Utah has a number of issues that will press its state revenues in the near future. Not the least of those issues is the large number of children who will be entering grades K-12 over the next decade. In Utah, the funding for education is largely through the individual income tax.
Our current income tax is unstable and is rapidly losing its internal integrity. It taxes a base that is too narrow at a rate that is too high. Additionally, it is not competitive with our neighboring states.
What are our options? We can do nothing now and try to raise rates when it is too late to take any other course of action (translate that as a tax increase), or we can take action now that will help make our families better off economically and let the growth in our economy raise the revenue necessary to meet our needs without raising taxes.
Raising taxes places an additional burden on families and generally acts as a drag on the economy. Accordingly, raising taxes seems to be an option we should try to avoid. The alternative is to design a tax system that will promote economic growth, strengthen our families economically and help provide Utah jobs for the youth of Utah as they enter the work force.
That is the system Gov. Huntsman is proposing and asking the Legislature to consider.
How do we design a tax system that will help stimulate our economy?
First, the system should bring stability to the revenue stream. Second, it should minimize the burden shift among economic groups. Third, it should have a stimulative effect on the economy; that is, it should be as competitive with our neighboring states as possible.
The best alternative to a tax system redesign lies in a tax that will broaden the base and lower the rate. I do not believe a pure flat tax is the correct answer, but a variation on the flat tax should achieve the desired goals.
The simplified plan should be elegant by virtue of its simplicity. It needs only four parts: a base, a single tax rate, a low-income exemption and a phase-out of the low-income exemption.
To promote stability and avoid large swings in the revenue stream, the base should be a broad as practical. I believe the most practical broad base that will promote stability is federal adjusted gross income. A base that is narrower is simply less stable and introduces elements that will eventually lead to the corruption of the system as it becomes necessary to raise rates on that narrow base.
Assuming revenue neutral- ity, as the base is broadened, the rate will need to be lowered. The final pieces are a low-income exemption and the phase-out of the exemption as AGI rises. These last two parts are necessary to protect those with lower AGIs from an increased tax burden.
The phase-out also prevents a tax "cliff" wherein an additional dollar of AGI brings a sudden large tax burden attached to that dollar. We want to avoid a system that serves as a disincentive for anyone to further themselves economically.
The Gov. Olene Walker advisory group found that by using this pattern with a carefully planned exemption amount and phase-out of the exemption amount, it was possible to minimize the burden shift among economic groups.
Admittedly, redesigning the personal income tax system alone will not provide all of the economic stimulation necessary, but it is a very important factor in economic development and should not be ignored. Our current system has lost its internal integrity, and its high nominal rate is not competitive with our neighboring states. Only the simplest of systems is transparent enough to avoid eventual corruption by special interests.
History has shown us that the more complicated and progressive a tax system, the sooner it will become filled with special-interest tax breaks. In the end, the rich end up paying about what they would pay under a flat tax at the expense of simplicity, transparency and administrative cost.
The biggest danger to the process will be special interest groups. Therefore, the opinions of those protecting sacred cows and special tax advantages should be heavily discounted as the plan is designed.
We have a current surplus and therefore a unique opportunity to act. It will take courage and determination from our leaders. Let us each lay aside our prejudices and special interests and take a statesman- like, long-term view of what is best for Utah. A rising tide raises all ships.
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Keith Prescott is a certified public accountant practicing in Salt Lake City. He was a member of Gov. Olene Walker's tax advisory group, is the current chairman of the Tax Review Commission and formerly chaired the Corporate Tax Task Force.
