Deseret Morning News graphic

Never underestimate the political pressure to give a tax cut, especially in an election year.

Wednesday, Utah's part-time legislators talked about a September special session where they would somehow give residents a $70 million personal income tax cut in 2006.

"We will dedicate our whole (July) interim meeting to the dual tax system" and see if problems with tax-cut estimates can't be worked out," said Sen. Curt Bramble, R-Provo, co-chairman of the Legislature's Revenue and Taxation Interim Study Committee.

Gov. Jon Huntsman Jr. is glad legislators are seriously talking about "the dual tax system reform," his spokesman, Mike Mower, said.

"We are open to considering the best way to facilitate its passage," Mower added, which could include a fall special session.

Senate President John Valentine, R-Orem, said he too is willing to talk. "But I won't favor calling a special session unless two things are clear: We have certain, verifiable numbers on what the change in the tax system would cost us, and I have 15 votes (a Senate majority) for the change in my (GOP) caucus."

Senate Republicans discussed the tax cut in a Wednesday closed caucus, but no decisions were made, Valentine added.

The renewed interest in a tax cut — coming as it does when all 75 House members and half of the 29-member Senate face voters in November — arises as a new Tax Commission report shows the state has $200 million to $300 million in tax revenue surplus this current fiscal year, which ends June 30.

Those are not record numbers, but they are very healthy surpluses. That money is not needed for this year's tax cuts — $160 million for those has already been set aside by the Legislature.

While the Utah House stood with Huntsman on a number of thorny issues during the 2006 general session, House GOP members may not be able to deliver the votes asked for Huntsman's so-called "personal income tax reform."

"I have some problems with the dual tax system," House Speaker Greg Curtis, R-Sandy, said Wednesday.

For two years the governor has been advocating a "fairer-flatter" personal income ttax system, one that dumps a number of traditional tax deductions or exemptions but also would lower the current top income tax rate from 7 percent to around 5 percent.

However, that so-called H3 reform is now out the window with the dual tax system, Curtis, Valentine and other legislators said Wednesday.

Under the dual system, a taxpayer could choose the current system, with a 7 percent top rate, and a number of deductions and exemptions, including mortgage interest and charitable giving. Or the taxpayer could choose a true flat-rate tax — no deductions at all, where the new, lower flat rate would be applied against the taxpayer's adjusted gross income, explained Valentine, a tax attorney.

Since the taxpayer would pick the system that gives him the greatest tax advantage, there would be no losers in the change, legislators and Huntsman say.

But, Curtis said, the lion's share of the $70 million tax cut allocated to the flat-tax returns would assuredly go to the wealthiest of Utahns — who don't get that much of a tax benefit from the current system's deductions and exemptions.

"You would see the wealthiest among us, those making $250,000 a year and more, eating up most of that $70 million tax cut because they would choose to pay the lower rate. I have a real problem with that, and so would many of my House colleagues," Curtis said.

Speaking to the Deseret Morning News editorial board, House Democratic leaders said they oppose giving a $70 million income tax cut. By law, income taxes go to public and higher education, and House Minority Leader Ralph Becker, D-Salt Lake, said Democrats will do whatever they can to stop a special session or passage of a tax cut that could better be used for critical state programs.

The governor's H3 "flatter-fairer" income tax reform passed the Senate but died in the House the final night of the general session.

Huntsman thought he probably could force it through in a summer special session. But then the State Tax Commission said original estimates that the "fairer-flatter" 5 percent tax would cost around $70 million — the amount legislators allocated for the personal income tax cut — proved inaccurate. The tax cut could be as much as $230 million, tax experts said.

The deal looked dead, with Huntsman, who is not up for re-election this year, saying he'd just wait for the 2007 Legislature.

House Republicans, however, didn't give up. They signed a letter asking Huntsman to call a special session to just cut the top rate of the current system a bit to give the $70 million tax cut — and reform could wait a year or so.

But Huntsman said he knows if he just gives a small rate reduction, he'll never get his personal income tax reform he wants through later.

House Majority Whip Steve Urquhart, R-St. George, said Wednesday it is not assured that the House would vote for the new dual tax system package.

"Tax reform may sound sexy, but it is not necessary," said Urquhart. "What we need this year is a tax cut — drop the top rate a bit. Our current tax system is good, except that it takes too much money" from taxpayers.

Tax and Revenue Committee members heard a new economic and tax revenue report Wednesday that shows Utah state government is truly "in the money."

Legislators had an extra $1 billion to spend during the 2006 Legislature. They spent most of it, putting aside $160 million for tax relief.

But just a few months later, the state is running an additional revenue surplus of $200 million to $300 million.

With only one month of tax collections to go in the fiscal year, revenues in the General and Uniform School funds are growing by 17.1 percent — when growth was originally estimated to be only 9.4 percent, Phillip Dean of Legislative Research and General Counsel said.

Utah created 51,000 new jobs over the past year, on par with the huge economic growth years of the mid-1990s. Sales tax revenue is up 15 percent. Corporate income tax collections are up nearly 38 percent, Dean said.

Contributing: Lisa Riley Roche