Utahns will see the most significant tax changes made in decades come Jan. 1, and state leaders hope voters will remember these tax breaks at election time next November.
All told, residents will see more than $205 million in tax cuts for 2008 starting in the new year, Legislative Fiscal Analyst Jonathan Ball says.
The savings will be $85 million in sales and food tax through lower rates and $120 million in personal income taxes through the new, flat-rate tax. The changes were approved by the last Legislature, specifically aimed to take effect Jan. 1, 2008.
And taxes could be cut again late next year or early 2009. The Republican majorities in the Utah House and Senate have already said they want to authorize additional tax cuts that could approach $100 million during the 2008 Legislature, which starts in three weeks.
Gov. Jon Huntsman Jr., who will seek re-election in 2008, made a campaign promise in 2004 that he would reform Utah's tax system. He's made some progress with what he described as "a very good tax package," and it's maybe more than skeptics believed possible when he first came into office in 2005.
"I believe we get a passing grade" on tax reform, Huntsman told the Deseret Morning News. While he may not have gotten all that he wanted (at one point he suggested in vain that the current 5 percent corporate income tax be phased out), Huntsman believes his flat-rate income tax, a general sales tax cut and especially the reduction of the sales tax on food have earned the state positive reviews around the country and helped the state rank high among business groups and the financial media for its business climate.
"There is a lot of buzz on Main Street and on Wall Street" about Utah, he said, especially about the 5 percent flat-rate personal income tax.
Should he win a second term, Huntsman said his "main tax goal" is to finish removing all of the sales tax from food. Before then, however, he also wants to try to help people with escalating health-care costs by giving self-employed people the same personal income tax break that corporate-employed people currently receive.
Doing so could cost between $40 million and $50 million, but he wants to start the process this year. To help kick-start it, he has included $30 million in his proposed budget for health-care reform.
While he didn't initially call the money a tax break, he now sees it "as a tax cut to many Utahns, and there is real interest in the Legislature to do something on health care."
Huntsman doesn't see much more to be done in an overall attempt to give business more tax breaks — there may be some targeted efforts ahead — and "there is not much interest" in trying to extend the sales tax into service areas, either, he said.
"We are going to stay focused on the bottom line — watching how our growing economy evolves while making sure we can pay for essential services," Huntsman said.
Sen. Scott McCoy, D-Salt Lake, one of the more liberal lawmakers, says that the Legislature acted properly in cutting taxes the past several years, even with all the demands on critical state programs.
"We did have real, sizable revenue surpluses," says McCoy. And public education and other programs were still treated well. "We still have to pump as much as we can into public education, and we have."
But McCoy still worries about a softening Utah economy and dropping state tax revenues. Currently, the state can cover reduced revenues from the tax cuts because of a growing economy, so the real test for the tax cuts will come when the economy slows.
"We need to make sure we still have the necessary resources over the next few years" to take care of social and education programs while building huge road projects, he said. Still, he said that "as of now" the tax cuts were the right thing to do.
But Utah Education Association executive director Susan Kuziak wonders if, even with all the new monies put into state programs, conservative lawmakers and Huntsman would be willing to raise taxes, rather than cut programs, should revenues fall off. She also was skeptical about how much real impact individuals would feel because of the cuts.
"The true consequences of these tax cuts, long term, remain to be seen," says Kuziak, who runs the largest teacher union in the state. "I think the Legislature did what the public wanted. But it is too early to say that it was the right thing."
A good tax system is broad-based and stable. And while the new flat-rate income tax may result in those goals, at least to a small extent, cutting the food sales tax actually narrows the state's sales tax base, not a good thing for tax purists.
A new study by the University of Utah's Center for Public Policy & Administration, comparing Utah's tax systems with those of surrounding states, shows that Utah's sales tax system is fraught with special exemptions.
For example, Utah taxes just 57 out of 168 services — like haircuts — notes the study's authors, Janis Dubno and Levi Pace. Thus, the state taxes just 34 percent of the ever-growing public and personal service industries. A special two-year tax study committee, which ended its work last year, decided not to recommend any great extension of the sales tax into service areas — like health care, attorneys' fees, lawn care, house cleaning and so on.
Worse, the study finds, overall Utah places the sales tax on just 45 percent of the state's gross domestic product.
So, while the food tax is one of the most hated taxes in the state, as various polls have shown over the years, and it is tremendously popular to cut that tax, doing so not only brings in less money, it makes the sales tax less stable over time.
"I think the food tax is the most regressive and unfair tax we have," says House Speaker Greg Curtis, R-Sandy, who helped push food tax cuts through the last two Legislatures. "It taxes our most basic product — food — and it hits the low- and moderate-income families hardest.
"We were right to cut it in half (to 3 percent come Jan. 1). And down the road we need to find ways to remove it" completely, says Curtis. "It is the right social policy."
And Curtis believes Utah voters will remember the 2008 tax cuts next November — and be grateful for them. "The sales tax reductions we'll see right away. Maybe it will be only $2 a week or so for low-income families. But that's a hamburger the family wouldn't have had. We're driving tax relief to the families that need it the most.
"Most won't see their personal income tax relief until they pay their (2008) taxes" in April of 2009. "But we're cutting the food tax by 4 percentage points — and that should be felt" from the first of the year, Curtis added.
Tax changes as of Jan. 1, 2008
• Personal income tax rate drops to 5 percent for all Utahns, down from 5.35 percent for those who in 2007 opted for the new flat-rate tax system, down from a top rate of 6.98 percent for those who in 2007 chose to stay in the old various-rate system.
• Statewide sales tax of 3 percent on unprepared food. That includes a state sales tax of 1.75 percent, city sales tax of 1 percent and county sales tax of 0.25 percent. Food exempted from various so-called "boutique" sales taxes, like the resort tax.
• The state's general sales tax rate drops to 4.65 percent from 4.75 percent.
• Emery, Kane and Millard counties impose for the first time a county 0.25 percent sales tax. All other counties already were imposing that tax.
• Following a vote of residents, Utah County imposes a 0.3 percent transit and road sales tax.
• All locales that already impose the transit and road sales tax sees that rate increase to 0.3 percent.
• Park City and Midway increase their resort sales taxes to 1.1 percent; Moab and Springdale increase their resort sales tax to 1.6 percent.
*Source: Utah State Tax Commission