figure their income taxes two different ways. It saved businesses several million dollars. And businesses, the state Tax Commission and state budgeters were able to deal with that system just fine.
"If we do this already for businesses, why not allow individuals to have the same options?" Harper asked. "I see this as an education challenge. We have to let people know how they can figure their personal income taxes in the way that benefits them most."
In reality, he added, more than 60 percent of Utahns now don't itemize on their state income-tax returns they take standard deductions.
There is little doubt that standard deduction-takers will fare better financially under Huntsman's "H3" flatter-rate income tax plan. So, most Utahns will choose the new system, Harper believes.
Still undecided is how often Utahns would be allowed to switch back and forth between the current system and the new system. "We let businesses do that every five years pick the system that's best for them (financially). We're looking at the same option" for individuals as well, Harper said.
Because the 2006 Legislature failed to adopt Huntsman's "H3" alternative, there isn't time now to go into a special session to get the $70 million income tax cut on the 2006 rolls.
"The option to pick one system or the other would start Jan. 1, 2007," Harper said.
Valentine said Huntsman would likely have to call a special session by September to give the Tax Commission time to retool computers by the Jan. 1 deadline.
As various changes to Huntsman's "H3" plan were suggested over the months, impacts on Utahns' individual tax situations changed. The last bill was passed by the Senate in the 2006 Legislature but died the last night in the House. The bill showed that few Utahns would see an actual tax hike under "H3." (See accompanying chart.)Comment on this story
A small group, including some large families with high mortgages and some retired seniors who now get a tax break, would pay more. But even those only saw increases of $10 to $100 or so a year, tax experts said.
As concern over unknown impacts rose among House Republicans in this election year and as updated fiscal impacts showed the state could lose an extra $35 million under "H3" support for Huntsman's flatter tax dropped. And in April, House GOP caucus members were talking about a special session where the $70 million would be given out this year, just slightly lowering the current 7 percent state income tax top rate.Fearing a real opportunity to change Utahn's tax structure for the better could be lost, Huntsman and GOP leaders started talking over the last week about the new two-prong approach, several legislators told the Deseret Morning News.