Utah has received national recognition throughout the past quarter century for its high rankings on economic and business climate indexes. In 2015 the accolades keep coming: #1 on Forbes Best States for Business and Careers; #1 on ALEC Economic Outlook Rank; #3 on ALEC Economic Performance Rank; #9 on Tax Foundation 2015 State Business Tax Climate Index.

   While these recognitions are important, the question that should be asked is, what remaining obstacles to economic growth need to be eliminated?

   Over the years it has become increasingly clear that Utah’s individual income tax and corporate franchise tax makes the state less competitive when compared to the seven states that have no income tax at all. Cognizant of this, the Utah Legislature in 2006 dropped the individual rate from 7% to 5% while keeping the corporate rate at 5%. The legislature should continue to chip away at the income tax rate. However, there is an even more immediate tax change which should first be resolved by the legislature: the sales tax on manufacturing parts and equipment with a life of less than three years.

Removing the Remaining Sales Taxes on Production Machinery and Equipment

   Your Taxpayers Association successfully led the effort in 1995 to eliminate the sales tax on manufacturing machinery and parts. The legislature gave the exemption after becoming convinced that Utah’s economic competitiveness required that taxes not be imposed on business inputs. Instead, taxes should be imposed on business outputs, such as profits, wages, and the final sale of the product. Otherwise, there is danger that taxes on inputs will inhibit effective use of capital. To use an example from farming, government should not tax a farmer’s seed corn, unless government wants the farmer to plant less corn.

   Unfortunately, due to a flawed fiscal note, the sales tax exemption was amended in a 1996 special session to apply only to parts and equipment with an economic life of at least 3 years.

   Following years of economic success due to the manufacturing exemption, in 2007 the legislature extended the sales tax exemption to mining equipment to ensure that Utah is competitive in attracting capital for the extraction of natural resources in the state.

   The legislature has worked in recent years to remove the sales tax on machinery, equipment and parts with a life of less than three years. So far, this exemption has been granted to computer chip manufacturers, diamond bit manufacturers and a few other business inputs in an incremental way. By continuing to tax parts and equipment that last less than three years, the state is in essence saying we want ice cream manufacturers but we don’t want production which is abrasive or caustic.

   Your Taxpayers Association, together with the Utah Mining Association and Utah Manufacturers Association is working to educate the legislature on the necessity of removing the 3-year-life restriction to the sales tax exemption altogether. In the 2015 legislative session Senator Stuart Adams sponsored SB 267 to accomplish this, but it failed primarily due to a $54 million fiscal note.

   The problem is that the legislature requires “funding” be provided in order to reduce tax revenues. It is based on the incorrect assumption that government deserves all the tax revenue it currently receives and to cut a revenue source, the government must find a way to replace it.

   Fortunately, the Office of the Legislative Fiscal Analyst has done on a limited basis a new “dynamic” fiscal scoring process, which takes into effect the positive growth in the economy from sound tax policies such as eliminating the three-year-life sales tax. Based on their analysis, when all benefits are considered, the fiscal impact of removing the remaining production sales tax drops from $64 million to just $23 million by 2023.

   It is time to get rid of this barnacle on the state’s economic ship. An easy way of accommodating the $23 million fiscal note is to phase the implementation of the policy over, say three years, thus requiring funding for just $7.6 million annually until fully phased in. Both the manufacturing exemption and the mining exemption were achieved through a phase-in implementation. It makes sense to eat the elephant over three years because the economic benefit of the exemption will be felt immediately, even though the budgetary accommodation is delayed. Utah’s economy will be strengthened by businesses knowing the exemption is coming.