In 2018, your Taxpayers Association gained major success for our legislative initiative, Utah 2.0, including eliminating the three-year sales tax penalty and the expansion of single sales factor.
As a reminder, the expansion of single sales factor, accomplished in House Bill 293, moves key industries in Utah to single factor apportionment when calculating corporate income taxes. This is a key element of Utah 2.0, the Association’s legislative initiative to boost economic output for decades to come.
The calculation increases the emphasis on sales within the state while decreasing the emphasis on property and payroll when determining a business’s income tax. This method incentivizes companies to invest their payroll and property in Utah and produce products that sell nationwide. This calculation method is expected to be a $27.8 million tax cut when fully phased in.
Meanwhile, in July, the elimination of the three-year life sales tax penalty was funded in its entirety, via SB 2001. This legislation was a result of the Wayfair Inc. vs. South Dakota ruling the Supreme Court issued in June of 2018 dealing with remote sales taxes. The bill put a structure in place for Utah to begin requiring out-of-state online retailers to collect and remit sales taxes to the state of Utah. (continued on page 3)
The legislation also changes the effective date for the manufacturing sales tax exemption, nicknamed the 3-year-life bill around the Capitol. In March of 2018, your Taxpayers Association passed legislation to trigger the sales tax exemption based on when the state collects $55 million in online sales taxes (our hope was the Supreme Court would rule the way it did to allow states to collect the taxes).
Thanks to the work of former Senate President Niederhauser, that trigger was amended and passed in the special session. Now starting at the beginning of this year, the manufacturing sales tax exemption will go into full effect.
But our work is not done. We have identified more work to do during the 2019 Session, and have incorporated them into the new Utah 2.0 proposal.
Elimination of the Double Taxation on Personal Property Tax
Utah small businesses have faced a heavy burden in accounting for all tangible personal property used during the process of creating a final, consumable product. Businesses are required to account for, then pay property tax on those items, which can range from gears used by manufacturers to silverware in restaurants. In addition, small businesses must pay the sales tax on the purchase of the personal property and then pay property taxes for years into the future.
Businesses have to account for every item in their possession, then match them to find what “class” they belong to. There are 17 classes of items that the Utah State Tax Commission identifies.
Following this, the business owner must then calculate the depreciation of each item, as outlined by the Tax Commission. For example, office furniture has an 8% depreciation if purchased in 2018.
After the owner classifies and calculates depreciation, then the property tax must be paid on the item. Tangible personal property is exempt if the property has a total aggregate fair market value of $10,300 or less.
Many of our members have told us that this is an extremely burdensome tax, and have asked us to push for elimination of it. Throughout the summer, your Taxpayers Association has been explaining the issue to legislators, and are pleased to report that the Revenue and Taxation Interim Committee unanimously passed a proposal for the total elimination of personal property taxes on small businesses.
Lowering the Income Tax Rate
Following action taken in 2018, the statewide income and corporate franchise tax was lowered to 4.95%. Your Taxpayers Association continues to call on the legislature to lower the statewide income and corporate tax as it is a significant factor in decisions that companies make when looking to expand or relocate.
The call becomes more urgent, however, as ideas are raised to expand the base of the sales tax to include services. These services can range from a landscaping service or a haircut to legal and health care professions.
While there isn’t a target number of newly generated revenue due to a lack of specificity in the proposal, we strongly believe the legislature, if they are to expand the sales tax base, should cut the income tax by an equivalent amount. This prevents growth in government, which the legislature has generally agreed to, including following the collection of remote sales taxes.
Expanding the sales tax base should not increase net tax revenues, but should be used to stabilize the sales tax base and insulate it from economic peaks and valleys.
Even if the Legislature does not make the move to expand the sales tax base, Utah’s income tax rate should be lowered following increased property and sales taxes from the past few legislative sessions.
Keeping the Promise
The Legislature is expected to keep its promise, made in 2013, to ensure that $200 million in new tax revenue from the U.S. Supreme Court decision on Wayfair, Inc. will be used to cut taxes dollar for dollar.
In 2013, Sen. Harper’s sponsored legislation that would force the legislature to keep the promise, and in 2016’s SB 68, canonized the legislature’s agreement that when the new revenues flow from collecting from remote sellers, Utah would not use the estimated $200 million to grow government but would instead reduce taxes correspondingly. It was clear that the Utah Legislature would not have passed the legislation without the promise that it would not result in a net tax increase. Senator Harper said that in the special session the legislature cut taxes by $85 million through family income tax reductions and elimination of the three-year life sales tax penalty on manufacturing and mining. “We’re part way there,” he said, “we still have a cut of $115 million to make in the next General Session.”
The 2018 Legislature has already cut $85 million of the $200 million and is expected to lower other taxes to fulfill the remaining $115 million promise. $55 million was from the elimination of the three-year life sales tax penalty, while an additional $30 million was to offset a tax increase on larger families, following federal tax reform passed in December of 2017.
Aligning Utah’s Workforce to the Needs of Utah’s Employers
Utah taxpayers and students are paying more than $2.3 billion annually for state funded higher education.
Unfortunately, more than half of that goes for non-completions and of those who do complete, more than half cannot get a job in their field of study. Your Taxpayers Association will be lobbying for greater alignment of higher education spending with Utah workforce demands.
Because Utah’s System of Higher Education and Utah Technical Colleges are not supplying sufficient numbers of trained workers, Silicon Slopes and other high-technology industry employers simply don’t have the supply of trained workers they need. This results in companies recruiting from their neighbors.
Your Taxpayers Association is working with the Utah Technical Colleges in supporting their request for a $7 million appropriation to handle bottlenecks in high wage, high demand technical certificates. We will be working with legislative leaders and the Higher Education Appropriations Subcommittee to advocate for greater accountability for the immense resources currently going into the system.
We will also be supporting legislation by Senator Ann Millner which would ensure college students receive credit for competencies students bring with them rather than being forced to sit through classes for which they already have expertise. Her stackable credentials legislation is already providing students with the on and off ramps they need to easily move back and forth between employment and education.
Moving Forward into the 2019 General Session
Over the past few weeks, your Taxpayers Association has brought these issues to light with each of the new Revenue and Taxation standing committee chairs and vice chairs, as well as various members of both House and Senate leadership, and the governor’s office.
We had very productive discussions with each of them and are encouraged by their willingness to listen to our ideas and to participate in the solutions.
You can hear from each of these standing committee chairs, as well as the governor and legislative leadership on these issues at our Legislative Outlook Conference on January 7, 2019. Register by emailing email@example.com.