Frustrated that Utah cities seem to fall all over themselves to attract low-wage retail businesses because of the potential sales-tax riches, state lawmakers may be moving toward a new way to divvy up those revenues to local government.
A draft proposal to start that reform on a few million dollars of the hundreds of millions of dollars streaming to local governments each year won unanimous endorsement Wednesday in the legislative committee overseeing tax policy in the state.
The plan would create a new formula for doling out a portion of local sales taxes if Congress authorizes state collection of taxes on out-of-state Internet purchases. The proposal would allocate a portion of the local money based 50 percent on population and 25 percent each on point of sale and 25 percent on property value. That’s a change from the current formula that awards the money 50 percent based on population and 50 percent point of sale.
Rep. Jim Nielson, R-Bountiful, who has worked on the bill for several years, said the problem with the current system came to his attention when doing some city planning work in Idaho, where there is no sales-tax distribution based on point of sale.
In Utah, “communities have incentives for retail. There’s no incentive related to quality of life, economic development, jobs,” Nielson said. “It does impact zoning, there’s no question. … Look at the shapes of the [city] borders — retail is cherry-picked in annexation and zoning decisions are highly driven by retail.”
Paul Clayson, executive chairman of HZO, a Draper-based high-tech company, said when his business was trying to find a new bigger location in the Salt Lake Valley two years ago, he found a suitable site and contacted the city about available incentives.
“The first question was, ‘Do you have any retail sales?’ ” Clayson said. When he said his wasn’t a retail company, “the response was, ‘Well, then there’s nothing we can do for you, there are no incentives we can give you but we’d sure love to have you here.’ No CEO or chairman or senior management of a growing technology company wants to hear that — that retail is highly favored over any kind of technology business.”
Pointing to the difference in wages between retail and high-tech — Clayson said his company pays an average $73,500 in wages while many retail jobs are minimum wage or close to it — “it does not make sense to those of us in the technology community.”
Sen. Howard Stephenson, R-Draper, and head of the Utah Taxpayers Association, endorsed Nielson’s bill as a way to begin escaping this “mess of searching after and worshipping retail.”
The use of tax increment financing to subsidize new developments “has been basically used as a tool for cities to war with each other over the location of retail activity that would otherwise occur in the general community without any subsidy whatsoever. So cities have warred over the location of malls, of auto dealerships because of this 50 percent based on point of sale,” Stephenson said. “It’s time we as a Legislature step forward and end this craziness.”
Nielson explained that his proposal cuts in half the portion of sales tax awarded based on point of sale and shifts that to property value because of the high correlation between property values in an area and the number of high-paying jobs available to residents. To avoid widening already big disparities between, say, a Park City and a West Valley City, the proposal would impose a cap on the award of sales tax revenue based on property value.
His theory is that the change in incentives will encourage cities to shift focus and adopt more forward-looking policies. “High-value employment will increase property value far more than retail,” Nielson said. “It will make a difference in the way cities and towns respond to incentives.… This is something that will bring more manufacturing jobs.… It’s something that I believe progressives and conservatives alike should care about.”