Contrary to popular belief, not all Utah sales tax exemptions go to businesses. In fact businesses receive 47% of total sales tax exemption amounts, according the Utah Taxpayers Association’s analysis of Tax Commission data. Elected officials, the spending lobby, and the local media frequently refer to $566 million in business sales tax breaks even though more than half of this amount is actually not business related as demonstrated by the accompanying chart.
|Exemption||State Sales Tax||
Local Sales Tax
|Motor and special fuels 1||$92,521,500||$33,491,000||$126,013,000|
|State/local government purchases||$39,721,000||$14,378,000||$54,099,000|
|Religious/Charitable sales and purchases||$9,758,000||$3,532,000||$13,290,000|
|Newspaper sales and subscriptions||$2,535,000||$918,000||$3,453,000|
The oft-cited $566 million in sales tax exemptions includes the $28.4 million annual exemption for energy used in the manufacturing process. However, not included in the Tax Commission’s $566 million amount are the reduced state sales taxes on energy usage for residences. Households pay 2.00% state sales tax on energy consumption instead of the normal 4.75% (local sales taxes are additional). The reduced state sales tax rate for residential energy usage provides $27 million less than if the rate were at the usual state rate of 4.75%. If this amount were included in the Tax Commission’s total exemption amount and the total household exemption amount, non-business sales tax exemptions would be 55% of total sales tax exemptions.
As a Utah Senator, I have sponsored legislation exempting sales taxes on manufacturing machinery and equipment, ski lift equipment, mailing lists, and other business inputs from sales taxes. Exempting business inputs from sales taxes is sound tax policy. If business inputs are subject to sales taxes, then tax pyramiding occurs as taxes are applied to taxes at each stage of production. Taxes should occur at the final stage of consumption because taxing business inputs during the various stages of production hides the true cost of government. Moreover, eliminating sales taxes on business inputs makes Utah ’s businesses more competitive with their out-of-state rivals. This benefits Utah workers and their families as much as Utah businesses.
Currently, only certain business inputs are exempted from sales taxes including manufacturing equipment, energy used during manufacturing process, and agricultural machinery, among others. Former Gov. Olene Walker recommended expanding the sales tax exemption to include all purchases of property that can be capitalized under federal income tax law.
Some exemptions are not based on sound tax policy and should be eliminated, with offsetting tax cuts elsewhere to prevent a net tax increase. Private sector recreation centers, golf courses, and telecommunications companies compete against government on an unlevel playing field. The state should either exempt these private sector companies from sales taxes on inputs, especially telecommunications companies competing against UTOPIA and IProvo, or the state should remove exemptions from government purchases that are used to compete against the private sector.
Currently, municipally owned power companies are largely exempt from sales taxes on inputs. Murray City Power, for example, does not pay sales taxes on transformers or other equipment while PacifiCorp does. Murray City Power and PacifiCorp do not compete against each other, but customers of PacifiCorp have sales and property taxes on business inputs imbedded in their utility bills while customers of municipal power for the most part do not.
Sales taxes should be imposed at the final stage of consumption which means exemptions at the final stage consumption that are not targeted for low-income households should be repealed. One such example would be the sales tax exemption for newspaper subscriptions and purchases.