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Utah loses $650 million each year due to sales tax exemptions

Published July 3, 2017 5:43 pm

Revenue lost every year prompts Utah lawmakers to begin review of 91 exemptions, from hay to jet fuel to ski resort equipment.
This is an archived article that was published on sltrib.com in 2017, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

In 1996, Utah offered 48 exemptions to its sales tax. Twenty years later, that has mushroomed to 91, a near doubling in two decades.

New estimates say all those tax breaks cost at least $650 million a year in lost revenue.

The Legislature's Revenue and Taxation Interim Committee is beginning to study the array of exemptions — from hay to prescription drugs to collectible coins to ski-resort equipment to purchases by churches — and whether they still are justified or should be eliminated. It's part of a wider look at overall tax reform.



Rep. Tim Quinn, R-Heber City, did some quick figuring and said that "16 percent to 17 percent of all goods sold in the state" are escaping sales tax. That means losing $1 of every $6 possible from the tax.

Gov. Gary Herbert called for such a study during his State of the State address this year, partly as a response to the Our Schools Now initiative seeking to put on the ballot a $750 million tax hike for education.

Herbert argues that such tax increases could hurt the state's growing economy. He suggested other ways to raise money for education — including possibly removing some of the snowballing tax exemptions and better collecting taxes owed but not paid for online sales.

But even as the legislative review begins, lawmakers this year approved three more sales tax exemptions that take effect in coming months: one valued at $3 million to incentivize oil refineries to upgrade to handle cleaner-burning fuels, one for car washes worth $12,000 and another for machinery worth $14 million.

A similar review of tax exemptions during then-Gov. Mike Leavitt's administration succeeded in removing only a handful of such tax breaks against heavy pressure from affected industries, and several of those were later restored.

As the committee starts its work, legislative staffers prepared a report listing all current sales tax exemptions — and how much they may cost. But legislative researcher Leif Elder warned that the estimates are simply "guesstimates. They are the best guess based on the best information the folks at the Tax Commission have."

In fact, for 26 exemptions, researchers have no cost estimates at all because of poor or nonexistent data collection.

Still, the extensive list shows some interesting exemptions. (A full list is online at sltrib.com.)

They include:

• Hay (estimated to cost $9.2 million a year).

• Prescription drugs ($68.1 million).

• Nonreturnable packaging ($17 million).

• Pollution-control equipment ($7.7 million).

• Food stamp and Women, Infants and Children (WIC) purchases ($5.9 million).

• Newspapers ($2.4 million).

• Admission to college sports events ($2.3 million).

• Molten magnesium ($600,000).

• Ski resort equipment ($449,000).

• Electricity for ski lifts ($151,000).

Others include:

• All purchases by the Heber Valley Railroad ($6,000 a year).

• Semiconductor fabricating materials ($7 million).

• Food sold by airlines for in-flight consumption ($5,000).

• Fuel for railroad locomotives ($1.3 million a year).

• Car parts installed by "an authorized carrier" ($1.5 million).

• Sale of crops harvested by the producer ($2.3 million).

• Construction materials for Salt Lake City International Airport (no estimate).

Three exemptions date back to 1933, when the state sales tax began. They include purchases by churches ($5.9 million a year); purchases by state and local governments ($46 million); and in-state telecommunications services ($9 million).

The exemption with the biggest estimated cost — $182 million a year — is for "aviation, motor and special fuels," such as jet fuel, gasoline and diesel.

"But they are subject to other taxes," noted Rep. Steve Eliason, R-Sandy and House chairman of the committee. Gasoline and diesel currently are subject to a 29 cent-a-gallon tax, and jet fuel pays 2.5 cents a gallon.

Rep. Marie Poulson, D-Cottonwood Heights, said many exemptions on the list appear to be justified, but why many others are there seems to be a mystery. "I'm frustrated when I look at this."

Eliason gave an example of a reason for one exemption that he says may no longer be valid — on vending machine food sold for less than $1 (costing $2.1 million a year in lost revenue).

In research, he said, he found "that back in the day, you had a sales tax token to use and they were not in small denominations — so they just exempted it."

Such tokens have long since disappeared and continuing that exemption may not be fair now, he said, considering many stores sell the same items and must charge sales tax. "They have to use labor to actually sell it, while with a vending machine there is no labor."

The vending machine exemption was one that was discarded during the Leavitt review and later restored.

Eliason said the committee may want to focus on exemptions where it seems something "doesn't fit" and "a decent sum is involved."

Elder cautioned that legislative staffers have not yet conducted research on whether some exemptions may have been designed successfully to change behavior — such as reducing pollution — or to bring in new business.

"Maybe a business came because of a particular exemption," he said.

Elder also noted that, at one time, the Utah Tax Review Commission reviewed exemptions on a five- to seven-year cycle. "That requirement, I believe, was removed in 2006 or 2007, so that no longer takes place." —

Top sales-tax exemptions (by estimated value)

$182 million • Aviation, motor, special fuels

$122 million • Machinery, equipment, parts

$68 million • Prescription drugs, syringes, supplies

$46 million • State and local government purchases

$43 million • Farming operations

$31 million • Products purchased for resale

$27 million • Natural gas, electricity, power for industrial use

$17 million • Nonreturnable containers, labels, casings

$9.7 million • Isolated and occasional sales

$9.2 million • Hay

 

 

 

 

 

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