by Howard Stephenson
Tax reform is a cornerstone of economic development, according to Governor Jon M. Huntsman. The Utah Legislature agrees and has expressed that agreement in the formation of a Tax Reform Task Force which has already begun meeting to propose changes to Utah ’s tax system.
Chaired by Senator Curtis Bramble and Representative Wayne Harper, the Task Force has been divided into four Subcomittees: Property Taxes, Sales Taxes, Income Taxes and Miscellaneous Taxes including Redevelopment Agency reform.
Lt. Governor Gary Herbert in remarks before the recent Utah Taxes Now Conference represented Governor Huntsman’s hopes when he said, “We want businesses to be successful and want to protect homegrown businesses while bringing new employers to Utah . The best incentive for economic growth is a good stable, predictable and fair tax structure. Government subsidies are sometimes a temptation, but I don’t believe they are a good use of taxpayer dollars nor are subsidies good public policy,” he said.
He said a good tax system is one where achievement and risk are not punished. The risk/reward opportunities in a free market system thrive best on a level playing field. Herbert said the Governor would like to have a tax code which does not play favorites, where government doesn’t pick the winners and losers in the marketplace.
The Lt. Governor explained that the Huntsman/Herbert administration has put together five basic principles of taxation which spell the acronym: TREES.
Transparent and accountable to taxpayers. Taxpayers ought to know where their money is going and why. Taxpayers ought not to be caught in a maze of paperwork
Revenue -sufficient. Adequate funding for essential services. Flexibility to meet economic ups and downs and stability for long-term planning.
Efficient . Should not stifle the efficiency of the marketplace.
Equitable . Fairness. Ability to pay for those on the lower end of the economic spectrum. Government ought not to pick winners and losers in the marketplace
Simple and understandable. Compliance and enforcement ought to be as easy as possible.
Herbert pointed out that it costs $194 billion to comply with the U.S. tax code. Utah ’s tax system ought to be simpler than that. Herbert said the current three legged stool of property taxes, sales taxes, and income taxes ought to be kept.
Which Tax Cuts Best Improve Utah ’s Business Climate?
Just a few years ago, a discussion in Utah of ways to cut business taxes would have been considered an academic exercise or worse, a waste of time. Due to the leadership of Governor Jon M. Huntsman, Jr., there is serious debate about which tax cuts would produce the greatest economic growth and job creation.
Implement Flat Individual Income Tax Rate
Keith Prescott called for a flat individual income tax. He said tax codifiers and tax dodgers are locked in a mutually destructive “arms race.” The code is made more complex because more and more people seek to avoid taxes. He said the best way to fight tax avoidance is with tax simplicity.
He suggested that nothing should be out of the question for simplifying Utah ‘s individual income tax including eliminating the patchwork of exemptions, deductions and exclusions. He said Utah needs to broaden the base and lower the rate. Utah ’s high 7% nominal tax rate is seen as a deterrent to attracting high-paying employers to the Beehive State . High-paid CEO’s and other corporate executives find Utah less attractive when they learn of our high income tax.
Repeal Utah’s Corporate Income Tax
Utah ought to seriously consider repealing its corporate income tax, according to Dr. Gary Cornia of BYU’s Romney Institute. Cornia said that the corporate tax base is volatile – requiring a larger rainy day fund – but worse, the corporate income tax has a declining base resulting in a structural decline of about 8% per year. “We would have to have non-agricultural wage growth of 4.2% from 2004 to 2009 just to overcome the loss of revenue in the declining [corporate income tax] base,” Cornia said.
Dr. Cornia explained that the corporate income tax becomes a tax on exports because it is a tax on business inputs. By taxing exports, Utah goods and services become less competitive.
He said that perhaps the most significant problem with the corporate income tax is its nonuniform application. There is little uniformity between what a corporation pays in state income taxes vs. federal income taxes. The relative corporate tax burden depends on the type of firm. By keeping its corporate income tax, Utah inadvertently punishes some types of firms while rewarding others.
Repeal the Sales Tax on Business Inputs
In my remarks before the conference, I called for elimination of all sales taxes on business machinery, parts, and equipment, noting that this would make Utah more attractive for capital investment and make Utah businesses more competitive nationally and internationally. I explained that Utah ’s current manufacturing sales tax exemption applies only to parts and equipment with a three year life or more. He said it is time to extend the exemption to all inputs consumed or used by basic industries regardless of the lifespan of the equipment. I presented data on the amounts of sales taxes paid on equipment purchases by various types of businesses.
Eliminate Business Personal Property Taxes
“There are win-win options which Utah can use to eliminate or substantially reduce personal property taxes on businesses in Utah ,” said Stan Lockhart of Micron Technologies in remarks delivered before the Utah Taxes Now Conference. He said Utah needs to explore exemptions to personal property taxes including circuit breakers, tax abatements, caps and other tax and value limits and changes to depreciation schedules. He said one proposal which should be implemented regardless of any other changes would be to index Utah ’s personal property depreciation schedules to match the federal government’s depreciation schedules.
Mr. Lockhart noted that Utah is one of sixteen states that allows no tax exemption for business personal property. A seventeenth state, Vermont imposes nonresidential personal property tax at 120% of assessment. Fourteen states do not impose taxes on business personal property. The 50-state average business personal property tax exemption is 55.2%.
Utah is one of forty-one states that does not impose taxes on inventories and is one of nineteen states that offer no exemption on business fixtures. The number of states that exempt inventory from personal property taxes has been increasing in recent years.