business. The Education Partnership was established to solve that problem. It meets every
three months to find ways to meet the business communities' needs through education. Sen.
Hillyard said that business needs a research tax credit to provide incentives in education.
b. Overview -- Mr. Stan Parrish, Salt Lake Area Chamber of Commerce, outlined the wide variety of telecommunications industries in the state and said there are 465 high tech
industries. He noted the traditional software industries are decreasing while
telecommunications continues to increase. To encourage the industry, he recommends
legislation creating a research tax credit. He said that it is appropriate to invest while the
economy is strong to fuel growth and reduce impact on resources.
c. What is the Problem We Are Trying to Solve? -- Mr. Glenn Lambert, Novell, Inc., distributed a handout outlining the reasoning behind a research tax credit. He said there is a
perception that Utah has no research but that is not true. He said that Novell spends 17 percent
of its revenues on research. He noted that 16 states have research tax credits. He explained
that California's high tax rate is neutralized for business by their research tax credit. He noted
there is great competition for research dollars and Utah should get a better share. He felt that
research is costly and high risk with a long term investment. He outlined those who benefit
from research including education, small entrepreneurial firms, large multinational companies,
manufacturing, and life science.
d. Proposed Solution -- Mr. Brent Maxfield, KPMG Peat Marwick, distributed two handouts titled "Research Credit Computation" and "Solution, A Research and Experimentation Credit for Utah." He noted that 77 percent of companies relocate and a credit may draw those companies to the state. He said that a $1 credit produces $1 in additional
private research and development in the short run and $2 in the long run.
Mr. Maxwell recommended legislation based on the California model, which is based on
the federal rules and definitions. He explained that a company would not claim a credit until
1999 so there is no state impact until 2000. He said the fiscal note would be $2.5 million but
there are other factors that need consideration, including the multiplier effect. Mr. Maxwell
outlined the incentives that would be available and he urged support for legislation. The credit
would be available only if the research is done in Utah. He said the credit would increase
economic development.
e. Education Community -- Dr. George H. Emert, President, Utah State University, said that he is part of a committee studying this issue. He noted that the enhanced opportunities
would pay for the credit.
f. Committee Discussion and Direction for Future Action-- Rep. Valentine said the General Accounting Office (GAO) has said that research tax credits don't encourage economic
development. Mr. Maxwell said he had another study showing the opposite. Rep. Valentine
said the GAO study discredited the Peat Marwick study.
3. Valuing of Intangible Assets for Property Tax Purposes --
a. Overview and Background -- Mr. Asplund, Assistant Director,
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.
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. She 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.
b. Review of Wiltel Decision -- Commissioner W. Val Oveson, Chair, Utah State Tax Commission (tax commission), distributed a handout titled "Diagram of Property Taxable and Non-Taxable." He said that the tax commission can tax registered vehicles, personal business property, buildings and improvements, and land. Those that cannot be taxed are moneys,
credits, inventory, bonds, stocks, representative property, franchises, copyright, and patents.
However, he said that there are still areas over which the tax commission struggles to make
determinations of taxability. He made suggestions to correct the problem including: 1) do
nothing; 2) amend the definition of intangibles; 3) give the tax commission a specific list of
intangibles; 4) exempt centrally assessed property from the income tax; 5) impose a new tax
on centrally assessed taxpayers; 6) increase the residential exemption; or 7) create a whole
new class of property.
c. Committee Discussion _ Sen. Dmitrich suggested changes need to be made. Commissioner Oveson said a special session would be needed to affect this tax cycle. Sen.
Blackham agreed. He asked how much money is involved. Commissioner Oveson said that it
is very costly and time consuming to determine the intangibles. Sen. Blackham suggested
changing the law to tax intangibles. Rep. Buffmire recommended further study to avoid
making hasty decisions that may be problematic in the future.
Mr. Greg Fredde, director of research, Utah Taxpayers Association, distributed a
handout titled "Tentative Analysis of WilTel Decision and Its Impact on Locally Assessed Taxpayers." He said he believed the percentage of intangibles contested will be much less than some estimates indicate. He said he expected the shift to locally assessed taxpayers to
cause a $13 property tax increase on a $150,000 home and 24-percent increase for a business.
He reminded the committee that the WilTel decision brings the tax process into line with the
Utah Constitution and that is as it should be. He added that no entity should be harmed by this
change.
Mr. Glen Stevens, representing Questar and Western State Tax Association, distributed a
survey he had taken with the centrally assessed taxpayers as they determine what they will
appeal on their 1997 assessments. He said it is difficult to determine intangibles.
4. Other Business -- The next meeting of the committee will be held on Wednesday, June 18, 1997 at 2:00 p.m. in room 223.
5. Adjourn --
MOTION: Rep. Short moved to adjourn the meeting at 4:30 p.m. The motion passed unanimously. Reps. Garn, Hunsaker, Jones, Seitz, and Valentine were absent for the vote.
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