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Tuesday, September 19, 2006

Closure 2006

From the Guv's press release:
"Finally we have closure on the business of the last legislative session. This will provide tools to improve the State’s long-term economic competitiveness and our transportation infrastructure," Governor Huntsman said. "Now it is time to continue, even redouble, our efforts to make education our single most important priority as a State."


Blogger jcox said...

"Continue . . . our efforts to make education our single most important priority."

When was education ever a priority for this State Legislature? Your actions speak so loud I can't hear your words. I hope the rich senators and representatives enjoy their nice tax breaks.

9/19/2006 10:01 PM  
Anonymous Marie said...

This was the "smart" answer from politicians for an election year. No one has to take an increase in taxes, but some may see a decrease. Unfortunately, it's not likely going to be the families or moderate income earners that see a decrease. This is a compromise that I'm willing to accept, but I don't like how there isn't a more equitable tax cut across the board. That's how it's smart. What do we have to complain about, except that there is a huge surplus (meaning overpayment in taxes) and the majority of us won't see any of it coming back.

When you have such a large surplus, it doesn't make sense to keep taxes where they are at. The flat tax does cut the tax rate, but it does not typically lower taxes for families who tend to have higher deductions (home owners, children, etc.). Nor does it tend to reduce the actual tax payment of moderate income earners, whose deductions and personal exemptions being a much higher percentage of their income than the wealthier taxpayer,will not benefit from losing those exemptions/deducitons. When you have a lower rate (say 5% instead of 7%) but you apply it to a larger base (say the Adjusted Gross Income rather than the Taxable Income after deductions) you will still end up with a larger number, meaning more taxes owed. So anyone who has enough in deductions from the AGI to make up for the 2% rate cut won't benefit at all from this plan, and there is also no relief for all of these taxpayers.

If, though, you don't have enough deductions to make the difference(ie, people who have no dependents, no real estate --home mortgage interest and property tax payments, medical/dental deductions, charitable contributions, etc.), or if the deductions/exemptions are a less significant percentage in contrast to your income (ie, wealthy taxpayers), then the lower rate will save you.

Considering that a large population of Utah Taxpayers use those deductions, this is a way the Legislature gets their 'pat on the back' for doing something about outrageous taxes while holding onto their surplus and giving the higher income taxpayers (like many of the lawyer legislatures and the Huntsman family) a tax cut.

Here's how to know if this plan will help you, or if you're part of the majority who will see no change (thus a continuation in overpayment of taxes to the state):
Take your 1040 out from last year. Look at line 37. This is your Adjusted Gross Income (AGI).

Now look at line 43. This is your Taxable Income.

If you are going to do what you've done in the past, you will see no change at all. You will have the same tax rate applied to the same base, which is currently your Taxable Income, or your AGI after you have deducted either itemized or standard deductions and personal exemptions. The tax rate is a little higher (let's say 7%) than if you use the new system, but I think for most people who pay out 10% of their income in charitable contributions, are paying mortgage interest or property tax, and/or have dependents will see that this is still the "cheapest" choice (isn't it nice how the legislature now makes it looks reasonable to just keep paying what we've been overpaying all along?)...

If you opt for the "flat tax", you will simply take your AGI, again this is your income before you deduct personal exemptions and your deductions (either standard or itemized), and multiply it by the new tax rate (which we'll call 5%).

So if you have an AGI of $50k, you would pay $2500 with the flat tax.

If you have an AGI or $50K, and you are the only person in your household with no itemized deductions, you could subtract the $5k for the standard deduction and then subtract $3200 for your personal exemption. Now multiply your new Taxable Income of $41,800 by the old rate (7%) and pay $2926 for taxes.

So if that is your scenario, the flat tax makes more sense for you, saving you $426.

On the other hand, if you are married with 2 dependent children, you can now subtract an additional $14,600 (extra $5k for standard deduction and 3 more personal exemptions). This brings your Taxable Income to $27,200. Multiplying that by the old tax rate (7%), and you get $1904. So the "old" method "saves" you $596.

That's not even counting if you have more deductions by itemizing than you get for the $10K standard deduction. If you are of the predominant relgion, you would have likely paid $5K alone in charitable contributions. Then you might have a home, so would have mortgage interest and propoerty tax payments that you can deduct. Etc. Etc. So for families, and for middle income citizens, especially of the predominant religion you will get nothing at all out of this new grand standing by the Legislature.

AND the higher your income, the less likely you will use the current system. If you make $500K for example, the standard deduction and the personal exemptions are less of a percentage of your overall income compared to if you make $50K --married w/ two dependents using standard deduction would be 4.5% for the $500K income vs. 45% of income for the $50K income with same deductions/exemptions. So a lower tax rate is going to surely be more of a benefit to the rich, while the middle income average citizen gets no change at all. Hey, but our taxes didn't go up right!? Everyone's happy!

I'm sure those who are in favor of the flat tax will argue that the rich pay a higher percentage of their income in taxes and so should be the primary beneficiaries of a tax cut. Well, congratulations to all of you who feel this way!

9/22/2006 9:23 AM  

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