Sens. Chris Hansen and Dominick Moreno

Democratic Sens. Chris Hansen of Denver and Dominick Moreno of Commerce City explain an amendment to House Bill 1402, the Tax Fairness Act, June 13, 2020. 

Senate Democrats on Saturday night announced a deal on a controversial tax bill intended to boost K-12 education funding but that was roundly opposed by business groups, and the bill won preliminary approval.

It goes to a final vote on Monday, and if passed, will go back to the House for a decision on the amendments.

The sponsors of House Bill 1420, Sens. Chris Hansen of Denver and Dominick Moreno of Commerce City, announced the deal, ending more than two days of intense negotiations with the bill's sponsors, business and industry groups, Gov. Jared Polis, the Colorado Fiscal Institute and education advocates.

Gov. Jared Polis threatened a veto on Thursday, stating he did not "see a route for the tax bill to become law." Polis has long advocated ending tax exemptions, but he also has said he wants to see an income tax rate cut. The latter was not part of the deal on Saturday. 

As introduced, HB1420, called the "Tax Fairness Act," would change the state’s tax laws.

  • Net operating losses for "C" corporation businesses would be capped at $400,000 annually.
  • A deduction for "qualified net capital gains" would be repealed, effective at the end of the 2020 tax year.
  • A tax exemption for the sale or use of electricity, coal, gas, fuel oil, steam, coke or nuclear fuel used for industrial purposes would be repealed, effective August 1. The bill allows for a sales and use tax refund of up to $1,000, and provides exemptions for agriculture, diesel fuel purchases for off-road use, and fuel used to generate electricity. The bill states that repealing the exemption does not affect the sales and use tax base for counties, cities and special districts.
  • Repeals a provision for insurance companies with regional home offices in Colorado that cut the tax on insurance premiums from 2% to 1%. On March 1, 2021, that would go up to 2%, the provision governing all other insurance companies.
  • Institutes a tax on insurance policies issued in connection with an annuity plan.
  • The measure also partially repeals a state small-business deduction allowed under the 2017 federal tax reform law, although it continues to allow the exemption for joint filers with adjusted gross incomes under $150,000.

The deal struck Saturday watered the bill down substantially.

Among the most substantial changes, the amendment adopted by the Senate on Saturday night took out the bill's sections modifying  tax law on "qualified net capital gains," the section repealing the exemption on energy and the section applying to insurance companies. 

The amendment also removed the bill's original cap on net operating losses for "C" corporation businesses. The section on small business deductions also changed, hiking the income limits for joint filers from $150,000 to $1 million. 

Whatever dollars generated from the bill as amended — about $82 million — will go immediately to the State Education Fund, Hansen said. The bill as introduced estimated 2021-22 revenue of $248 million, with $150 million going to the State Education Fund.

The bill also hikes the state's earned income tax credit from 10% of the federal credit claimed on income tax returns to 15%. 

"This will make our tax code more progressive," Moreno explained. But the General Assembly needs to have a conversation on the state's tax code and tax exemptions. "That's a conversation we cannot have in the remaining time" left to the General Assembly, he said. 

Republicans said little during the second reading, instead huddling over copies of the amendment.

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