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Tax Review Commission

MINUTES OF THE

TAX REVIEW COMMISSION

Friday, May 16, 1997 - 2:00 p.m. -- Room 405 State Capitol



Members Present:    
    Mr. Gary Cornia, Chair
    Mr. James B. Lee, Vice-chair
    Mr. Robert M. Graham
    Sen. Lyle W. Hillyard
    Sen. E. George Mantes
    Ms. Carol McCormick
    Judge Jon Memmott
    Rep. John Valentine
    Mr. Ray Wood


    
Members Excused:
    Ms. Bonnie Miller
    Mr. Mark Buchi
    Ms. Dorothy Owen
    Mr. W. Val Oveson
    
Staff Present:
    Mr. Bill Asplund
     Executive Director
    Ms. Rebecca L. Rockwell
     Associate General Counsel
    Mr. Bryant R. Howe
     Research Analyst
    Ms. Karen E. Mecham
     Secretary

Note:    A list of others present and a copy of materials distributed in the meeting are on file in the Office of Legislative Research and General Counsel.
    

1.    Call to Order and Approval of Minutes -- Chair Cornia called the meeting to order at 2:10 p.m. and welcomed members of the Tax Review Commission (TRC) including Rep. Buffmire who was recently appointed to replace former legislator Grant Protzman.

     MOTION: Mr. Lee moved to approve the minutes of the April 11, 1997 meeting. The motion passed unanimously.

2.    Appreciation for Outgoing Members of Commission -- Chair Cornia honored Mr. Grant D. Protzman, former Representative, and Mr. Roger O. Tew, former State Tax Commissioner, for their dedicated service to the TRC and presented each of them with a plaque as a remembrance.

3.    Report on Tax Burden Study -- Mr. Doug Macdonald, Chief Economist, State Tax Commission (tax commission), distributed a handout titled "Business and Household Initial State and Local Tax Burdens." He explained that the tax commission's Economic and Statistical Unit has been conducting a study called the "Macro Western State Business and Household Tax Study" since 1981. He said the study was an attempt to determine tax burdens in several western states. He explained that some states, like Nevada, were dropped from the study because their tax base significantly differed from Utah's.

    Mr. Macdonald compared tax burdens in other western states to Utah's and noted the taxes paid by households as a percentage of income was 6.98 percent on average in these other states while Utahns pay 8.39 percent. He noted that the business tax burden in Utah is presently 2.75 percent down from 3.1 percent in 1994. He said that over the past 10 years household taxes have risen while business tax burdens have consistently dropped. He explained that while some may maintain that the lower tax burden on business has increased economic development, a study conducted in the state of Oregon found no significant relationship between the share of taxes paid by business to economic growth. Finally, he outlined the correlation between the number of children and higher household tax burdens in Utah.

4.     Income Tax Brackets and Related Issues _ Mr. Tom Williams, Senior Economist, State Tax Commission, distributed a handout outlining the correlation between income and the income tax burden on a household of four. He also outlined the impact of seven proposals to change the state individual income tax system. The first one reduces the federal deduction to zero. This would reduce income tax rates significantly. The second increases the federal deduction to 100 percent. This would raise the rate. The third increases the personal exemption to 100 percent. The fourth proposal would make brackets similar to 1973 in real dollars and adjust rates accordingly. The fifth proposal would take 50 percent of the federal exemption. This would fix the brackets at 1987 real dollars and would increase the rate by 1.4 percent. The sixth proposal would impose income taxes based on a percentage of the federal tax liability. Mr. Williams said it would take 31 percent of the federal tax liability to raise present revenues. The seventh proposal would impose income taxes based on a percentage of federal taxable income.

    Chair Cornia thanked Mr. Williams and said that the TRC will continue this study throughout the summer and encouraged members to review the materials thoroughly.

5.     Introduction to Issues Surrounding Intangibles -- Mr. Asplund distributed a handout explaining the state's property tax structure by type of property. He also reviewed the role of property taxes as a source of state and local revenue. Mr. Asplund noted the 20-percent reduction for intangibles for locally assessed properties and explained there was a study that indicated that this amount was too high so it was changed to 5 percent and applied to all types of property. This 5-percent exemption recently lapsed to 0 percent. Mr. Asplund noted there has been a tax shift to locally assessed real properties such as land, improvements, and farm property representing 76.4 percent of the property tax burden in 1996 compared to 70.7 percent in 1987. Sen. Hillyard asked to see the dollar amounts rather than just the percentages. Mr. Asplund said he would obtain that information.

    Mr. Asplund said that the significance of property taxes in Utah's tax system has been shrinking in relation to other sources of revenue, such as income and sales taxes.

    Ms. Rockwell distributed handouts and gave an overview of the taxation of intangible property in Utah, reviewing the provisions and legislative history of the Utah Constitution granting a permissive exemption for intangible property.    Ms. Rockwell said that Utah provides a statutory exemption for intangible property. She discussed the legislative history of the exemption. She also presented an overview of the statutory definitions relating to intangible property, including the legislative histories of these definitions. Ms. Rockwell then reviewed the history of the discount for intangible values, which lapsed to 0 percent in 1994.

    After providing background on the statutory and constitutional provisions relating to intangible property, Ms. Rockwell discussed the commission's recent WilTel decision. Ms. Rockwell noted that WilTel is a centrally assessed telecommunications company. She explained that in WilTel, the commission considered the taxability of WilTel's intangible property. Ms. Rockwell reviewed the commission's analysis in WilTel, which served as the basis for the commission's conclusion that Utah law prohibits the taxation of intangible property, and that the value of intangibles must be separated and removed from the calculation of taxable value. Ms. Rockwell highlighted that the commission provided as part of its WilTel opinion a list containing thirteen categories of intangible property. She noted that the commission explained that intangibles include, but may not be limited to, the list contained in the WilTel opinion.

    Mr. Howe distributed a handout explaining the potential impact of the WilTel decision on the state, counties, and school districts. Mr. Howe noted that the tax base of an urban county, such as a Wasatch Front county, has a higher percentage of locally assessed taxpayers than a rural county. The tax base of a rural county, such as Millard County or San Juan County, generally has a high percentage of centrally assessed taxpayers. He said that one of the results of the WilTel decision could be to reduce taxing entities' property tax base. If a taxing entity has a lower property tax base, the taxing entity will have to raise its property tax rates to make up the loss in revenues. He explained that statutory rate limits may be an issue in raising rates to restore lost revenues.

    Mr. Howe said that there are three counties that exceed or are very close to their rate limits including Carbon and Emery. This means that in these counties if the taxable value decreases and the rate cannot be raised due to the limit, the counties will lose revenue. Mr. Howe noted, however, that under certain circumstances, taxing entities may by statute raise certain tax rates above the rate limits. He outlined how valuation decreases apply to school districts. He said a valuation decrease would affect the rural school districts the most. He also noted that property taxes are not the only revenue source for school districts.

    Chair Cornia noted that a significant amount of money is inherent to this issue. Mr. Howe showed the potential property tax increase on a $150,000 home for three levels of centrally assessed valuation decreases. He also distributed a list of major property tax levies and a

property tax calendar. Commissioner Alice Shearer, tax commission, noted that the counties have been given a 10-day extension to deliberate over the local assessment rolls.

    Chair Cornia said that all the companies that have a question about their intangible value will appeal their assessments from the property tax division, will explain the amount of their value reflected in intangibles, and will negotiate a compromise. He added there will be great uncertainty among governmental units that rely upon the property tax because of the WilTel decision. He noted even a small percentage can translate into a significant amount of revenue. Commissioner Shearer said that there are several appeals in process that will be affected by this decision.

    Chair Cornia asked whether the TRC members were interested in the impacts of the WilTel case. He wondered if the TRC should play a role in finding a resolution. Rep. Valentine urged the TRC to assist in formulating a resolution. He said the counties will appeal the decision. Sen. Hillyard agreed and other members concurred. Chair Cornia said that interested parties will be invited to future meetings to make presentations on this issue.

6.    Other Business -- Chair Cornia said that the next meeting would be on June 13 at
1:00 p.m.

7.    Adjournment--

     MOTION: Rep. Buffmire moved to adjourn the meeting at 4:30 p.m.





    

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