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MINUTES OF THE

TAX REVIEW COMMISSION

November 6, 1998 - 12:00 p.m. -- Room 405 State Capitol



Members Present:    
    Mr. Gary Cornia, Chair
    Rep. Judy Ann Buffmire
    Mr. Robert M. Graham
    Sen. Lyle W. Hillyard
    Sen. George Mantes
    Comm. Rich McKeown
    Judge Jon Memmott
    Ms. Dorothy Owen
    Mr. Keith Prescott
    Rep. John Valentine
    


    
Members Excused:
    Mr. James B. Lee, Vice-chair
    Mr. Mark Buchi
    Ms. Anne Clark
    Ms. Bonnie Miller
    
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 2:20 p.m. He welcomed members of the Tax Review Commission ("TRC") and the Revenue and Taxation Interim Committee.

     MOTION: Rep. Buffmire moved to approve the minutes of the October 2, 1998 meeting. The motion passed unanimously. Commissioner McKeown and Ms. Owen were absent for the vote.

    Mr. Asplund announced that Governor Leavitt has reappointed Gary Cornia to the TRC and has requested that he continue as the chair of the TRC. The Governor has also appointed Ms. Anne Clark to the TRC.

    Chair Cornia thanked Sen. Mantes for his service to the TRC and informed the members that Sen. Mantes has been appointed to the Board of Regents.         
    Rep. Valentine informed the members that if he is appointed to the Senate, he would no longer be a member of the TRC.


2.     State Revenues
    a) A look at state revenues throughout the nation -
    Mr. Asplund reviewed the article "Rolling in Dough," which reports that a robust economy has boosted state finances to their healthiest levels in almost two decades. Mr. Asplund said that surplus revenues at the state level have been used to cut taxes, create rainy day funds, and increase expenditures. He reported that nationally about 8 percent of states' budgets are put into rainy day funds. Utah had $88 million in their rainy day fund at the end of fiscal year 1998.
Revenues at the federal level have increased by approximately 80 percent.

    b) State revenues in Utah over the past decade -
    Mr. Asplund reported that over the past decade state revenues have increased by 50-60 percent while cities (that rely more heavily on property taxes) have experienced an increase of 45-50 percent.

    c) Changes to the tax system in Utah over the past decade -
    Mr. Asplund distributed a document prepared by Lance Rovig, Governor's Office of Planning and Budget, titled "State Tax and Fee Changes from the 1994, 1995, 1996, 1997, and 1998 Regular and Special Legislative Sessions (A)(B)." Mr. Asplund stated that the property tax, income tax, and sales tax have been cut since 1984, resulting in lost revenue of almost $1billion. Sen. Hillyard argued that these tax cuts may have generated more revenue through business growth.

    Mr. Howe distributed to the TRC "Revenue Trends for Selected Utah Taxes." He reported that since 1984 the income tax has generated more revenue than the property tax or sales tax. He reviewed the adjusted and nonadjusted tax collections as a percentage of personal income for the sales and use tax, cigarette tax, individual income tax, corporate franchise and income tax, motor fuel tax, and special fuel tax. Mr. Howe also discussed sales and use tax and income tax elasticities, changes in certain tax collections, and the taxable value of property in Utah.

    d) Issues surrounding the future of state revenues -
    Chair Cornia commented that the TRC needs to focus on ways to reduce the volatility of the state tax system. Mr. Rovig reported that the Uniform School Fund has been growing, while the General Fund has been declining.

    The TRC discussed possible ramifications of internet sales on state revenues. Chair Cornia noted that Govenor Leavitt was influential in getting federal legislation passed regarding electronic commerce. Chair Cornia also discussed recommendations of the National Tax Association Communications and Electronic Commerce Tax Project including: (1) internationally acceptable uniform definitions; and (2) one sales tax rate per state.
3.    Study of the Sales Tax Base
    a) The 1990 policy statement -
    Mr. Asplund reviewed the positions established by1990 General Session H.J.R. 32, "Tax Recodification Commission Sales and Use Tax Policy" as follows:

    1. the sales tax should be broadly based;
    2. the sales tax base should seek to mitigate regressive impacts;
    3. the sales and use tax should be administratively simple;
    4. the sales and use tax laws should promote compliance; and
    5. the sales and use tax should not be earmarked.

    b) Sales and use tax on food -
    Rep. Short told the TRC that the Revenue and Taxation Interim Committee approved the draft legislation "Income Tax Credit For Sales And Use Taxes Paid On Food" as a committee bill. He explained that this bill provides for a refundable individual income tax credit of $20 per person to help with the burden of paying sales and use tax on food. Rep. Short said the fiscal note would be approximately $42 million.

    Rep. Buffmire expressed concern that individuals most needing the refund may not file individual income tax returns and therefore not receive the refund. Ms. Owen recommended that the TRC study other options to remove sales and use taxes on food. Chair Cornia suggested implementing a sliding scale to target those who need the refund the most. Mr. Graham said this could be accomplished with an exemption. Sen. Mantes stated that by raising the general sales and use tax rate to 6.5 percent, the tax on food could be removed without impacting state revenues. Rep. Valentine explained the impact of removing sales and use taxes on food on local governments.     
    c) Structural changes regarding manufacturing -
    Mr. Asplund explained that the Revenue and Taxation Interim Committee hired a consultant, Hal Hovey, President of State Policy Research, Inc., to review the manufacturing sales and use tax exemption. Mr. Asplund distributed Mr. Hovey's resume and asked that those who would like to provide information on the exemption contact Mr. Hovey. Mr. Hovey will present his report to the Revenue and Taxation Interim Committee during its November meeting.

    Mr. Asplund also distributed a packet titled "Sales and Use Tax Exemption for Certain Purchases or Leases by a Manufacturer," which provides a history of the exemption. He explained that certain sales and use tax exemptions are granted to a taxpayer if the taxpayer falls within certain codes established by the federal Standard Industrial Classification Manual. He explained that these Standard Classification Codes are currently undergoing some significant changes on the federal level. The TRC discussed the definition of "manufacturing facility" as it

is used in the current Standard Industrial Classification Manual and whether that definition should be used for purposes of the manufacturing sales and use tax exemption.

    d) Other issues -
    Chair Cornia reminded the members that during a previous meeting Sen. Hillyard recommended meeting with the governor to prioritize a list of sales and use tax exemptions for study. He reported that certain TRC members have met with the governor and will hold additional meetings with the governor as necessary.

    Sen. Hillyard suggested that the TRC meet during the session to discuss proposed tax legislation. Sen. Nielson highlighted some committee bills from the Revenue and Taxation Interim Committee. Chair Cornia said the TRC would attend a meeting during the session if invited by the Legislature.

4.    Other Business - The possible impact of In Re Young on the TRC
    Ms. Rockwell discussed some of the implications of the recent In Re Young Supreme Court decision, which states that the Legislature may not appoint members to or serve as members of the Judicial Conduct Commission. Ms. Rockwell explained that this decision may affect all boards with mixed branch membership, including the TRC, and reviewed the statutory makeup of the TRC. She informed the members that the Legislature is currently evaluating options for addressing the issues raised by In Re Young. Ms. Rockwell said she will update the TRC on this issue next year. The TRC then discussed the potential impact of this decision and the history of the Judicial Conduct Commission.

    Chair Cornia welcomed Commissioner Bruce Johnson, who was recently appointed to the Utah State Tax Commission. He also thanked the members and staff for their work, especially with the study of intangible property.

    Sen. Nielson thanked the TRC for assisting the Revenue and Taxation Interim Committee with its studies this interim.

5.     Adjournment

     MOTION: Mr. Graham moved to adjourn the meeting at 2:40 p.m. The motion passed unanimously.

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