by Howard Stephenson
American taxpayers know the significance of April 15 about as much as
they do July 4. Those who paid their federal taxes in the past will be
receiving a big rebate to in the next few weeks – a rebate of money the
federal government doesn’t have, but they’ll have it printed up and our
grandkids will pay the debt. But it will help to stimulate the economy
that was sent into recession by other bad debts.
But federal taxes are not the subject of this column. It seems the
biggest concern of Utahns this year is what the Legislature has done
with state income taxes.
The Utah Taxpayers Association has received many contacts from concerned
taxpayers who wonder if the recent changes in Utah’s income tax laws
have produced higher taxes instead of promised tax simplification. They
assume that the 2007 tax year’s choice between bracketed income taxes
and a flat tax is changing to a mandatory flat tax in 2008 which will
greatly increase their taxes. In many cases, their tax preparers are the
ones convincing them of this misunderstanding.
The accompanying four charts help to illustrate that the fears of Utah
income tax hikes are exaggerated. The first chart shows the taxes in tax
year 2006 for a Utah median-income, two-parent, three-child family whose
taxes under the old 7% top bracket income tax system The family paid
$2,079 in Utah income taxes. The following two charts show the
bifurcated system which is in effect for the 2007 tax year, which has a
lot of people making mistaken assumptions about what to expect in the
2008 tax year.
TY2007 allows Utah taxpayers to choose between a bracketed system with a
top marginal rate of 6.98% and a 5.35% flat tax rate The example family
would see a slight reduction in their taxes under the bracketed choice
and a $1,000 increase if they choose the flat tax option.
Fortunately, the TY2007 pure flat tax option is not what will be
mandatory for the 2008 tax year. In eliminating the confusing dual
system the legislature also restored certain credits equaling 6% of
federal itemized deductions and 6% of three-fourths of the federal
personal exemption. As can been seen from the FY2008 chart the mandatory
5% single rate will actually produce an income tax liability of $1,809
for this model family – a drop of $266 over their liability of $2,079
While this example is not typical for all taxpayers in all situations,
it should nonetheless quell fears about what many thought was a
mandatory TY2008 tax hike.