Revenue and Taxation Interim Committee

language was based on existing statute. Lee Peacock, Utah Petroleum Association, commented that he needs additional information about the changes before supporting the legislation. Rep. Jones commented that Utah may be at a disadvantage in recruiting businesses without this exemption.

    MOTION: Rep. Valentine moved to pass draft legislation "Sales and Use Tax Exemption for Pollution Control Facilities" as a committee bill. Rep. Garn expressed concerns with the exemption. Chair Short referred the committee to the handout "Sales Tax Exemption for F/Y 1997 and F/Y 1998," showing the industries that received the exemption and the amount of the exemptions. Chair Nielson spoke in favor of the exemption. Sen. Dmitrich declared a potential conflict of interest. The motion passed unanimously. Sen. Poulton and Rep. Garn were absent for the vote.

3.    Marriage Penalties Under the State Individual Income Tax
    a.    Review of Proposed Legislation -- Rep. Harper explained the draft legislation "State Income Tax - Elimination of Marriage Tax Penalties," and reviewed certain definitions included in the bill. He explained that the legislation: (1) modifies the adjusted gross income amounts at which the retirement income deduction and the personal retirement exemption are reduced; and (2) clarifies the amounts that may be deducted under the retirement income deduction. He noted that the Tax Commission estimated a $7.3 million impact on the Uniform School Fund, and the Office of the Legislative Fiscal Analyst estimated an $8 million reduction to the Uniform School Fund. Rep. Harper commented that although these changes will hurt some single taxpayers, they will help even more married taxpayers.

    b.    Public Comment - Commissioner Joe Pacheco responded that the Tax Commission is comfortable with this legislation.

    c.    Committee Discussion and Action

    MOTION: Rep Harper moved to pass draft legislation "State Income Tax - Elimination of Marriage Tax Penalties," as a committee bill. The motion passed unanimously. Sen. Poulton, and Reps. Garn and Valentine were absent for the vote.

4.    Revisions to the State Individual Income Tax
    a.    Overview of Issues - Chair Nielson informed the committee that the Tax Commission is in the process of changing computer systems and therefore has requested that the number of changes to the tax system be limited this year. Commissioner McKeown explained that the Tax Commission is creating an integrated tax system, but is still using the existing system. He said that changes that are administratively difficult to implement must currently be implemented in both systems. Commissioner McKeown informed the committee that the Tax Commission will notify the Legislature if a bill is administratively difficult to implement. Commissioner

McKeown also reported that the Tax Commission has started testing changes to resolve the year 2000 problem.

    Chair Nielson said that due to the request by the Tax Commission to limit statutory changes, he would conduct a poll of the committee regarding their support of revisions to the state individual income tax instead of presenting legislation. The committee supported modifying the basis for calculating the individual income tax from "federal taxable income" to "adjusted gross income." Chair Nielson then discussed other possible revisions to the individual income tax including: (1) repealing the addition to federal taxable income of 25 percent of the federal personal exemption; (2) allowing full deductibility for federal income taxes; (3) expanding the personal retirement exemption to allow taxpayers age 65 or older to qualify for a portion of the exemption regardless of income; and (4) indexing brackets and tax rates for inflation. He noted that these issues will be discussed during the September meeting.

    b.    Utah State Tax Commission - Tom Williams, Tax Commission, reviewed the handout "Presentation to Revenue and Taxation Interim Committee." He presented several options for revising the individual income tax provisions , discussed the fiscal impact of each revision, and explained who would benefit from the change. He commented that low-income and middle- income taxpayers have been disadvantaged most by the existing tax brackets.

    c.    Committee Discussion and Action - Chair Short recommended that the committee members study the material provided by Mr. Williams before the next meeting.

    Rep. Valentine informed the committee that at a recent CPA conference, a consultant for the IRS reported that IRS systems will encounter problems associated with the year 2000. He noted that not all experts agree about the extent of these problems, and added that Val Oveson, who was recently appointed as the taxpayer advocate for the IRS, has been contacted for more information.

    Chair Nielson asked those from the Tax Commission to convey the committee's congratulations to Val Oveson on his appointment.

5.    Study on Residential Property Tax
    a.    Introduction - Senator Stephenson presented to the committee legislation he sponsored during the 1998 General Session to study the feasibility of establishing an acquisition date based valuation system for administering the property tax on homes. He explained that Utah's truth in taxation provisions have been very successful in limiting tax rate increases because they require taxing entities to publish notice in the newspaper of a proposed property tax increase and to inform taxpayers what actual property tax increases will be. Sen. Stephenson noted that there are about 600 taxing entities in Utah and this year only about 24 are planning to exceed the certified tax rate.

    While truth in taxation has been effective in controlling tax rates, Utah law requires property to be assessed for property tax purposes based on fair market value. Sen. Stephenson explained that his proposal arose from a concern that when a person buys a home, the person shouldn't have to live in fear because of the rising market value of the home. He concluded that a better way to administer the property tax is that once a taxpayer purchases a home, the home would retain its value at the purchase price for property tax purposes until ownership changes. The home's value would not stay current with fair market value, as is the case under current law.

    Sen. Stephenson said that in making this proposal he has two objectives: (1) maintaining the amount of revenue now flowing to local governments that depend on the property tax; and (2) preventing shifts in the property tax burden to other classes of property.

    Sen. Stephenson commented that under the current system, homeowners must deal with the financial uncertainty of getting hit with a big tax increase. When people buy a home, they calculate what they can afford as a total cost of home ownership, including property taxes. Under the current tax system, because of market fluctuations, home buyers never know what they can afford. Sen. Stephenson concluded that our current system punishes individual homeowners based on what happens in the market place.

    Rep. Buffmire asked if this proposal would require a change in the Utah Constitution. Sen. Stephenson replied that the constitution would need to be amended.

    b.    Jonathan Coupal, Howard Jarvis Taxpayer's Association, Sacramento, California, addressed the committee regarding the effects of California's Proposition 13, enacted in the late 1970s. Mr. Coupal said that prior to the enactment of Proposition 13, no state had an acquisition date based valuation system for property taxes. Mr. Coupal commented that almost everyone in California opposed Proposition 13, but 20 years of experience has shown that this is a good system.

    Mr. Coupal stated that for local governments, Proposition 13 has stabilized the revenue stream in recessionary times. It also provides tax certainty for homeowners. It takes the fear away that homeowners experience under a market value based system where homeowners do not know from year to year what their property taxes are going to be. When a home's value for property tax purposes is set at its acquisition value, there is more certainty.

    Mr. Coupal said that the reason society even has property taxes dates back to Roman and feudal times when land was one of the few things that could be taxed. Mr. Coupal then raised the question of whether a tax on wealth and not on an economic transaction even makes sense, but concluded that for historical and political reasons, we will probably always have a property tax.

    Mr. Coupal explained that property values may be increased for inflation at a maximum rate of 2 percent per year. He said that under California law, this is predicable, can be budgeted for, and improves the system. This system links property taxes with the notion of ability to pay because it links value with the voluntary acquisition of property, not on some other factor that the homeowner cannot control. A new home buyer in California can predict what the tax will be as long as the home buyer retains the property.

    Mr. Coupal acknowledged that some express concern that under this system new homeowners end up paying more in taxes. However, he said that this is not the case in California. New homeowners don't want to abandon Proposition 13 because of the certainty aspect in always knowing what their property taxes are going to be. As long as homeowners think that their taxes are reasonable, he concluded, they shouldn't care what their neighbors are paying. Under this system a homeowner's tax is based on what the homeowner was willing to pay at the time the home was purchased. New home buyers and those with fixed incomes are hurt the most with a market value based system vs. the acquisition date based valuation system.

    The other benefit to Proposition 13 is that it has stabilized the revenue stream for local governments that depend on the property tax. In a recession, the market value of homes may decline, but for tax purposes the tax value remains fairly constant. Mr. Coupal said that some county assessors do apply the 2 percent inflationary adjustment factor on declining values as well. In California, school board members grudgingly admit that the property tax is a more stable source of revenue, even when the value of real estate goes down.

    Rep. Short asked if California had to lay off several thousand teachers because of the effects of Proposition 13. Mr. Coupal replied that this is not correct and that school budgets are 40 to 50 percent higher than before Proposition 13 was enacted.

    Mr. Coupal said that property is reassessed upon a change in ownership or when the property is substantially modified. Sen. Stephenson indicated that he is uncertain whether to apply a new value after the renovation of a home. He commented that some would argue that it is not fair to tax improvements to property.

    Sen. Nielsen asked what would happen if a home loses value. Wouldn't the homeowner pay taxes on more than market value? Wouldn't a homeowner who wants to sell be hurt under this example? Mr. Coupal replied that in California some county assessors granted a county wide reduction in value when home values were declining. Also, if an individual taxpayer applied for a reduction in value, most of the time it would be granted.

    Rep. Walsh asked whether new construction on an existing home is valued. Mr. Coupal replied that a supplementary assessment is made. Taxes are assessed at fair market value only on the newly constructed portion of the home. The home as it existed before the new construction

would remain taxable on the basis of its acquisition value. After two years, the incremental value due to new construction becomes part of the homes taxable value.

    Rep. Harper asked how county assessors collect data to value homes and gather information including information about unrecorded sales and title contracts. He also wanted to know how assessors maintain equity in the system. Mr. Coupal replied that assessors must be vigilant and guard against manipulation, but because assessors do not have to value homes every year, they can focus on other aspects of the system. Rep. Harper stated that because some real estate contracts are not recorded, there would be nothing for an assessor to find.

    Rep. Pace asked how the revenue stream is stabilized and asked whether local governments would lose money. Mr. Coupal replied that local governments can still raise tax rates. Senator Stephenson's proposal does not affect tax rates and local governments can still raise rates to generate revenues.

    Sen. Stephenson emphasized that local governments would not lose revenue. New home buyers would pay to keep local budgets whole, while other homeowners would have fixed values, subject to an inflationary adjustment.

    Rep. Short stated that there are many questions regarding implementation of this proposal.

    b.    Public Comment -

    Blaine Willis, Director, Property Tax Division, Tax Commission, asked how unrecorded sales are tracked in California. Mr. Coupal said that it would not be in a homeowner's best interest to have a title that is not properly recorded.

    David Hahn, Weber County Assessor, told the committee that county assessors do not "sales chase" on individual homes. Also, in the past the Legislature has not supported laws that mandate the disclosure of sale prices for homes.

    c.    Committee Discussion and Action -

    Because a quorum was not present, Sen. Stephenson took a poll of the committee to whether they would support asking the Tax Review Commission ("TRC") to study this proposal and make a recommendation, including a resolution and a bill, back to this committee. He noted that any proposed constitutional amendment would be placed on the ballot in 2000 and therefore would not have to be considered until the 2000 General Session. The members present supported sending the request to the TRC.

6.    Adjournment

     MOTION: Rep. Walsh moved to adjourn the meeting at 11:50 a.m. The motion passed unanimously.