Two weeks ago, Gov. Jon Huntsman presented a proposal for what he calls a "flatter tax" - one that may exclude many exemptions that are available for Utah taxpayers.
"This proposal is flatter, fairer and simpler than the current structure and will make Utah highly competitive in our economic development efforts," said Huntsman. "At the same time, this proposal will protect the lower income individuals and families in our state."
The plan lowers the income tax rate from seven percent to five percent.
The proposed rate will take Utah from the 16th highest rate in the nation to the 35th highest. Utah's rate will be lower than all Western states except Colorado.
The proposal allows for an exemption of $12,000 per household, regardless of income levels.
In addition, there will be a $4,000 per person exemption for each dependent. The charitable tax credit is anticipated to encourage greater giving.
The governor outlined a typical scenario for a Utah family and compared how that scenario would be affected by the proposed flat tax.
In the example, a family with an adjusted gross income of $50,000 with four exemptions makes a housing interest deduction of $5,000 and a property tax deduction of $1,000. Two examples were given to reflect the adjustment that a charitable donation of approximately 10 percent would have on the family's taxable income. With the charitable deduction, the family has a taxable income of $39,000. Without the charitable deduction, that increases to $44,000.
However, the biggest difference under the governor's proposal is the amount of tax paid on that amount. The tax under the current structure is $1,801 with the charitable donation, $1,898 without it.
Huntsman indicates that his plan will reduce the amounts to $1,415 for the example with the charitable exemption and $1,540 for the example without the charitable exemption.
"If correctly implemented, in the long run, everyone wins," said Keith Prescott, one of the tax advisers who crafted the new plan. "One of Gov. Huntsman's goals was to protect the lower income individuals and families, while creating a more competitive economic environment and this plan meets that objective."
Prescott is a tax expert who has been Huntsman's tax preparer for years.
The governor and the tax force that presented the proposal indicated that the income tax reform proposal should also make the process of filing taxes much simpler.
The current income tax filing could go from the current two pages with 18-pages of instruction, to a simple postcard-sized form.
As taxpayers head into another fiscal year, it's not just the state that is considering changes for the way taxes are calculated. Huntsman's proposal, even if approved by the 2006 legislature, will not take effect until at least 2007.
However, the United States Internal Revenue Service has announced certain changes that will be implemented for the 2006 tax year.
State tax changes often require the Utah Legislature to act.
In contrast, the IRS has a more broad-sweeping power to amend the tax code as necessary.
Last week, the IRS announced on such change that will affect the amounts which taxpayers can claim related to pension plans. The IRS is governed by Title 6 of United States code. In specific changes were made to part Title 6 U.S. code, section A, chapter one, subchapter D, part one.
One change, the adjustment of limits for cost of living increases, is an annual adjustment made by the IRS commissioner. Various portions of the tax code were adjusted last week to reflect the cost of living increases.
Those changes affect those with various accounts that the employer or the employee contribute to as well as employee stock ownership plans and other pension plans. It also adjusts contribution levels for defining key employees and other various definitions.
Taxpayers should contact their tax preparer or financial adviser for questions regarding the changes to the federal tax rate for his year and the proposed tax changes for the state.