A group of Utahns who want to change the state's personal income-tax system from the new flat-rate tax to the more traditional graduated income-tax system wants to put its plan before voters.
The Rings True Coalition aims to collect hundreds of thousands of signatures from registered voters to place on the 2010 ballot a six-bracket, graduated income-tax system. If voters approve the new system in the 2010 general election, it would take effect that year. The new flat-rate tax took effect Jan. 1.
The 5 percent flat-rate tax is one of the crowning achievements of GOP Gov. Jon Huntsman Jr.'s first term, and certainly the governor, and many of the legislators who voted for the change, will oppose the citizen initiative.
Doug Macdonald, a former chief economist for the Utah State Tax Commission, worked on a chart that he says shows the actual effects of the flat-rate system on different taxpayers like a retired widower making $26,800 (in adjusted gross income), a married couple making $29,800 a year, a retired single person making $54,500, a physician making $703,600, and so on.
"The effect of the flat tax is that it's unfair, random and has unintended consequences," said Macdonald.
"You can find aberrations in any system," said Huntsman spokeswoman Lisa Roskelley. But several independent studies of the flat tax show that the new system is "broadbased, more fair and more stable" than the old bracket system.
The flat-rate system continues the state down the road of tax competitiveness, and Huntsman "is committed to competitive tax reform" in the future, she said.
Still, Macdonald and others say the flat-rate system's results are just the opposite of what the governor and lawmakers intended.
"We want to make the state's tax system more attractive to bringing in business," said Macdonald. But the flat-rate system is resulting in higher taxes for people making $100,000 to $2 million a year the pay ranges of CEOs of major firms, he added. Meanwhile, because of lower capital-gains taxes on those who, for example, sell their business, "a person making $5 million or $10,000 in one year gets a big tax break" under the 5 percent system, Macdonald said.
Macdonald said a retired widow who makes $26,700 a year will pay $713 under the flat-rate system but only $366 under a six-bracket, graduated system that runs from 3 percent to 8.25 percent tax brackets.
Finally, while it made sense for the 5 percent system to cut personal income taxes overall, "that was back several years ago. Now we're in a recession," said Macdonald.
And since the state income tax by law goes to public schools, the new flat-rate tax means hundreds of thousands of dollars less for schools. "It turned out to be real bad timing" with public-school revenue dropping as tens of thousands of new children enter public education, he added.The state's poor tax-revenue picture is not getting any better, either. Monday, the Tax Commission released its four-month tax-collection report for this year. It shows that the state's main fund is down $118.25 million from the first four months of the last fiscal year.