by Howard Stephenson
I’ve written in this column about the positive aspects of Governor Walker’s tax reform plan which is now being considered by Governor Huntsman and the Utah legislature.
However, there are some incorrect assumptions by those making the proposals to reform Utah taxes, according to new Senate President John Valentine. While Valentine applauds former Governor Walker for taking on this very difficult issue at a time our state is attempting to define itself and its business climate, he says there are erroneous assumptions made by those who developed the plan which would require that when any tax is cut, another tax should be increased to ‘hold harmless’ government budgets. Governor Huntsman is working to perfect the Walker plan and Valentine’s advice applies to him and the entire legislature as they consider tax reform legislation.
Writing a guest article in the Utah Taxpayers Association’s monthly newsletter, Valentine said, “As a practicing tax attorney for the last 29 years, I have watched with interest the development of tax policy on both the federal and state levels. But whenever tax policy is debated, it is important to understand the underlying policies driving those reform measures. In other words, we should examine the goals that are being furthered before we examine the details of any proposal. Using this methodology, what are the underlying assumptions in the tax reform proposals?”
He said the primary assumption in the Governor’s tax reform proposals focuses on the government side of the equation: how does government level out its revenue so that taxes received by the state are not as volatile as they have been this past four years? Valentine noted that many of the public presentations made prior to the release of the specific reform proposals focused on portfolio theory in the investment world, i.e. reform the state’s portfolio of tax revenues to mirror an investment portfolio of stock, bonds and REITs, to level out the hills and valleys of the revenue the state receives from its various taxes.
To accomplish this proposal, the reforms make a second assumption: households and businesses have the ability to pay taxes, even in rough economic times. Of course this seems implausible, but to level the revenue flow, you have to assume the ability to pay as being independent of the economic activity of the taxpayer. President Valentine said that these two assumptions must be kept in mind when examining the following specific proposals that accomplish the assumed goals:
1. Lower the tax rate but shift the calculation of the Utah personal income tax to federal adjusted gross income, allowing no deductions including medical, charitable, other taxes and interest expense. Valentine points out that while this shift would even out revenues to the state, it assumes that the ability to pay taxes in a household budget is not affected by what was spent for other expenses.
2. Lower the tax rate but shift the calculation of the Utah personal income tax to federal taxable income with no credits. The deductions allowed on the federal return would be allowed on the state return, but the biggest loss would be to retirees who lose the state retirement exemption.
3. Repeal the corporate income tax, but tax businesses conducted in sole proprietorships,
partnerships, limited liability companies, limited partnerships and the stockholders of “S”
electing corporations, and those individuals who have the large Federal tax payments who are currently able to deduct 50% of federal taxes paid from state taxable income.
4. Shift any shortfalls caused by reform to the “more stable” property tax. Property tax is an asset-based tax which often bears little relationship between the ability to pay tax and the value of the property being taxed. This is especially true for the fixed income taxpayer or the taxpayer who has held property for some time. It forces a sale of the property when the taxes cannot be paid. It can come at a surprising time when revaluation occurs and the taxpayer suddenly has a major increase in the tax burden to retain the property.
5. Increase the sales tax base and lower the rate. Senator Valentine points out that this sounds good on the surface, except that the services include medical, hospital and dental bills. It includes real estate commissions, accounting fees and attorney’s fees, unless they were for a business in which case they would be exempt.
“This means your will and divorce are taxable, but the formation of a business would not be taxable. The commission on a personal real estate transaction like the purchase of a house would be taxable, but a business purchase . . . who knows?” Valentine wrote.
“Finally,” President Valentine wrote, “The assumption which poses the most difficulty is the idea that government is entitled to its money during the reform process. If the reforms are valid, government should share in the reform process by not forcing shifts between taxpayers. Instead, government should hold the taxpayer harmless from increases during the reform process by taking less revenue.”
He reiterated that if the proposed tax reforms are truly expected to improve the economy – then the new, greater tax revenues from economic growth should be sufficient and tax increases should be rejected.
I wish I had said that.