Tax experts cite growing complexity

The Utah Legislature may be moving toward a more complex, more volatile personal income tax system, tax experts said Friday.

But even warnings from the Tax Review Commission likely won't keep Gov. Jon Huntsman Jr. and the majority GOP legislators from pursuing a political tax cut this session over a more sound tax policy solution — mainly because a more sound solution would result in some taxpayers paying more, a result the politicians won't accept.

The TRC is a group of tax experts and legislators that reviews state tax policy. While members often try to stay out of politics, the commission's recommendations in the past have been roundly ignored as political leaders wrestle with tax decisions.

The TRC asked Brigham Young University tax expert Ray Nelson to run various models on two of the major state income tax reform bills this session — HB123 and SB223.

Both bills would change the new flat-rate income tax system, which this year will run at the same time as Utah's long-standing tax system that includes deductions and exemptions.

SB223 sponsored by freshman Sen. Wayne Niederhauser, R-Sandy, and backed by Huntsman, would cut $102 million from income taxes this year and is the more volatile of the two.

HB123 by Rep. John Dougall, R-Highland, is a catch-all bill that would further "reform" the flat-rate income tax and remove the final 2.75 percent of the state's sales tax on food. The changes would cost nearly $300 million.

Both bills use enhanced tax credits to entice low- to middle-income taxpayers to move over from the old tax system to the new flat-rate tax.

It's estimated that SB223 would move 80 percent of taxpayers into the new flat-rate system.

Nelson told the TRC that because of those credits, both bills would "significantly" increase the volatility of the state's income tax system.

And that can be real trouble in times of economic recession.

For example, if the Utah adjusted gross income were to decline by 1 percent, income tax revenues would actually decrease by 4 percent, Nelson said.

TRC members said legislators should be very concerned about that volatility.