Failed legislative proposal initiates dialogue on business equipment tax
During the early part of the 2005 legislative session, Utah lawmakers considered a proposal to eliminate the personal property tax on businesses.
Although the bill failed, the Utah Foundation indicates that proposal has initiated dialogue on the efficacy and efficiency of the personal property tax on business equipment.
According to the independent public policy organization's researchers, the personal property tax is a component of the overall property tax structure in Utah.
Personal property may generally be defined as any tangible property that is temporary or movable.
Locally assessed personal property is specific to business furniture and fixtures, business equipment, construction equipment and manufactured homes.
Personal property like vehicles, boats and trailers were not considered in the analysis.
In contrast, real property is defined as permanently fixed assets like land and buildings.
Real property taxes contribute 73.9 percent of the state's total property tax revenues.
The bulk of the Utah business property tax falls on machinery and equipment, explained the foundation's latest news brief.
However, there is an exemption for farming equipment.
The administration and compliance of business personal property taxes can be intensive, noted the independent researchers.
The companies are required to inform county assessors that the firms have started conducting business or have relocated to the local areas.
The businesses must fill out forms detailing all personal property, including information on the year of acquisition and cost of the equipment or machinery.
The county assessors calculate assessments based on valuation schedules developed by the Utah Tax Commission.
In subsequent years, businesses need to report newly acquired equipment and sales of previously assessed property.
Businesses have 30 days from the date personal property tax notices are mailed to appeal assessments to the county.
Since the mid-1950s, data show that the percentage of the total tax assessed value coming from personal property has declined in all states.
In Utah, the assessed value as a percentage of all property fell 2.2 percent from 1956 to 1991
Utah Foundation researchers determined that the decline continues in more significant fashion for business property tax values.
From 1992 to 2003, the assessed business personal property value fell from 7.7 percent to 6.2 percent.
From 1992 to 2003 real property values grew 213 percent, while personal property values have only grown 53 percentt.
One explanation for declining personal property values is the tax base may be narrowing. But from 1992 to 2003, Utah had no legislation to narrow the personal property tax base.
Also a comparison of personal property value growth with personal income growth - an indicator for economic expansion - does not provide conclusive evidence that the tax base is eroding.
Another concern that business personal property taxes raises is that of horizontal equity. Businesses with similar income levels may be paying significantly different amounts of personal property tax. If the assumption that manufacturing businesses utilize more personal property than service businesses, then a manufacturing business will end up paying more taxes than a service business that makes a similar profit. However, property taxes, in principle, are supposed to be a tax on wealth, and businesses that hold more assets may have more value than businesses with fewer assets, even if their profits are similar.
Currently, 39 states and the District of Columbia continue to tax personal property. As of 1992, according to John Mikesell, 16 states continue to tax business inventory and eight continue to tax intangible personal property. Utah taxes neither business inventory nor intangible property. Intangible personal property includes stocks, bonds, and franchises. Most states have eliminated taxes on intangible personal property because the tax is very difficult to administer. According to Cornia and Wheeler, most states have eliminated inventory taxes because they can cause competitive disadvantages for businesses that often ship goods to other states.
While the personal property tax on businesses only constitutes 6.3% of total property tax revenues, eliminating the tax would mean a loss of over $100 million in revenue for local governments and schools in Utah. However, if the personal property tax base continues to erode and real property values continue to rise, the personal property tax will play a smaller and smaller role in financing government and schools. The factors along with questions of administration, compliance and equity must be considered when discussing the business personal property tax in Utah, concluded the foundation researchers.