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Utah taxpayers will have a choice in state income tax systems under changes approved Tuesday: paying under a bracketed structure with a slightly less than 7 percent top rate, or paying at a flat rate just under 5.4 percent with no deductions or credits.
Gov. Jon Huntsman Jr. and his supporters sold the "dual-track" plan as a tax reform crucial to Utah's economic growth because it will help the state lure executives and their businesses.
The tax change approved in a one-day special session will also mean a $78 million tax cut for individuals.
"This is an investment in our long-term competitiveness," said Huntsman's chief of staff, Neil Ashdown. "This is a first step in tax reform."
Critics, including most Democrats and the education community, complained the dual-track system is woefully short of the real tax reform the state needs and will rob Utah education of $78 million in fiscal year 2008.
"We've been told that everyone's a winner with this plan," said retiring Sen. Patrice Arent, D-Murray. "The school children in the state of Utah are really the losers. This money could make a substantial difference in class size."
But Huntsman, who has argued the plan will boost revenues in the long run, said in a statement that the tax change by no means signals flagging attention to schools.
"Now is the time to continue, even redouble, our efforts to make education our single most important priority as a state," the governor said.
The biggest change in the tax code is that filers will have the option to pay a flat rate of 5.35 percent with no deductions or credits. Analysts predict that only about 4 percent to 5 percent of Utahns will benefit from the flat tax. The rest will stick with the bracketed system.
Rep. Jim Dunnigan, R-Taylorsville, amended the proposal to reduce the top rate in Utah's traditional bracketed system from 7 percent to 6.98 percent and slightly compressed the brackets. The change increased the tax break (and the funding loss to education) from an estimated $76 million to $78 million. Republican lawmakers said the difference is insignificant because the state's surplus is running ahead of projections.
"This proposal helps the middle class," said Dunnigan, explaining the very rich would benefit from the flat tax and the poor from the new brackets. "The middle class has been neglected by [the previous] plan."
That would depend on the definition of the middle class. Dunnigan's change slightly decreased the proposed tax cut to most Utah families, from $67 to an estimated $50-$60. But the amendment will give an increasingly larger tax cut to families making more than $60,000. Legislative and Governor's Office analysts say they have not figured out the exact effect of the new brackets under the top 6.98 percent rate.
Sen. Ed Mayne, D-West Valley City, amended the bill to build in future inflation protection, then chided his colleagues for failing to pass true tax reform.
"Come on folks, the public understands this isn't tax reform," Mayne said, hinting it is more about a pre-election tax cut. Half the Senate seats and all House seats are up in the Nov. 7 balloting.
Critics say the change is not real reform because less than 5 percent of filers, mostly the rich, will benefit from the flat-tax option, yet they will carry off $35 million of the tax cut. The vast majority of Utahns will stay under the "traditional" bracketed structure with its top rate of 6.98 percent. That majority will get $42 million of the tax cut.
Though Huntsman promises the state will reap much more education revenue through economic growth, many in the education community are skeptical the gamble will pay off and, if it does, that the Legislature will direct the money to schools.
The education community launched a last-ditch effort to reach lawmakers Monday. Instead of a tax break, they argued, the state could pay the salaries of more than 1,200 new teachers and reduce class size in kindergarten through third grades by four students in one year, according to the Utah Education Association.
Outgoing Rep. David Ure, R-Kamas, unsuccessfully attempted a compromise by delaying the tax cut for one year in order to put the money into schools. Ure argued that most Utahns surveyed have said keep the "bloody money and put it into education."
In an emotional appeal, Ure said: ''Excuse me if one of your constituents wants his $45 back. Sorry to offend him. I can't say I've had one telephone call from a taxpayer saying, 'I want my $45 to take my wife out to dinner tonight.' ''
But most lawmakers agreed with Rep. Greg Hughes, R-Draper, who said the Legislature had supported education with a 7 percent spending hike in the last session. It was time to return money to the taxpayers.
"Reform has never been easy. It is heavy lifting," Hughes said. "It isn't easy to put money back into the economy. It's easier to spend it all."