combined taxes. He said he will prepare a chart showing how Utah compares to these other
states.
Chair Cornia asked Mr. Strong to include on the chart the methodology used by each
state. Mr. Strong agreed and said he would also include the property tax per dollar of
investment.
Chair Cornia asked if Mr. Strong would recommend that the Legislature prescribe
weightings for purposes of valuation correlations. He recommended that the Division disclose
weightings rather than prescribing the weightings statutorily. Mr. Buchi then asked if Mr. Strong
would recommend legislation as the solution to the intangibles issue. Mr. Strong said he would
rather have the Commission set clear rules and regulations.
Chair Cornia asked Mr. Strong to prepare a brief report explaining why he feels the
Division's policies are inappropriate.
Rep. Valentine said there is a need to define the issues of valuation methodology more
clearly. He said that it is difficult to understand the points of disagreement between the county
assessors and the Commission.
Chair Cornia asked Mr. Eyre and Mr. Strong to prepare a report showing their points on each issue. Chair Cornia requested that each address their valuation estimate under various
methodologies including: (1) cost; (2) stock and debt; (3) discounted cash flow; and (4) direct
capitalization. Rep. Valentine said that information would be very helpful.
Rep. Short asked Mr. Strong what method he feels is the most equitable. Mr. Strong
replied that a property tax applied fairly among all classes of property is reasonable.
Mr. Reed Searle, Intermountain Power Agency, said disclosure of weightings and a
uniform application of the process would be an improvement over the current practice. He said
that he would like to know the reasons behind any adjustments to the correlation factors.
Sen. Stephenson said that residential property tax valuation information is public and
asked if similar information about centrally assessed properties is confidential. Mr. Strong said
that all similar companies should know how they are weighted. Mr. Strong stated that it is more
important, however, for the Division to disclose to a company information regarding the
company's own valuation.
Mr. Lee asked Mr. Strong what he feels is the best method to arrive at fair market value.
Mr. Strong advocated the use of the cash flow yield model to arrive at the income indicator rather
than the direct capitalization or stock and debt methodologies.
Rep. Short asked Mr. Eyre if the Division has ever changed weightings to achieve a
predetermined value. Mr. Eyre said he knows of no case where that has been done. Mr. Eyre
said the correlation process is judgment and that value cannot be determined to the dollar.
Glen Stevens, Questar, said the focus of his presentation was to provide additional facts
concerning the WilTel intangible issue and centrally assessed appeals. He made the following arguments: (1) the WilTel decision did not create a crisis; (2) centrally assessed taxpayers are carrying their tax load; and (3) centrally assessed properties in Utah are overvalued when
compared to other states.
Mr. Stevens claimed that the WilTel decision did not create a crisis. He said the percentage of the Division's assessments in dispute has decreased in recent years. This is
attributable to Commission rulings requiring the Division to modify their methodology. WilTel has not changed the reasons why centrally assessed taxpayers have appealed. Intangible value
imputed into centrally assessed valuations by the use of and reliance on stock prices has been an
issue since the Division changed its methodology to capture intangibles.
Mr. Stevens said that centrally assessed property taxpayers are carrying their load. There
has been a definite shift in the overall property tax burden. Homeowners received exemptions
which creates a shift in the tax base to centrally assessed taxpayers. Mr. Strong commented that
centrally assessed tax payers have been forced to assume an artificially greater share of the total
tax burden through income, sales, property, and franchise taxes.
Mr. Stevens claimed that centrally assessed property is overvalued. He said that
because of the Division's use of the direct capitalization methodology and reliance on the stock
and debt indicator, the Division has consistently calculated higher system values than other states
in which PacifiCorp and Questar Pipeline operate. He said these methods overstate value
because they impute intangible value included in stock prices into assessments. There would be
fewer appeals if centrally assessed properties were valued and taxed at the legislated level of 100
percent of fair market value of the tangible real and personal property.
Chair Lee asked what changes need to be made in statute to arrive at fair market value.
Mr. Stevens replied that the Legislature should state that methodologies (such as direct
capitalization and stock and debt) that impute intangible value into assessments may not be used.
Rep. Buffmire commented that it is too soon to tell if Wiltel will create a crisis. She feels that there may be a crisis and we need to be prepared for that possibility.
Chair Cornia requested that Mr. Stevens and Mr. Strong provide the following
information to the TRC:
1. A comparison of assessed and allocated values and the taxes paid in other states in which the company operates.
2. Describe the differences in values calculated by the Division, the counties, and the taxpayers. Demonstrate whether the differences in value are attributable to the various
valuation methods employed (i.e. stock and debt, direct cap, yield cap, discounted cash flow)
or whether the differences arise in the correlation of the values calculated under different
valuation methods.
3. Explain why a cost regulated utility has intangibles. What are the comparisons with unregulated utilities?
4. The WilTel decision requires the taxpayer to identify intangibles. What are your company's intangibles and how do you propose identifying their separate values? Are they
currently subject to property taxation? Should they be taxed in light of WilTel?
5. Has the system become too complicated? Is there some other process or some other tax that would generate the revenues fairly and with less administrative and compliance
difficulties?
Chair Cornia also asked the Association of Counties and the Division to respond to these
issues.
2.
Property Tax Methodology
Utah Association of Counties _ Brent Gardner, Executive Director, Utah Association of Counties, said he was asked to comment on procedural issues at the Commission, assessment
methodology on centrally assessed properties, and intangibles.
Mr. Gardner referred to an audit titled "1995 Audit of the Utah State Tax Commission"
in his discussion of procedural issues. He said that this audit (pages 7 and 15) makes
recommendations for an increased litigation budget for the Commission to be able to meet the
time frames prescribed for appeals.
Chair Cornia asked if the counties present an appraisal when they make an appeal to the
Commission. Mr. Eckhardt A. Prawitt, Utah Association of Counties, said that it is not required.
However, he feels that a reason for appealing should be required.
Mr. Gardner raised the issue of proposed legislation separating the administrative
functions from the adjudicatve functions of the Commission. He said that although this bill did
not pass, he feels it is still an issue that needs to be addressed.
Mr. Gardner said the issue concerning methodology is not whether the methodology
overvalues the property, but whose judgment should be used in applying the methodology. He
said that the courts and the Commission have upheld the methodology being used in Utah. The
disputes are over judgments in applying the methodology. He said that fairness between Utah
and other states is not as relevant as fairness within the state.
Chair Cornia felt that fairness between states is an important issue and requested a brief
report from Bill Thomas Peters showing comparisons to support Mr. Gardner's statement about
the issue of fairness between states. Mr. Gardner agreed to produce that information for the
TRC.
Mr. Gardner distributed a handout titled "Comparison of Property & Severance Taxes on
Oil and Gas Property/Production." This handout shows that the amount of property tax and
severance tax on oil and gas property and production track very closely. Therefore, he made a
proposal to replace the property tax with the severance tax, arguing that the severance tax is less
expensive and less complicated to calculate. He said that the oil and gas industry was not in
favor of this change.
Mr. Prawitt said that according to the universal valuation principle, a property should
always be valued at its highest and best use. He said that the Division has determined that the
highest and best use of property is as an integrated unit system. He said that this includes the
intangibles.
Mr. Prawitt said that it is his thesis that an entire property consists of nothing but
intangibles. He explained that all costs are intangible. For example, the value of land is based
on its scarcity and the availability of services, which are intangible. Mr. Prawitt claimed that the
real question is which intangibles will be taxed and which will be exempt. He feels that only
intangible property which is capable of ownership is exempt under the law. Mr. Prawitt referred
to an article by Jim Bonbright in his discussion on intangibles.
Mr Prawitt said that comparisons between states are irrelevant because other states are
simply taxing a different set of intangibles. This is due to the fact that they have defined a unit
differently than Utah. He feels that the relevant comparison is between centrally and locally
assessed property in Utah. Both should have the same exemptions.
Chair Cornia asked Mr. Prawitt to provide the citation to the Jim Bonbright article and a
copy of his presentation for the TRC. Chair Cornia asked Mr. Prawitt to respond to the request
for information given to the other speakers, using a replacement cost methodology. Mr. Prawitt
said that the cost indicator will not get to the fair market value.
Chair Cornia asked Mr. Prawitt if he would use replacement cost in cost regulated
utlities. He said that he uses replacement cost as an indicator.
Mr. Oveson commented that H.B. 129 put a two-year time limit on the Commission for
adjudicating centrally assessed appeals and therefore there is no need to increase the budget for
litigation.
Chair Cornia asked staff to mail copies of the 1995 audit to the TRC members.
Mr. Buchi asked Mr. Gardner to provide a county by county list of who uses Marshall
and Swift as a basis for determining cost. Mr. Gardner agreed to do so. Chair Cornia asked the
Division to provide the TRC members with a summary of Marshall and Swift. Chair Cornia
asked Mr. Buchi to provide a copy to staff of Hal Heaton's paper that was presented in Wichita.
4. Other Business--The next meeting of the TRC will be held on Friday, September 12, 1997, at 1:00 p.m. in room 405.
Sen. Stephenson reported that the National Conference of State Legislators and the
National Tax Association enacted resolutions regarding taxing the internet. He said Congress is
also discussing this issue. He commented that the National Conference of State Legislators and
the National Tax Association are very interested in the outcome of the national study on the
taxation of telecommunications chaired by Gary Cornia.
5. Adjournment--
MOTION: Vice-chair Lee moved to adjourn the meeting at 4:55 p.m. The motion passed unanimously. Mr. Wood and Ms. Owen were absent for the vote.