The 2018 Utah Legislature was praised by various national business advocacy groups for eliminating the three-year life sales tax on manufacturing and mining machinery, equipment and replacement parts. The legislature was also recognized for finally passing the single sales factor for apportionment of multi-state business profits. Legislators seemed to be convinced that taxing business inputs was economically counter to capital investment in the tools of production providing more and better jobs in the Beehive State.
But Then It All Changed
The 2019 Legislature ended disastrously as the Utah House of Representatives attempted to ram HB 441, clearly the worst Utah tax bill of the century, through the legislature with only ten days left in the session. Surprisingly supported by the Salt Lake Chamber, the bill would have imposed millions of dollars in business taxes, among other things. When our Association and businesses across the state weighed in with a united voice against the tax package, the governor, together with leadership in both houses held a hastily called press conference announcing that the bill was dead. It was also announced that a year long task force would be formed to get public input on a better tax reform package.
Listening tours were held across the state. Unfortunately, there was no tax reform proposal to which the public could react during the listening tours. Following numerous constructive meetings of the task following the listening tour, the Governor called a December 2019 special session of the legislature to deal with tax reform. A proposal was prepared which actually contained only a few flaws, but wasn’t available to the public until the day before the special session and significant new items were added the very day of the special session. While the Senate got a two-thirds majority support of the bill, the House fell seven votes short, making the measure subject to veto or public referendum. Even though the bill was a net tax cut of $160 million, the two things most citizens understood was the restoration of the full sales tax on food and a hefty motor fuel tax hike. As everyone knows, the referendum challenge was successful and the legislature, rather than putting its budget in limbo until the November election, repealed the bill in the first week of the 2020 legislature.
Many of us thought the House of Representatives had learned from the multiple tax policy fiascos in 2019 and would surely return to the wisdom shown in the 2018 session.
Not so.
Things Actually Got Worse
In the current 2020 legislative session a House bill repealing the existing exemption on diesel fuel used by a railroad and imposing a new 4.85% pyramiding sales tax on business was given a committee hearing 12 days prior to the end of the session. But this time, unlike HB 441 which heaped new taxes on inputs of most businesses, the ill-advised HB 356 singled out only the railroad industry for new taxes. HB 356 (Ferry) flies in the face of your Taxpayers Association’s successful efforts for the past 35 years to eliminate sales taxes on business inputs. The legislature’s actions in removing these barriers have led to record capital investment and job growth.
In an unusual move, Speaker Brad Wilson assigned himself and Majority Whip Mike Schultz to the House Revenue and Taxation Committee the day before it considered HB 356.
HB 356 passed unanimously out of committee and passed unanimously from the floor of the House. When asked why they voted without hesitation for a bill which knew went contrary to sound economic principles here are some of the responses: That’s not a hill I’m willing to die on. I don’t have a dog in that fight. Union Pacific hasn’t been a good corporate citizen. I didn’t want to be on the wrong side of the speaker. I didn’t want to jeopardize my bills.
Why a Sales Tax on Railroad Fuel is Pyramiding
Unlike the construction and maintenance of highways which are funded through a combination of user fees, motor fuel taxes and general fund revenues and the materials which go into the road are not subject to sales taxes, the “road system” used by trains is paid for by the railroad and built with materials on which sales taxes are collected. Proponents of the tax argued that other off highway use of motor fuels such as excavators are required to pay excise taxes on their fuels and this is an equity issue. If that is true, the remedy is not to add a pyramiding tax to railroads, but to remove the pyramiding tax from diesel fuel used by heavy equipment on construction projects.
The Utah Legislature has been supporting a new economic growth project called the Inland Port which will increase rail freight traffic many times over current traffic. This doesn’t exactly send the best message that we want the Inland Port. In any event, this tax will ultimately drive up the costs of rail transportation and be paid for by customers of rail freight systems.
Your Taxpayers Association Is at Least Partly to Blame
Over the 35 years of success with tax reforms, your Taxpayers Association carefully educated policymakers about the economic principles that supported removing sales taxes on business inputs in addition to other important tax issues such as reducing income tax rates, the single sales factor for multistate businesses and protecting Utah’s truth-in-taxation property tax limitation law. We thought legislators’ clear understanding of economic principles produced the great tax cuts of 2018 and that same understanding would have prevented the tax reform disasters which have followed.
We were wrong to assume policymakers widely understood those principles. Your Taxpayers Association should have done the careful one-on-one interface with 104 legislators during the tax reform cycle in 2019 instead of only meeting with the Task Force members. We should have assured that every legislator had a full understanding of why Dr. Art Laffer’s Rich States Poor States economic analysis gave Utah the number one best economic outlook for 12 years running. I fear that recent Legislative action may cause our ranking to fall, and more importantly, impede the prosperity of Utah families.