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MINUTES OF THE

REVENUE AND TAXATION INTERIM COMMITTEE

Wednesday, November 18, 1998 -- 9:00 a.m. -- Room 223 State Capitol


Members Present:    
    Sen. Howard C. Nielson, Senate Chair
    Rep. Raymond W. Short, House Chair     Sen. Leonard M. Blackham
    Sen. Mike Dmitrich         Sen. E. George Mantes
    Sen. L. Steven Poulton
    Sen. Howard A. Stephenson
    Rep. Judy A. Buffmire
    Rep. Greg J. Curtis
    Rep. Kevin S. Garn
    Rep. James R. Gowans
    Rep. Wayne A. Harper
    Rep. David M. Jones
    Rep. Loraine T. Pace
    Rep. Jack A. Seitz     Rep. John L. Valentine
    Rep. Richard L. Walsh
    
    

    Members Absent:
        Rep. Patricia B. Larson

    Staff Present:
        Mr. O. William Asplund,
         Assistant Director
        Mr. Bryant R. Howe,
         Research Analyst
        Ms. Rebecca L. Rockwell,
         Associate General Counsel
        Ms. L. Kaye Clark,
         Secretary



     Note:    A list of others present and a copy of materials distributed in the meeting are on file in the Office of Legislative Research and General Counsel.

1.     Committee Business_     -- Chair Nielson called the meeting to order at 9:00 a.m.
        
    a.    Approval of minutes of October 21, 1998 meeting

MOTION: Rep. Seitz moved to approve the minutes of the October 21, 1998 meeting . The motion passed unanimously. Sen. Blackham and Reps. Short, Curtis, Harper, Jones, and Valentine were absent for the vote.

2.    Report of the Airport Funding Task Force _
    a.    Task Force Report _ Senator Lyle Hillyard, Senate Chair, explained that because Utah's property tax on airplanes is higher than in surrounding states, many airplanes are currently stationed out of state. Therefore, Utah is losing property taxes, and is foregoing revenues from fuel purchases and employment. Sen. Hillyard told the committee that Utah has a serious problem with the maintenance of its airports and discussed the impact of raising airplane fuel prices on the airlines. Sen. Hillyard reviewed a handout titled "Aircraft Assessment," listing the number of aircraft, the total value of the aircraft, and the total property taxes collected on the aircraft by county. Bob Barrett, Director, Aeronautical Operations, discussed the need for an increase in state funding for airports.
    Sen. Hillyard reported that a subgroup of the Airport Funding Task Force met to develop a proposal to generate money for airports. The proposal includes: (1) raising the aviation fuel tax from $.04 to $.08 for all aircraft except common carriers; and (2) repealing the property tax and inposing a flat fee on locally assessed airplanes. He said the task force also discussed using some General Fund monies to support rural airports. Sen. Hillyard explained that he plans to sponsor legislation during the 1999 General Session to provide funding for airports.

    b.    Committee Discussion
    The committee discussed the flat fee option, incentives to relocate airplanes to Utah from other states, and the need for supporting rural airports.

3.    Sales and Use Tax Exemption for Purchases of Eyeglasses and Hearing Aids _
    a.     Jerry Crouch, Capital City Task Force, American Association of Retired Persons (AARP), distributed "Proposal to Remove Sales Tax on Hearing Aids and Glasses," listing the revenue loss for removing the sales and use tax on hearing aids and eye glasses.

    b.    Committee Discussion
    Chair Nielson asked about including dentures in the exemption. Ms. Rockwell reviewed the current criteria that home medical equipment and supplies must meet to be exempt from the sales and use tax, and noted that the current statute specifically excludes eyeglasses and hearing aids from the exemption.

4.    Tax Incentives to Purchase Long Term Care Insurance _
    a.    Review of Proposed Legislation - Kendall Surfass, Long Term Care Technical Advisory Group to the Health Policy Commission, explained that under federal law, long term care out-of-pocket expenses and premiums for long term care insurance are deductible as medical expenses on a taxpayer's income tax return.

    Sen. Nielson explained that draft legislation "Long Term Care Amendments," creates an income tax deduction for long term care insurance premiums and out-of-pocket long term care expenses, and allows the use of medical savings accounts for long term care insurance and expenses. He commented that the proposal would result in a revenue loss of $35 million, but argued that providing an incentive for individuals to provide for their long term care needs will cost the state less in the long run.

    b.    Public Comment
    Andrea Wilko, Office of the Legislative Fiscal Analyst, stated that 80 percent of the revenue loss comes from the out-of- pocket expenses provisions in the legislation. Commissioner Hendrickson, Utah State Tax Commission ("Tax Commission") said the Tax Commission is concerned about double deductibility.

    c.    Committee Discussion and Action
    The committee discussed changes to the bill to lower the revenue loss and resolve other concerns. Sen. Nielson urged the committee to support the bill.

     MOTION: Rep. Valentine moved that the sponsor delete the out-of-pocket provisions in the legislation and to add language to the legislation providing that premiums are only deductible to the extent they are not deducted on the taxpayer's federal income tax return. Sen. Nielson supported the motion. The motion passed unanimously. Sen. Blackham and Rep. Curtis were absent for the vote. Sen. Nielson said a new draft would be prepared for the next committee meeting.

5.    Review of Sales and Use Tax Exemption for Purchases or Lease of Machinery, Equipment, and Normal Operating Replacements (Maufacturing Equipment Exemption) _
    a.    Report on the Sales and Use Tax Exemption _ Mr. Asplund introduced Mr. Hal Hovey, President, State Policy Research, Inc., who reviewed the draft report titled "Sales Tax Exemptions for Machinery and Equipment Used in Utah Manufacturing." Mr. Hovey noted that after he considers comments and additional materials, the he will convert the draft into a final report. The final report is scheduled for completion on or before January 11, 1999. Mr. Hovey requested that any comments regarding the draft be given to Mr. Asplund by November 30, 1998.

    Mr. Hovey reported that "experts in tax policy view the sales tax as appropriately applied only to final consumption of end products. They generally do not believe that purchases by manufacturers for use in production should be taxed." He said that "as a matter of tax policy, if Utah officials wish to raise additional revenue, there are better alternatives than taxing sales of machinery and equipment. Besides offering better tax policy, those alternatives would have less adverse impact on economic development than ending the exemption." Mr. Hovey then reviewed the exemption as an economic development policy. He stated that while the exemption contributes to achieving development, so do other uses of scare resources such as other business tax exemptions and credits, and spending on education. Mr. Hovey concluded that "Utah should continue to exempt machinery and equipment used in manufacturing, whether for expansion or continuing operations, from its sales tax."

b.    Committee Discussion
    
    Mr. Hovey responded to questions from the committee including questions on economic development at the state level, manufacturing competition among states and internationally, the VAT tax, and "corporate welfare." Rep. Valentine discussed competition among businesses for available resources. Rep. Valentine asked about a national tax policy for electronic sales. Mr.

Hovey responded that there must be jurisdiction to tax that is independent of the mechanism of sale, and said that the solution is federal policy.

    Sen. Stephenson distributed draft legislation "Manufacturing Sales and Use Tax Exemption," which modifies the manufacturing exemption to retain a 100 percent exemption for normal operating replacements.

    Mr. Don Lewon, Utah Recycler's Association, commented that small businesses also need the manufacturing exemption. Mr. David Bird, Parsons Behle & Latimer, asked about the implications of making distinctions between existing and new businesses. Mr. Hovey said economically there is no difference. Sen. Dmitrich asked if the exemption should apply to the mining industry. Mr. Hovey responded that the exemption should pertain to all businesses that are in competition. Mr. Larry Bunkall, Utah Manufacturers Association, distributed handouts "Prosperity Tomorrow" and "Business Coalition in Support of Fully Restoring the Sales & Use Tax Exemption for the Purchase of Normal Operating Replacements in Manufacturing, Utah Code 59-12-104(15b)[sic]," and urged the Legislature to support the legislation to fully restore the sales tax exemption. Mr. Asplund distributed a letter from The Boeing Company urging a restoration of the exemption.

     MOTION: Sen. Dmitrich moved to pass draft legislation "Manufacturing Sales And Use Tax Exemption" as a committee bill. The motion passed unanimously. Reps. Garn and Jones were absent for the vote.
            
6.    Other Business _
    Chair Nielson announced that the next meeting of the Revenue and Taxation Interim Committee will be held on Tuesday, November 24, 1998, at 2:00 p.m.

7.    Adjournment --

    Chair Nielson adjourned the meeting at 11:20 a.m.

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