DEMOCRAT PARTY PROPOSES MASSIVE TAX INCREASE ON UTAH MANUFACTURERS

November 9, 2009 – The Utah Taxpayer

The Utah Democratic Party is proposing raising taxes on manufacturers by $135 million per year to address the state’s anticipated $850 million shortfall in FY2011, according to information posted at the party’s official blog. (http://utdems.blogspot.com/2009/11/tax-increase-on-food-is-wrong.html).

The Democrats propose eliminating sales tax exemptions for equipment and energy used in the manufacturing process. This proposal has several flaws.

Do businesses, especially manufacturers, get better tax treatment than individuals?
The Utah Democratic Party argues that businesses get favorable tax treatment compared to individuals. For example, manufacturers obtain sales tax exemptions for certain equipment purchases, but individuals do not. However, the Utah Democratic Party does not mention that individuals do not pay property taxes on non-vehicular personal property while businesses do.
According to the State Tax Commission, businesses paid $138 million in non-vehicular personal property taxes in 2008. Businesses pay property taxes on computers, printers, furnishings and other personal property. Individuals and households do not.

Individuals receive a 45% exemption on primary residential property while businesses receive no reduction in real property taxes. The 45% primary residential exemption shifts $298 million in property taxes, mainly to businesses, according to Utah Taxpayer Association calculations based on Tax Commission data for 2008.

Exempting business inputs from sales taxes is good tax policy.
Economists generally agree that business inputs should not be subject to sales taxes for numerous reasons.

First, taxing business inputs leads to tax pyramiding in which taxes are imposed at every stage of production. This conceals the true cost of government. Taxes should be imposed at the final stage of consumption so they are visible to taxpayers. Besides, most people realize that businesses don’t pay taxes, but customers, employees and shareholders do.

Second, unlike most retail and residential construction, manufacturers compete in national and international markets, and taxing manufacturing inputs makes Utah manufacturers less competitive. According to the CCH 2009 State Tax Handbook, nearly every state offers some type of sales tax reduction for manufacturing equipment. Increasing exports and production by local manufacturers is an important component in economic growth.

Third, the primary drivers of long-term economic growth are increases in productivity, which are driven in large part by investment in new equipment and software. Imposing taxes on business inputs reduces business investment.

Fourth, taxes generated from business inputs are highly volatile. During economic expansions, businesses invest heavily in equipment and during recessions businesses cut back significantly on capital purchases. By comparison, consumer expenditures are much more stable.

Eliminate RDA subsidies for retailers instead of raising taxes on manufacturers
According to the Tax Commission, Utah cities diverted $109 million in property taxes from local governments, about 50% from school districts, to developers in 2008. Most of this is used to subsidize retail activity. Subsidizing retail does not promote economic growth. Consumers do not increase consumption because their city decided to subsidize another retail venue. Besides, production and investment, not consumption, are the keys to long-term economic growth, particularly in a global economy where local production can be exported to other states and countries that brings wealth into the state.