Dual-track Income Tax Plan Unusual, Likely to Exist for Years

Dual-track Income Tax Plan Unusual, Likely to Exist for Years


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SALT LAKE CITY (AP) -- Utah's lawmakers have spent years trying to simplify the state's income tax code. In the end, tax forms will likely mirror a multiple-choice test.

Legislators are on the verge of approving an income tax plan this month that would require taxpayers to choose whether to file taxes under the current system with its multitude of deductions and a top rate of 7 percent or another plan minus the deductions and a lower rate of about 5.4 percent.

The intent is to lure wealthy people -- and their businesses -- to Utah with the new lower rate. The result is that Utah will likely end up with one of the nation's most unusual and complex tax systems for years to come.

"Many Utah taxpayers have grown accustomed to the use of various deductions such as home mortgage interest rate deductions and charitable contributions," said Gov. Jon Huntsman's spokesman, Mike Mower. "In order to preserve those deductions it's almost certain the dual system would continue for a long period of time -- for an indefinite period of time."

That's very different from what Huntsman and many legislators fought for earlier this year. The plan was for everyone to file their taxes under a lower, single rate of about 5 percent. That would have made the state competitive in attracting businesses, the governor contended.

Colorado, New Mexico and Arizona all have top income tax rates lower than 5 percent while Wyoming and Nevada don't have state income tax.

The Huntsman-backed plan breezed through the Senate. But it died in the House in the final minutes of the legislative session that ended March 1 because it eliminated too many deductions.

Huntsman and Senate leaders said they would likely wait until next year to take another stab at the proposal after the price tag on the plan ballooned from $70 million to more than $200 million when mathematical errors were discovered. But the House, where all 75 members face re-election this November, was not as patient and began seeking a compromise this summer. That effort resulted in the "dual-track" plan lawmakers are expected to approve in a special session.

Not everyone is pleased with what they see as a rushed plan that's more complex than it needs to be.

"The general comment I get (from constituents) is that they thought they were getting simplification, and I don't think we've simplified the system this way," said Sen. Lyle Hillyard, R-Logan, the Senate budget chairman.

Huntsman and backers of the dual-track proposal contend it isn't making filing taxes any more complex because it adds a few lines to existing forms.

But the plan has received widespread public criticism for requiring taxpayers to do their taxes twice to calculate which plan works in their favor. The ability to change how to file each year also worries education officials who depend on income taxes because it makes it difficult to forecast revenue more than two years into the future.

Hillyard said under the dual-track proposal taxpayers actually would have three filing options because people can choose to itemize or take standard deductions. Coupled with the so-called flat-rate option, that adds up to three choices, he said.

"I don't know of any other state that gives those kind of options," Hillyard said.

There is one.

Rhode Island recently approved a dual-track income tax system. It was concerned it was losing affluent residents and businesses to neighboring Massachusetts and Connecticut.

"They made a change to their tax code which had the effect of having you calculate your tax in two ways," said Bert Waisanen, a fiscal analyst for the National Conference of State Legislatures. "It's definitely a 'Choose which way you want to do this in whatever way is most beneficial to you."'

Typically, the most affluent taxpayers benefit the most from a choose-your-own plan. About 5 percent of Utah taxpayers are expected to choose to file under the new option, according to legislative estimates. That will make up $30 million of the $70 million tax cut legislators agreed to earlier this year. The other $40 million comes from expanding tax brackets for those who choose to continue filing under the current system. For a single filer, that results in a savings of $24 a year, or $48 for a married couple.

Some legislators say any tax cut is a good one.

"I'm always in favor of a tax cut. I think the government takes too much," said Sen. Michael Waddoups, R-West Jordan.

While the dual-track proposal falls short of Huntsman and legislative leaders' original goal of having a tax rate comparable with surrounding states, Mower says it's a start.

"This will put us long term in a more competitive position in regard to surrounding states," he said. "What we don't want is for Utah to be known as one of the states that charges the highest rate on taxes."

Mower acknowledges that as long as the state continues to offer dual filing options the state's income tax rate will never be as low as surrounding states.

Legislative leaders say they'll continue to tinker with the rate structure, but the dual track will be here to stay.

"I think this will be a dual tax system for many years," said House Majority Leader Jeff Alexander, R-Provo. "Do I think everybody will give up their deductions and slide over to the flat tax? No."

(Copyright 2006 by The Associated Press. All Rights Reserved

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