committee a monthly revenue summary for the first quarter of FY 1998-99. He explained that revenues are being collected at about projected levels. Mr. Macdonald also reviewed information regarding the economic assumptions that he and other revenue forecasters will be using as they prepare revenue estimates for the 1999 General Session. He noted that economic growth is slowing both nationally and in Utah. The state is currently experiencing slower sales growth. Residential and nonresidential construction are also slowing which will lead to declining employment growth. However, Mr. Macdonald expects Utah's average annual pay to remain strong and the unemployment rate to remain low.

3.    Individual Income Tax Credit for Sales Tax Paid on Food _
    a.    Review of Proposed Legislation _ Chair Short distributed to the committee draft legislation titled "Income Tax Credit For Sales And Use Taxes Paid on Food." Chair Short explained that this legislation provides a refundable credit equal to $20 multiplied by the number of federal personal exemptions a taxpayer is allowed to claim. The purpose of this credit is to assist taxpayers in meeting the burden of paying sales and use taxes levied on food. Chair Short explained that in many previous sessions legislators have introduced proposals to eliminate the sales tax on food. However, because of the large loss of revenue associated with these proposals, they have never been enacted. Chair Short said that this bill is a first step in alleviating the burden of the sales tax on food.

    The committee discussed the legislation and agreed that this legislation is a good start to gradually reduce the sales tax on food. Sen. Stephenson said that in the future the Legislature should work to raise the amount of the credit. Chair Nielson added that if the Legislature wants a revenue neutral proposal, it would have to raise the rates on other sales and uses, which may be unpopular. Rep. Buffmire spoke in favor of the bill, but expressed concerns that some poor people will not know that they need to file an income tax return to get this refundable credit.

    Mr. Rod Marrelli, Executive Director, Tax Commission, estimated computer programing costs to implement this legislation at about $36,000.

     MOTION: Sen. Stephenson moved that: (1) the legislation be adopted as a committee bill with the committee chairs to designate a sponsor; and (2) committee members belonging to the house of origin be given an option to serve as co-sponsors. Rep. Valentine, Rep. Pace, and Rep. Harper spoke in favor of the motion. Sen. Mantes said that simply providing a small tax credit does not go far enough. He said the tax on food should be completely removed, and the sales tax rate on nonfood items should be raised to replace lost revenue.

    Rep. Walsh asked whether the $20 credit would be subject to change during the legislative process. Rep. Valentine said that the Legislature should start with $20. This may need to be adjusted later.
    
    The motion passed unanimously. Sen. Blackham and Rep. Jones were absent for the vote.
4.    Sales Tax Exemption for Expanding Manufacturing Operations and Replacement Parts Used in Manufacturing _ Mr. Asplund reviewed with the committee the provisions of H.J.R. 32, "Sales and Use Tax Policy," 1990 General Session. Mr. Asplund said that this resolution states the sales tax policy for the Legislature, as recommended by the Tax Recodification Commission . H.J.R. 32 includes the following positions regarding the sales tax:
    (1) the sales tax should be broadly based;
    (2) the sales tax base should reflect the overall economy;
    (3) sales tax exemptions and exclusions should be carefully scrutinized;
    (4) the sales tax base should seek to mitigate regressive impacts;
    (5) the sales and use tax should be administratively simple;
    (6) the sales and use tax laws should promote compliance; and
    (7) the sales and use tax should not be earmarked.

    Mr. Asplund reviewed several previous studies on the manufacturing sales and use tax exemption. The first study was conducted in 1984, just prior to the exemption's enactment in 1985. Other reports followed in 1991 and 1994 recommending the continuation of the exemption. In 1996, the Tax Commission released a study of the manufacturing exemption recommending that the exemption be continued. However, this report raised issues regarding the difficulty of administering the exemption and raised questions about distinctions between replacement parts and parts used in new and expanding operations. The Legislature subsequently passed legislation expanding the exemption to include replacement parts, but later narrowed the exemption during a special session.

    Mr. Asplund explained that at its May meeting, the Revenue and Taxation Interim Committee passed a motion to hire a consultant to conduct a study of the manufacturing sales and use tax exemption. He said that Mr. Hal Hovey, president of State Policy Research, Inc., has been selected to conduct this study. Mr. Asplund distributed a copy of Mr. Hovey's resume, address, and phone number. He explained that Mr. Hovey requested comments and information from anyone wishing to assist him with this review process.

    The committee discussed the study process. Sen. Stephenson advocated that the committee schedule time to hear from people affected by this sales tax exemption. He requested that staff prepare legislation to restore the exemption for normal operating replacements to 100 percent.

    Mr. Larry Bunkall, President, Utah Manufacturers Association, distributed to the committee the last page of the enrolled copy of S.B. 185. He expressed concern that the consultant has been hired at a late date and that there is little time for those affected by the exemption to respond to the report. Chair Nielson responded that the committee will hear public comment and will have a copy of the consultant's draft report before the November 18 meeting.

    The committee decided to hold an additional meeting on November 24, 1998, at 2:00 p.m., instead of the meeting scheduled for November 4, 1998.

5.    Research Tax Credit _
    Ms. Rockwell distributed draft legislation titled "Research Tax Credits Modifications." She explained that this legislation allows a taxpayer an irrevocable election to be treated as a start-up company for purposes of calculating the base amount used in determining the research tax credit. The legislation also provides that a taxpayer qualifying for a credit for a purchase of machinery, equipment, or both may not claim the credit or carry the credit forward if the machinery, equipment, or both, is primarily used to conduct qualified research in the state for a time period that is less than 12 consecutive months.

    Sen. Blackham questioned the 12 month time frame. Rep. Valentine said that because the credits contain carry forward provisions, if the Legislature were to go beyond a 12 month time frame, the legislation would have to include recapture provisions and continual auditing provisions. Rep. Valentine also commented that high tech industries need to use the most up-to-date products in research programs. For research industries, a use period based on the life of the equipment may be too long.

    Ms. Ruth Ann Hamilton, Salt Lake Area Chamber of Commerce, spoke in support of the bill.
    
     MOTION: Chair Nielson moved to adopt the draft legislation "Research Tax Credits Modifications " as a committee bill. The motion passed unanimously. Sen. Dmitrich and Reps. Buffmire, Curtis, Garn, and Harper were absent for the vote.

6.    State Earned Income Tax Credit _
    Ms. Gina Cornia, Utah Issues Information Program, distributed to the committee a document explaining the Utah Based Earned Income Tax Program. Ms. Cornia said that despite Utah's booming economy there are still families who live in poverty. She explained that under federal tax law, certain low income and moderate income families with children receive a tax credit for earned income. This earned income credit primarily benefits families with earned incomes between $10,000 and $15,000. The credit phases out completely at incomes around $30,000. Other states with similar provisions include Kansas, Maryland, Massachusetts, Minnesota, New York, Vermont, and Wisconsin.

    Ms. Cornia proposed that Utah adopt a refundable credit that is based on 20 percent of the federal earned income tax credit rate for all households. In addition, she proposed that appropriate state agencies would alert those who may be eligible for the credit.

7.     Update on Utah State Tax Commission Management Information Systems, UTAX, and "Year 2000" Issues _
    Mr. Marrelli, Tax Commission, distributed to the committee information on how the Tax Commission computes the costs of implementing various changes to the state tax law enacted by the Legislature. Mr. Marelli explained that any change to state tax law currently requires changes to three computer systems at the Tax Commission.

    Mr. Marrelli told the committee that the Tax Commission is making progress in meeting its year 2000 compliance goals. He also distributed information updating the committee on the implementation of the new tax computer system. This system is designed to improve the collection and administration of taxes and motor vehicle administration at the Tax Commission. The cost for the new system is approximately $40 million, and the commission expects an increase in revenue resulting from an improved collection process.

8.    Apportionment of Airline Property Tax Value _
    a.    Mr. Kelly Wright, Office of the Attorney General, distributed to the committee an overview of the airline apportionment issue. He said that under current law, airlines are assessed as a unit with value allocated across states and apportioned to various taxing entities within the state. In June 1994, Salt Lake City and the Salt Lake City School District petitioned the Tax Commission to change its method of apportioning airline value, which was based on straight line flyover miles. The city and school district proposed an administrative rule basing apportionment on physical situs. This would have placed over 97 percent of the value of airlines within Salt Lake City and the Salt Lake City School District. The Tax Commission rejected the proposed rule but adopted a rule consistent with prior custom and practice. The city and school district then challenged the method of apportionment in district court and eventually before the Supreme Court. The matter is currently pending before the Supreme Court.

    Mr. Wright discussed the Tax Commission's position on the legality of its airline apportionment methodology. He said that the apportionment methodology for airlines is patterned after that used by other common carriers, such as trucks and railcars, and that there is a rational basis for this methodology under unitary valuation principles. If the Supreme Court ruled in favor of the city and school district there may be a potential tax shift for smaller counties and school districts of 10 -12 percent.

    b.    Mr. Steve Allred, Deputy City Attorney, Salt Lake City, and Mr. Steve Hale, private attorney representing the Salt Lake City School District, appeared before the committee. Mr. Allred said that in allocating value between states, 85 percent of an airplane's value is apportioned according to land time and 15 percent is apportioned according to tonnage. However, this methodology is abandoned when the Tax Commission apportions value between taxing entities within the state. Mr. Allred said that 90 percent of the taxable value for airlines is at the Salt Lake City International Airport. However, currently only 20 percent of the value is apportioned to the city and the school district. Mr. Allred presented arguments against the Tax Commission's methodology.
9.    Other Business _ No other business was discussed.

10.    Adjournment -

    MOTION: Rep. Seitz moved to adjourn the meeting at 12:10 p.m. The motion passed unanimously.