Gov. Olene Walker has unveiled a comprehensive proposal to overhaul Utah's state and local tax system.
The governor's plan places particular emphasis on lowering tax rates and broadening the revenue base.
Walker's proposal recommends 16 changes to the state's existing structure, pointed out the Utah Taxpayers Association.
The recommendations are based on sound policy principles of revenue stability, equity, ease of compliance and administration, taxing final consumption and exempting production inputs, indicated the independent public policy organization.
The reform recommendations introduced by the governor include:
Retaining the state's current three-legged stool tax system.
Utah system is based on taxing income, consumption and wealth.
Walker's plan favors retaining the system in order to maintain revenue stability through diversification, explained the association.
Lowering the state's individual income tax rates and broadening the base.
Utah's individual income tax currently has six brackets.
The top marginal tax rate of 7 percent applies to taxable income of more than $8,626 for married households.
Walker's proposal offers two options for changing individual income taxes.
The first option proposes a flat rate of 4.9 percent based on federal taxable income and an increase in the statewide basic property levy for education.
The proposal would allow Utah and Carbon County taxpayers to continue to claim deductions like mortgage interest, charitable contributions and dependent exemptions, noted the independent public policy organization.
The second option proposes a flat rate of 4.1 percent based on federal adjusted gross income. No deductions would be allowed under the proposal and no increase in property taxes would be required.
Both options would eliminate state-only deductions and credits and could complicate efforts to reform education through tuition tax credits.
Eliminating Utah's corporate income tax.
Walker recommends eliminating the corporate income tax, a volatile source of revenue, and offsetting the reduction by increasing the statewide basic levy for education, a stable source of revenue.
Utah's cooperative income tax comprises less than 5 percent of overall state monies and about 1 percent of total state and local revenues.
The corporate base is declining due to increased sheltering of income by multi-state firms and increasing popularity of pass-through entities taxed at the individual level, explained the association. Elimination of the tax would improve Utah's business climate and make the state more attractive for investment.
If eliminating the corporate tax is not politically feasible, the governor proposes a "fallback" position of double-weighting the sales factor which most states have already done. The action would benefit businesses that have a large share of payrolls and properties in Utah while shifting taxes to companies have a large share of sales in the state.
Simplifying and expanding Utah's sales tax exemption for business inputs.
The state currently exempts manufacturing equipment from sales taxes. The governor proposes extending the exemption to all business inputs that can be capitalized under federal income guidelines, thereby creating a system that taxes final consumption.
Exempting business inputs from sales taxes avoids "tax pyramiding" where taxes are imposed on taxes throughout the various stages of production.
The practice hides the true cost of government from taxpayers and discourages investment in capital.
Broadening the state's sales tax to include services.
Utah already taxes services like the repair of personal property, entertainment, transportation and cleaning. The governor proposes to expand the base to include professional services such as medical, legal and accounting. The tax would be applied to final consumers and businesses would be exempt from paying.
Reducing Utah's sales tax rate from 4.75 percent to 3.75 percent.
Broadening the base to include professional services would allow the state to reduce the sales tax rate. Presumably, local tax rates would also be reduced 21 percent. Reducing the rate would make the sales tax less regressive.
Continuing the state's participation in the streamlined sales tax project.
Imposing taxes on remote sales such as Internet and mail order catalog purchases will prevent further erosion of the the state's revenue base and allows for equitable treatment of main street retailers and remote sellers, noted the association.
Distributing sales tax revenues based on population and creating a single statewide state and/or local rate.
Distributing sales revenues based on population will prevent "zoning for dollars," where cities use redevelopment agencies to divert property taxes, most of which would go to the local school district, to attract retail under the guise of "economic development".
Creation of a single statewide sales rate will simplify collection for retailers, particularly small merchants who deliver goods and services to customers in multiple tax entities.
With a uniform statewide rate, retailers would not have to track location of deliveries. Local governments would be required to reduce property taxes if sales tax rates were increased.
Retaining the general structure of the current property tax system.
The governor recommends keeping the existing property tax system with one major change - adjusting the rates for inflation.
Funding urban and suburban water use with fees, not general taxes.
The governor proposes ending the taxpayer subsidy of water consumption. Utah is the nation's second driest state and has some of the lowest water rates due to tax subsidies.
Studying centrally assessed property.
Centrally assessed valuation is a contentious issue as counties continue to claim that properties like mines and utilities are not paying a fair share of taxes.
The governor's report treats thie claim with some skepticism, noting that assessed valuation imposed on utilities and mines are among the highest in the western United States.
The governor recommends conducting a joint summit to discuss the issue.
Allowing school districts to opt out of redevelopment agencies.
Cities currently use property taxes, about 55 percent of which would otherwise go to local school districts, to encourage retailers to locate in the municipalities.
Allowing a city to take the revenue base from a school district or county is poor tax policy and the governor's recommendation would end the practice, pointed out the association.
Adjusting property tax rate sfor inflation.
Under Utah's truth-in-taxation law, rates are reduced as valuation of existing properties increase. Therefore, local governments do not receive a revenue windfall when valuations increase.
The governor proposes the change to allow property tax rates to capture inflation.
Imposing sales and gas taxes on fuel purchases.
The governor recommends imposing sales taxes on gasoline and fuel purchases and reducing the rate to avoid a revenue windfall.
Simplifying the state's severance tax and investing the proceeds.
The governor recommends eliminating and replacing Utah's the two-tier severance tax system with a flat rate.
Since mineral resources are not renewable, the governor favors discontinuing the practice of applying severance tax revenues to cover ongoing expenditures and proposes using the monies for long-term investments and trust funds.
Retaining the state's inheritance tax unless the federal government eliminates the assessment.
The governor recommends continuing Utah's practice of tieing the state's inheritance tax to the federal inheritance tax credit.