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MINUTES OF THE

TAX REVIEW COMMISSION

Friday, October 2, 1998 - 12:00 p.m. -- Room 405 State Capitol



Members Present:    
    Mr. Gary Cornia, Chair
    Mr. James B. Lee, Vice-chair
    Mr. Mark Buchi
    Rep. Judy Ann Buffmire
    Mr. Robert M. Graham
    Sen. Lyle W. Hillyard
    Sen. George Mantes
    Comm. Rich McKeown
    Ms. Bonnie Miller
    Ms. Dorothy Owen
    


    
Members Excused:
    Judge Jon Memmott
    Rep. John Valentine
    
Staff Present:
    Mr. Bill Asplund
     Assistant Director
    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.    Call to Order and Approval of Minutes -- Chair Cornia called the meeting to order at 12:20 p.m. and welcomed the members of the Tax Review Commission ("TRC") and members of the Revenue and Taxation Interim Committee. He announced that Governor Leavitt has appointed Mr. Bruce Johnson to the Utah State Tax Commission ("Tax Commission").

     MOTION: Mark Buchi moved to approve the minutes of the September 11,1998 meeting. The motion passed unanimously. Vice-chair Lee and Ms. Owen were absent for the vote.         
2.     Consideration and Approval of Tax Review Commission Appointments

    Chair Cornia explained that the TRC has two remaining vacancies and asked for nominations. He noted that Ms. Owen has requested that she be reappointed. He pointed out that there are also two additional vacancies that require appointments from the Governor.

    MOTION: Ms. Miller moved that the TRC reappoint Ms. Owen to the TRC and also appoint Mr. Keith Prescott to the TRC.

    MOTION: Vice-chair Lee moved to cease nominations and appoint the nominees named by Ms. Miller. The motion passed unanimously.
    

3.    Research Tax Credits: Study Overview

    Ms. Rockwell reviewed the document "Research Tax Credits: Study Overview," which summarizes information on the research tax credits authorized by the Legislature during the 1998 General Session. She explained that S.B. 47 and S.B. 220 provide individual income tax and corporate franchise and income tax credits for certain expenses incurred in conducting research activities in the state. S.B. 47 authorizes credits of six percent of expenses or payments that exceed a base amount. S.B. 220 authorizes credits of six percent of the purchase price of machinery, equipment, or both. Ms. Rockwell reviewed the study requirements contained in the bills, and noted that the recent lapse in the federal credit may trigger a TRC study. She stated that the Revenue and Taxation Interim Committee has requested TRC's assistance in conducting the 1998 interim study. This study requires an analysis of: (1) the cost of the credits; (2) the purpose and effectiveness of the credits; (3) whether the credits will benefit the state; (4) whether to impose a limitation on the amount of credit a taxpayer may claim; and (5) whether the credits should be modified or repealed. She noted that the TRC has considered issues relating to each of the study items, except for the limitation on the amount of credit a taxpayer may claim, but has not developed formal findings or recommendations.

    Mr. Asplund discussed the issue of whether to place a limit on the amount of credit a taxpayer may claim. He distributed a handout prepared by the Tax Commission titled "The SAS System," which charts the number of corporations in 1994 and 1995 by amount of state corporate taxes paid. This information shows that a very small number of corporations fall in the groups paying $100,000 or more in corporate tax.

    Ms. Rockwell then discussed the fiscal impact of the 1998 General Session legislation. She reported that the total loss to the Uniform School Fund would be $5.2 million, however, both bills were substituted to delay a taxpayer's ability to claim a credit, and a revised fiscal note was not prepared.

    Mr. Asplund provided a summary of the studies conducted on the federal research tax credit and state tax incentives. He explained that although the federal research tax credit has been in existence since 1981, it has not become a permanent part of the tax structure. He reported that corrections proposed by advocates of the federal tax credit include: (1) making the credit permanent; (2) changing the threshold requirements for eligibility; (3) increasing the size of the credit; and (4) making the credit refundable. Mr. Asplund concluded that studies have shown the tax credits have had a positive effect on research spending. Also, because of its popularity, the credit is likely to continue. Studies at the state level are still in their infancy, he said.

    Ms. Rockwell explained that the federal research tax credit expired on July 1, 1998. She then reviewed some of the proposals before Congress to reinstate the credit. Ms. Rockwell distributed the draft legislation, "Research Tax Credits Modifications." She reminded the members

that at their last meeting the TRC made a motion to draft this legislation with the following changes: (1) to allow a taxpayer to be treated as a start-up company for purposes of calculating the base amount; and (2) to allow a taxpayer to claim a credit for machinery, equipment, or both if the machinery, equipment, or both is used to conduct qualified research in the state for a time period of less than 12 consecutive months. The TRC and public discussed the advantages and disadvantages of imposing a 12 month use requirement. Mr. Rod Marrelli, Tax Commission, explained the difficulties for the Tax Commission with auditing and enforcing any type of flexible requirement.

    MOTION: Mr. Lee moved to recommend the draft legislation "Research Tax Credits Modifications" to the Revenue and Taxation Interim Committee for further action. The motion passed with Ms. Owen voting in opposition.

    Mr. Glen L. Lambert, Novell, Inc., distributed a statement from the Salt Lake Area Chamber of Commerce Research Tax Credit Task Force/Coalition (the "Task Force/Coalition") titled "Salt Lake Area Chamber of Commerce, October 2, 1998." He explained that the Task Force/Coalition recommends that Utah adopt the federal Alternative Incremental Credit ("AIRC") instead of allowing taxpayers to elect to be treated as start-up companies. He noted that California has adopted an AIRC effective this year, and stated that by adopting an AIRC Utah would resolve the base year issue in its current law. Ms. Rosann Jacuzzi, Cordant Technologies, Inc., distributed the handout "Amount of Federal Research Credit," and provided an example of the calculation of the federal AIRC. Chair Cornia recommended that the Task Force/Coalition present their proposal to the Revenue and Taxation Interim Committee.

4.    Property Tax Valuation Report

    Commissioner McKeown explained that the Tax Commission has issued valuation guidelines to the Property Tax Division that comply with legislative intent. He reported that the Tax Commission has held hearings and will soon pass a rule for centrally assessed property valuation. He reviewed the handout "Property Tax Division Centrally Assessed Appeals Summary as of 7/1/98," and reported that the total remaining value in dispute is $4.4 billion.

5.    Report on the Year 2000 Conversion - Tax Commission
            
    Mr. Scott Rowley, Technology Management Division, reviewed the Tax Commission's plan for compliance , "Achieving Year 2000 Compliance." He reported that the system renovation will be completed by mid-1999. Mr. Rowley stressed the importance of creating a documented audit trail showing appropriate due diligence in resolving the Year 2000 problem. He concluded that the Year 2000 compliance program: (1) is focused on identifying problems early; (2) minimizes the effort required to demonstrate due diligence; and (3) builds public confidence in the commission.



6.    Other Business

    Ms. Owen asked members to review the document "Working Draft the Utah Based Earned Income Tax (UBET) Program," and forward their comments to Gina Cornia at Utah Issues.

    The next meeting of the TRC will be held on November 6, 1998 at 12:00 p.m. Mr. Buchi asked to be excused from that meeting.

7.    Adjournment

    Chair Cornia adjourned the meeting at 2:35 p.m.

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