Utah's flat-rate income tax is dead — even before it actually took effect.

Instead, Gov. Jon Huntsman Jr. and GOP legislative leaders said Thursday that Utah should move to a single-rate personal income tax system of 5 percent that is "credit-based, not deduction-based."

The new plan floated by Huntsman seems on its way to adoption, although House Republicans wanted to take at least one more day to mull it over. Across the whole state, the plan means a $97 per taxpayer income tax reduction on income earned in 2008.

Senate Republicans, who have long backed the governor's efforts at tax reform, are ready to approve it, Senate President John Valentine, R-Orem, said after the Senate majority's closed caucus Thursday.

"This proposal will pass the Senate," Valentine said. "Our caucus really likes the proposal. It seems to meet all of the qualities we've been looking for — a 5 percent rate, a much simpler system."

Huntsman, too, was enthusiastic. "We're encouraged by our initial feedback," the governor said, promising "endless patience" as lawmakers deliberate the proposal that he said would be the final step in tax reform.

"This, if it is manifest in its current form, very much represents to me our endpoint in tax reform," the governor said. "It will make our state a whole lot more competitive and conducive to growth and the attraction of capital than we've ever been in our history."

House Republicans, though, weren't so sure. "If we take this fork in the road, "where does this end?" asked Rep. Brad Daw, R-Orem,

"This is the end," said House Speaker Greg Curtis, R-Sandy.

There would be only one income tax system when taxpayers prepare their tax returns on income earned in 2007.

Under the new proposal, Utahns would get a $110 million income tax cut, enough money — along with the lower 5 percent rate — for all taxpayers to see a reduction in their income taxes.

But, admitted Curtis, there would be winners and bigger winners, depending on all kinds of factors: Amount of income, whether you take the standard deduction on your federal return or itemize, the size of your family, the amount of your mortgage interest payments or charitable giving.

But even tax experts, like Rep. Wayne Harper, R-West Jordan, were unclear what the new income tax compromise means.

"It is not a flat tax, that's for sure," said Harper, co-chairman of a former task force that studied tax reform for months a year ago.

"This is the governor's No. 1 item to get passed this session, and it's hard to deal with changing that, other than just say no," said Harper after Curtis and other House GOP leaders briefed the 50-member caucus Thursday.

House Minority Leader Ralph Becker, D-Salt Lake, said Democrats had not been briefed on Huntsman's new ideas and so couldn't make a reasoned comment. Senate Democrats, too, learned of the proposal only after it was debated by the Senate GOP caucus.

In fact, the last-minute chase to get some kind of flatter-rate tax system this session is bothering some longtime legislators, who have some familiarity with taxes.

A year ago, lawmakers failed to pass a last-minute tax proposal that turned out to contain massive errors. Since then, legislative staff have been given access to tax information needed to figure out the financial impact of such proposals.

"I believe there's time to get the numbers right," Valentine said, although he added that calculations were still being made about how the new proposal would affect various income levels.

Indeed, Curtis talked to his caucus off of notes written on three small sheets of scrap paper. "Basically, I was winging it," Curtis said after the caucus voted 30-15 to support the new single-rate income tax plan.

Assuming the new income tax plan is acceptable to majorities in the House and Senate, another $110 million in further tax cuts is left to be decided. (Both House and Senate GOP caucuses decided earlier to give $220 million in tax cuts this year.)

That last $110 million will likely come in sales tax reductions — either a general tax reduction, a food tax reduction or some combination of both — and $20 million or so in business tax cuts.

While Huntsman's latest income tax plan has only one, single-digit rate, House Republicans aren't calling it a flat-tax system.

"There really is not a whole lot of difference" in the final tax impacts between the current multi-deduction, multi-tax bracket system and a new 5 percent system, said Curtis.

The largest changes are the lower tax rate — which Huntsman wants for economic development — and replacing a deduction-based system, in which income is lowered through deductions before a tax rate is applied, with a credit-based system, where the tax rate is applied to an Adjusted Gross Income (AGI) and then tax credits are subtracted from the tax bill.

It's those credits that are causing sleepless nights for fiscal analysts. Valentine said they're trying to come up with a plan to give lower-income taxpayers a larger credit that phases out as earnings rise that will ensure the price tag for the new plan stays at $110 million.

Several Republicans complained that Huntsman's plan certainly isn't any simpler than the current system and may be more volatile — with larger swings between surplus revenues and revenue shortfalls depending on fluctuations in Utah's economy.

A few GOP lawmakers were also concerned about what the mortgage industry would think of the new tax plan and how LDS Church officials would respond to it.

More than a year ago, leaders of The Church of Jesus Christ of Latter-day Saints said that any tax reform in Utah should keep the charitable deduction in place.

After a further-reformed Huntsman plan that didn't give direct deductions for charitable giving was introduced at the first of the 2007 Legislature, the Deseret Morning News asked church public relations officials if church leaders' stand had changed — considering that the alternative didn't give direct deductions for charitable giving.

Church leaders just reiterated their previous warnings, but didn't oppose the plan.

The plan presented Thursday does include home mortgage interest and charitable giving in a "tax credit" formula.

A person's tax credit would be 6 percent of either the standard federal deduction or 6 percent of the itemized deductions.

And GOP House leaders said that as best as they can tell from modeling done by Huntsman economists, a family with large charitable giving should be slightly better off under Huntsman's new plan than under the current deduction-based income tax system.

As is now the case, however, a family would have to itemize its returns, and not take standard deductions, to get the most benefit out of mortgage interest paid and charitable giving.

For those "purists" in the House GOP who really wanted a flat-rate based income tax system, Huntsman's new plan kills that opportunity.

But, said Curtis, to just lower a true flat rate tax system to 5 percent would take $500 million out of the state's public/higher educations budgets and give by far most of that huge tax cut to higher-income Utahns — something no one really wants to do.

Through his latest plan, Huntsman gets a 5 percent rate — a two-year goal of the governor who says that rate makes Utah competitive with surrounding states' top income tax rates.

Valentine said there's still an "elegance" to the new proposal, because it recognizes larger families and preserves credit for mortgage deductions and charitable contribution, although the credit phases out depending on income level and filing status.

Not all are sold, however.

"Phasing out the tax credits," said Rep. Jim Dunnigan, R-Taylorsville, "completely changes the ball game." Middle-income Utahns would not see the same percentage of income tax cuts as some other groups, he maintained.

Huntsman's earlier income tax plan would result in middle-income Utahns "taking it in the shorts" because they wouldn't get much tax relief, Dunnigan said several weeks ago.

A chart accompanying Thursday's discussions shows that on average, a family making $40,000 a year would get a $100 tax cut while a family making $100,000 a year would get a $200 tax cut.


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