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Revenue and Taxation Interim Committee

MINUTES OF THE

REVENUE AND TAXATION INTERIM COMMITTEE

Wednesday, October 22, 1997 -- 2:00 p.m. -- Room 223 State Capitol


Members Present:    
    Sen. Howard C. Nielson, Senate Chair
    Rep. Raymond W. Short, House Chair     Sen. E. George Mantes     Sen. L. Steven Poulton
    Sen. Howard A. Stephenson
    Rep. Greg J. Curtis
    Rep. Kevin S. Garn     Rep. David M. Jones
    Rep. Patricia B. Larson
    Rep. Loraine T. Pace
    Rep. Jack A. Seitz     Rep. A. Lamont Tyler
    Rep. John L. Valentine
    Rep. Richard L. Walsh
    

    Members Excused:
    Sen. Mike Dmitrich    
    Rep. Judy A. Buffmire    
    Rep. Wayne A. Harper

     Members Absent:
    Sen. Leonard M. Blackham

    Staff Present:         Mr. Bryant R. Howe,
         Research Analyst         Ms. Rebecca L. Rockwell,
         Associate General Counsel         Ms. L. Kaye Clark,
         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.     Committee Business _      Chair Short called the meeting to order at 2:50 p.m.
    a.     Approval of Minutes of August 20, 1997 _ Due to the lack of a quorum, no vote was taken.

2.    Income Tax Reform_
    a.    Background Information -- Bryant R. Howe, Research Analyst, distributed a packet titled "Background Information, Utah Individual Income Tax" to the committee. The following material was included in the packet: (1) Summary of Selected Major Provisions of the Taxpayer Relief Act of 1997 and Effect on Utah Income Tax System; (2) Deductions From Federal Taxable Income, Utah Individual Income Tax; (3) Section 59-10-104. Tax basis _ Rates.; (4) Utah State Tax Commission, Individual Income Tax FY 95-96; (5) Utah Individual Income Tax Return form TC-40 1996; (6) Federal Individual Income Tax Return forms 1040 and 1040A 1997 (draft version); and (7) Special Report from the IRS News Team, President Signs Balanced Budget Legislation.

    b.    Review of Proposed Legislation _ Chair Nielson reviewed his draft bill "Income Tax Amendments" and said that the intent of the bill is to simplify the state individual income tax system and income tax preparation. He noted that the bill: (1) adjusts the individual income tax brackets and rates; (2) repeals the addition to federal taxable income of state income taxes deducted as an itemized deduction; (3) modifies the retirement income exemption; and (4) makes technical changes. He said Tom Williams, Utah State Tax Commission ("Tax Commission"), provided the calculations for the new tax rates.

    Rep. Valentine asked if federal phase-outs for personal exemptions and deductions were used. Ms. Rockwell said this bill and current law uses federal taxable income as the starting point for determining Utah taxable income against which the tax rate is applied. The federal personal exemptions, including the phase-out provisions, are calculated into federal taxable income. Ms.. Rockwell reviewed the contents of the legislation. She explained that the income tax brackets were raised to account for inflation since 1973, then rounded to be even numbers. A new income tax bracket was added to the top of the bracket structure. The rates were increased to achieve approximate revenue neutrality, then rounded. Ms. Rockwell noted, however, that these rates may be subject to modification pending further review of the legislation by the Tax Commission, a final analysis of the impact of the federal tax changes on state income tax revenues, and the Tax Commission's review in November of additional state and federal 1996 data.

    Ms. Rockwell then outlined the modifications to the current statutory provisions requiring amounts to be added to federal taxable income for purposes of calculating individual income taxes. First, the bill repeals the requirement that state income tax deducted as an itemized deduction be added back into federal taxable income. Second, the bill repeals the requirement that 25 percent of the personal exemptions be added back into a taxpayer's federal taxable income, subject to the federal phase-out provisions, which are annually indexed for inflation. She stated that the impact of this change would be to allow 100 percent of the federal personal exemption. She said these two repeals would benefit the taxpayer by potentially reducing the amount of income that is subject to taxation, but would result in a revenue loss to the state. However, the Tax Commission prepared the rate structure to be approximately revenue neutral.

    Ms. Rockwell then outlined the modifications made to items deducted under the current law from federal taxable income for individual income tax purposes. First, the language increases from 50 percent to 100 percent the amount of federal income tax liability that may be deducted. Second, the bill changes the calculation of the retirement exemption to equal 100 percent of the federal personal exemption for taxpayers age 65 or over before the close of the taxable year, and removes the phase-out provision. She noted, however, that the state exemption may phase out as a result of the federal personal exemption phase-out provisions for taxpayers having higher incomes. Under the current law, she commented that the personal retirement exemption is $7,500 per taxpayer for each taxpayer age 65 or over before the close of the taxable year, subject to a state law phase-out provision for taxpayers having higher incomes. Third, the language increases the deduction for each dependent child with a disability and adult with a disability from 75 percent to 100 percent of the personal exemption. This deduction and the personal retirement exemption are in addition to the personal exemption amounts deducted in calculating federal taxable income. Fourth, Ms. Rockwell reviewed the retirement provision for taxpayers under the age of 65. She said this legislation changes the basis for the phase-out from adjusted gross income to federal taxable income. Because federal taxable income is a smaller amount than adjusted gross income, the impact of this change is to make it more difficult to

reach the phase-out threshold. Finally, Ms. Rockwell noted that the bill takes effect on January 1, 1999.

    Rep. Garn asked if this bill would increase the tax for limited liability corporations or "S corporations" where the income is taken personally. Chair Nielson stated that if the taxpayer made over $300,000 there would be an increase. Rep. Garn expressed concern that this bill shifts the tax burden to the higher brackets. Chair Nielson said that the tax remains very close to the current rate. Rep. Curtis requested that staff prepare some income tax returns for different scenarios to illustrate the effect of this bill on various income levels.

    Rep. Jones told the committee that he is considering legislation which targets relief for families earning less than $100,000 per year. He proposed expanding the personal exemption to 85 or 90 percent for those families. This would create a $50 million income tax cut. He said because of the failure to index brackets, the average family is paying approximately $328 more per year in taxes. He said the lost revenues could be offset by closing some loopholes and special exemptions in the sales tax.

    Chair Nielson referred to the handout "Senator Nielson's Tax Proposal, State Tax Burdens" which compares the current rates to the proposed changes. He said the proposed rates show lower taxes for incomes through the $125,000 bracket. He said the taxes would increase slightly for the higher brackets and give significant relief to taxpayers in the lowest income brackets.

    Sen. Stephenson said that because of the federal tax law changes in the child tax credit, Utah will receive a windfall of revenue of approximately $9 million. He asked the committee to take this windfall into account in making its proposals.

    c.    Public Comment _ Milt Saathoff, Union Retirees, stated that this proposal will disadvantage some retired persons with incomes under $20,000. Chair Nielson explained that those persons will be allowed to deduct 100 percent of the personal exemption as a personal retirement exemption.

3.    Locally Assessed Residential and Commercial Property Tax Issues _ Chair Short thanked Doug Macdonald, Tax Commission, for providing to the committee an update titled "Key Economic Indicators." Chair Short then referred to items listed in the handout "Potential Amendments to the Property Tax System _ Residential Property and Uniform Fees" for the committee to consider reviewing this issue. He gave examples of problems and frustrations that people have expressed to him regarding the property tax.

    a.    Lenna Romine, Assessor, Piute County, and President of the Utah County Assessor's Association, stated that she uses sales to property ratio studies to ensure that the values in Piute

County are at market value. She also has a 5-year cyclical plan in place and does an on-site inspection of each property.

    b.    Lee Gardner, Salt Lake County Assessor, reviewed the measures that are in place to obtain market value of each appraisal parcel. One measure is the Tax Commission's sales ratio study which shows Salt Lake County is well within standards established by the Tax Commission. Another method to determine the accuracy of appraisals is to evaluate the number of appeals filed. Mr. Gardner said the number of appeals as a percent of parcels is decreasing and was 4.61 percent in 1996.

    c.    Board of Equalization Process--Fawn Jensen, Davis County Auditor's Office, explained the property valuation appeals process. She said if there is not enough evidence to make a decision on adjustments, the Board of Adjustments (County Commission) requires additional information from the property owner. Chair Short disagreed with the requirement that the property owner provide the evidence regarding the property's value. Ms. Jensen said the owner has 30 days to appeal the appraisal.

    d.    Committee Discussion _ Chair Short asked about the disparity between appraisals on similar properties. Mr. Gardner said that fair market value is calculated by utilizing a comparison of all sales in the area. He explained that the automated mass appraisal model generates a total value for the property, not just land value. Chair Short asked what legislative remedies could be proposed to improve the appraisal process and arrive at fair market value.

    Rep. Walsh asked if the assessors conduct on-site visits of parcels to be appraised. Mr. Gardner said due to decreases in personnel and timing issues, on-site appraisals are annually conducted on approximately one-fifth of Salt Lake County parcels.

    Mr. Jim Fauver, Emery County Assessor, told the committee that the Legislature needs to provide county assessors with the necessary tools to accurately appraise property values. The Legislature has considered, but never enacted, a law requiring the disclosure of real property sales prices. Assessors must rely on samples of sales and this may compromise the validity of some assessments.

    Chair Short thanked the speakers for their presentations to the committee.

4.    Other Business _ The committee did not discuss any other business.
    
5.    Adjournment _

     MOTION: Rep. Valentine moved to adjourn the meeting at 4:50 p.m. The motion passed unanimously. Sen. Poulton and Reps. Larson and Seitz were absent for the vote.



                    



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