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$35M flub kills tax session

Published April 13, 2006 1:19 am

Shortfall puts Huntsman's key reform on ice; legislative meeting on health care still planned
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In a surprise announcement Wednesday, Gov. Jon Huntsman Jr. canceled a May special legislative session to tackle income tax reform after state number crunchers discovered a $35 million mistake in his so-called flatter tax plan.

"I'm not willing to take the people of this state through something this important unless we have a firm grip on the numbers," Huntsman told reporters at a hastily called news conference.

Fixing the income tax has been a top priority for the governor, and he said that will not change.

"There will be no need for a special session on tax reform. If it is good policy to wait until the next session, we will wait until the next session [in January]," he said.

But a special "cleanup" session to address health care needs, among other things, still is planned for June, a Huntsman spokesman said. As many as 65,000 parents, senior citizens and blind and disabled Utahns on Medicaid still have reason to hope their dental and vision benefits will be reinstated - but lawmakers have yet to agree to the plan.

Regarding tax reform, the governor had warned lawmakers he would hold a special session to pass his so-called "flatter" tax plan when it stalled in the House in March. In a compromise, the Legislature passed a 40 percent reduction in the sales tax on groceries, but the accompanying income tax plan, which would reduce Utah's 7 percent top rate to a flat rate of about 5 percent, failed on the session's final night.

"We are going to take a look at the numbers one more time," Huntsman said, explaining Tax Commission analysts had failed to account for a tax credit given to Utah filers who have earned part of their income in another state. That credit - an estimated $35 million - would increase the cost of Huntsman's tax reform centerpiece from $70 million to over "$100 million, maybe more," Huntsman said. "We need to get a little more comfortable with the numbers before we shoulder ahead."

All state income tax revenue is dedicated to pay for the state's public schools and higher education system.

Huntsman's Chief of Staff Neil Ashdown said the error likely would have been offset by the state's rapid economic growth, in effect making it an additional tax cut.

When asked how such an error could have slipped through the state's many analysts and economists, Huntsman said, "I explain it as an unfortunate oversight. You have to figure out why it was there in the first place, then ensure it doesn't happen again."

The mistake does not undercut the need or value of tax reform, Huntsman emphasized. "The underlying premise is strong."

So strong, in fact, that some lawmakers are surprised that the $35 million goof is scuttling the special session. The tax change is supported by leaders in both houses.

Senate President John Valentine said the biggest hurdle was selling the philosophy behind the flatter tax. "You get over the initial threshold, then you start working on the mechanics."

"I'm a little surprised he [Huntsman] gave up when he hit the first road block," Valentine said. "It's not a fundamental problem."

Sen. Curtis Bramble, Senate sponsor of the income tax bill, said the basic structure is in place. "That's why we wanted the May special session," Bramble said. "We were going to fine-tune the variables to determine what that fiscal note would be."

If nothing else, delaying the reform until the January session would give the governor more time to sell his plan to skeptical House members, Bramble said.

Meanwhile, Huntsman said he will move ahead with a special "cleanup" session in June to restore dental and vision benefits to thousands of elderly, blind and disabled Utahns.

The $5 million needed for the so-called "optional" medical and dental care, could come from $15 million to $20 million in extra sales tax collected because the 40 percent grocery sales tax cut will be delayed a few months to give grocers time to prepare.

But the governor may face a fight from lawmakers who fear the medical programs, meant only for one year, could become an ongoing state burden, said Valentine, the Senate president.

As for the miscalculation on the tax proposal, Tax Commission Chairwoman Pam Hendrickson acknowledged that the error came from her office.

Because the flatter tax calls for the elimination of as many credits and exemptions as possible, the out-of-state income credit - which is in the bill - was not included in computing the fiscal impact, she said. "It's just a flat-out error. We are at a loss for how we missed it. But we just did."

Hendrickson also does not think the error should derail the special session. "It's disappointing to me, I spent three years on [tax reform]," she said. "I would hate to see good policy go away over an error."




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