Revenue and Taxation Interim Committee

provides an extension of the research tax credit; and (7) increases the social security earnings limits. He noted that Congress is scheduled to adjourn on October 10, 1998.

2.    Individual Income Tax Issues_
    a.    Review of Individual Income Tax Principles Recommended by the Tax Review Commission and Adopted by the Legislature _ Mr. Asplund distributed "1990 General Session H.J.R. 31, Tax Recodification Commission Income Tax Policy," and explained that in 1990 the Legislature adopted the state income tax, sales and use tax, and property tax policies established by the Tax Recodification Commission . He said that an optimum tax system should be: (1) a stable source of revenue; (2) fair and equitable; (2) easy to administer; (3) politically accountable; and (4) competitive with other states.

    Mr. Asplund then reviewed the following five positions for a state income tax system contained in the Tax Recodification Commission Income Tax Policy:
    (1) The state income tax system should be broadly based;
    (2) The state income tax system should shield subsistence income from taxation;
    (3) The state income tax system should be structured so as to be moderately progressive;
    (4) The overall state income tax system should be indexed for inflation; and
    (5) The state income tax system should be linked to the federal income tax system.

    Mr. Asplund reported that the Tax Review Commission ("TRC") voted at its last meeting to uphold the state income tax policy with one exception. Because Congress may dramatically change the federal income tax system, the TRC recommended changing the language in position 5 to clarify that the state income tax system should be linked to the current federal income tax system.
    
    Chair Nielson commented that the sales and use tax and property tax policies are not consistent with income tax position 3: "shielding subsistence income from taxation." Chair Nielson asked Mr. Asplund to provide for the committee the corresponding principles from the sales tax and property tax policies . Mr. Doug Macdonald, Utah State Tax Commission ("Tax Commission"), announced that a report will be available next month on Utah's tax structure.

    b.    Individual Income Tax Burdens--Tom Williams, Tax Commission, distributed the handout "Second 1998 Tax Bill." He reviewed the impact of the federal tax proposals on state revenue in the following areas: (1) the marriage penalty; (2) self-employed health insurance deduction; (3) relief to farmers; (4) relief to the elderly; (5) tax exclusion of up to $400 in interest and dividend income; and (6) extension of expired research and development tax credit provision.

    Mr. Williams then reviewed the total tax burden for a family of four relative to income and ability to pay. He said the income tax is slightly regressive because those in the upper brackets receive deductions and those in the lower brackets use the standard deduction. Mr. Williams highlighted information from a Minnesota study comparing states' 1994 state individual income taxes and rankings by tax amount. He noted that Utah's income tax rate is slightly above average in the lower income brackets, and Utah ranks ninth in the nation at the $35,000 level. Mr. Williams added that Utah imposes an income tax on persons below the poverty line.

    c.    Review of the Effects of Alternative Individual Income Tax Scenarios - Mr. Howe distributed handouts "State Tax Revenue, Utah and the 50 States Fiscal Year 1998," "Utah's Tax System: Rates and Revenues for Selected Major Taxes," and "Individual Income Tax, Background and Options for Reform." Mr. Howe reviewed the background and objectives of the Individual Income Tax Act of 1973, and said that Legislature linked the state individual income tax to federal taxable income to: (1) promote consistency in tax treatment; and (2) enable taxpayers to complete state tax returns with minimal effort.

    Mr. Howe then discussed several options, and provided, for each option, the: (1) rationale for adopting the option; (2) estimated fiscal impact; and (3) estimated new top rate for revenue neutrality. Chair Nielson recommended the option of basing state individual income taxes on federal AGI, granting a state personal exemption equal to the full federal personal exemption, and indexing state individual income tax brackets for future inflation. He stated that this option helps all taxpayers, especially those with children, and the future indexing prevents bracket creep. Mr. Howe referred to Rep. Jones' 1998 General Session H.B. 66, Income Tax - Amendments. He presented Rep. Jones' proposal, which provides a state personal exemption equal to 90 of the percent federal personal exemption for taxpayers with an AGI at or below $100,000, while retaining the existing state personal exemption for taxpayers with an AGI that exceeds $100,00..

    d.    Committee Discussion
    Rep. Valentine questioned the advisability of making significant changes to the income tax system during: (1) the tax system upgrade; and (2) the "Year 2000" transition. Commissioner Joe Pacheco responded that it would depend on the complexity of the changes. He explained that Tax Commission is in the process of changing computer systems and therefore has requested that the number of changes to the tax system during the next session of the Legislature be limited. He added that any changes made this year will have to be implemented into both systems, which is expensive. Ms. Lynn Solarczyk, Tax Commission, commented that Year 2000 system tests will be performed by mid-1999. She stated that it is up to the Legislature to decide how to best spend the state's resources. Rep. Valentine then discussed compliance issues and recommended that the Legislature use restraint in making changes in the tax system this year.

    MOTION: Rep. Valentine moved to request the Tax Commission to: (1) review the proposed income tax reform options and provide an estimate as to the Tax Commission's ability to implement these options; and (2) report its recommendations to the Revenue and Taxation Interim Committee at the October meeting. Chair Nielson asked that the Tax Commission also report on making changes to other taxes administered by the state at a subsequent meeting. The motion passed unanimously. Reps. Harper and Seitz were absent for the vote.

3.    Other Business_
    Ms. Ruth Ann Hamilton, Salt Lake Area Chamber of Commerce, reported that the Salt Lake Area Chamber of Commerce Research Tax Credit Task Force/Coalition ("Task Force/Coalition") made a presentation to the TRC regarding issues in implementing the tax credit bills that passed during the 1998 General Session. She reviewed the Task Force/Coalition's recommendations that the TRC: (1) provide a provision, either by an administrative rule or through legislation, to allow companies an irrevocable election to be treated as a start-up company for purposes of calculating the research tax credit; and (2) amend the credits to require that equipment must be used in a qualifying research activity for a period of one year or the claimed credit is subject to recapture. The committee discussed some concerns with the one-year period recommended by the Task Force/Coalition.
            
    Chair Nielson informed the committee that ten states have a state earned income credit and asked members to be prepared to discuss this issue during the October meeting.

    Sen. Blackham requested that the apportionment of airline property taxes be discussed during the October meeting.

    Chair Nielson announced that the next committee meeting will be held on October 21, 1998.

4.    Adjournment --

     MOTION: Rep. Short moved to adjourn the meeting at 4:10 p.m. The motion passed unanimously.