Utah businesses should get a $200 million tax cut, while consumers should pay $150 million more in new sales taxes extended to a number of non-medical services, a subcommittee of the state's Tax Reform Task Force recommended Wednesday.

Full consideration of a controversial flat tax proposal and whether to remove tax exemptions for charitable contributions and mortgage interest payments was postponed until the task force's next meeting.

The business tax cut and sales tax recommendations approved Wednesday by the subcommittee are not binding but make clearer the direction of the state's massive tax reform effort, which will likely culminate in in several new tax bills before the 2006 Legislature, now four months away.

"This is a good middle ground," extending the current sales taxes to various services, said Rep. Roz McGee, D-Salt Lake. Imposing the state's portion of the sales tax — 4.75 percent — on non-health-care services would bring an extra $150 million to state coffers.

Under the proposal, doctor and hospital bills and prescription drugs would remain tax free, but attorney and accounting bills, airfares, newspaper sales, public investigator bills, lawn care and pest control, hair cuts, car towing, diet services, Internet service bills and elective surgeries such as face lifts — would all be subject to state and local sales taxes, the subcommittee decided.

Extending the sales tax base to catch more consumer purchases, the state's sales tax rate could be lowered to 4.38 percent from 4.75 percent, said Pam Hendrickson, chairwoman of the Utah Tax Commission and a task force member.

But because an overall goal of task force members is to keep the system revenue-neutral — neither reduce nor increase tax revenues — the sales tax rate might not be reduced to allow for cuts in other taxes.

"Taking action (to impose the) sales tax on services is central" to tax reform, said McGee. "For it allows (for new revenues) and some of the other changes to work."

Some task force members want to restructure the income tax and/or give a food tax break to help lower-income Utahns.

In voting to adopt a $200 million tax cut for "inputs" on businesses purchases, said Sen. Howard Stephenson, R-Draper, the state gets its most "bang for the buck" for economic development through the move.

Huntsman, who has two appointees on the task force, recently gave up on his original proposal to repeal the current state corporate income tax and seems more willing to look at Stephenson's sales tax reduction on purchases made by businesses.

Stephenson, president of the Utah Taxpayers Association, talked subcommittee members into taking utilities out of the business "inputs" tax cut, saying Utah's utility industry is now well-managed and competitive with surrounding states' utilities and doesn't need that kind of a tax break.

Tax Commission chief economist Doug Macdonald argued that the business sales tax cut should only apply to the purchase of operating materials that last longer than three years. "That would be more in line" with the current manufacturers' tax exemption on replacement and new long term equipment.

Buying new equipment may make a business more profitable, more competitive, and to give a sales tax break for that makes sense, Macdonald said. But to give a sales tax break "on chemicals a firm may use" in its production won't necessarily make the business more productive — it's just a tax break, he said.

The subcommittee also recommended a previously discussed credit for taxes on unprepared food paid by lower-income Utahns. Explained in detail in previous Deseret Morning News reports, the credit is one suggested by Utah Issues, the low-income advocacy group. Basically, any family making less than $30,000 a year ($18,000 a year for an individual) would get a $75 refund per family member (or individual) per year on their state income taxes.

While rather simple in concept, the credit would work in theory but wouldn't in practice, other low-income advocates say. They point out that poor Utahns wouldn't actually receive the reimbursement because many, if not most, don't file tax returns now and aren't likely going to file a sales tax refund requests in the future.

Expanding that proposal, however, could be palatable to task force members as a way to shift the impact felt by lower-income taxpayers if a flat tax is approved or current exemptions are removed. A 4 percent flat tax proposal was considered briefly by the full task force Wednesday and narrowly tabled after members said said they wanted to make sure all pending reform proposals are considered first.

"Philosophically, I suport the proposal, but the proposal runs smack into the political reality that this could have some very serious impacts on certain segments of society," said task force co-chairman Curt Bramble, R-Provo.

The sponsor of the motion to approve the flat tax, Rep. Greg Hughes, R-Draper, said that this was an important "stake" in the tax reform effort and that the notion of a flat tax is widely supported. With the task force endorsing the idea, the public could then help tailor how it is implemented, he said. "If we could deliver to our constituents something with the simplicity of a postcard for their tax bill they would appreciate it."


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