tax shelter

Democratic lawmakers have introduced a pair of tax bills that could result in some of the largest-ever tax breaks for small business and families hard hit by the pandemic, which would be paid for with some of the biggest-ever changes in tax breaks for high-income wage earners and big business. 

While the numbers on how much House Bill 1311 and House Bill 1312 will produce in revenue and expenditures are still in flux, estimates on the total impact have been as high as $400 million. 

The two bills put into legislative form promises made by Gov. Jared Polis earlier this year. 

When Polis gave his State of the State address on Feb. 17, the only time Republicans gave him a standing ovation was when he pledged to eliminate the business personal property tax for tens of thousands of small businesses.

That pledge came with a second one: doubling the Earned Income Tax Credit, and providing up to $600 in tax credits per child for up to 200,000 families through the Colorado Child Tax Credit.

Those pledges, as contained in House Bill 1311 and House Bill 1312, are sponsored by Reps. Mike Weissman, D-Aurora and Emily Sirota, D-Denver, and by Sens. Chris Hansen, D-Denver, and Dominick Moreno, D-Commerce City, both members of the Joint Budget Committee. Both bills are scheduled for review by the House Finance Committee on Friday. 

The bills have something for everyone: for Republicans and those who love TABOR refunds, it’s major changes to the business personal property tax, something they’ve been working toward for years. The closest they came was in 2017, when the Sustainability of Rural Colorado bill hiked the exemption to its current $18,000. The fiscal note for both HB 1311 and HB 1312 also estimate that the myriad of changes in tax policies will result in TABOR refunds from both bills: $18.5 million from HB 1311, to be refunded in the 2024 tax year; and a whopping $122 million, also to be refunded in the 2024 tax year.

For Democrats and families struggling to recover from the pandemic, there's the changes to the Earned Income Tax Credit and first-ever funding for the Colorado Child Tax Credit, both contained in HB 1311.

Families eligible for the child tax credit are those with children under the age of six. The credit is intended to help with child care and other pre-elementary school expenses. The Economic Policy Institute estimates that the average cost of infant care in Colorado is $1,277 per month. That could eat up as much as 21% of a median family income, according to the Colorado Fiscal Institute, one of the bill’s major backers.

The change to the Earned Income Tax Credit, which is for low-wage earners, is in two forms: lowering the age of those who can apply for it from 25 to 19; and increasing the credit from 15% to 20%. Under current law, Colorado’s Earned Income Tax Credit is available for those who claim the federal EITC; the Colorado credit is equal to 15% of the federal credit.

The Colorado Fiscal Institute says that 322,000 Colorado families currently qualify for the EITC and would see an increase in their credits. Another 202,000 families would qualify for the first time.

Hansen said the EITC expansion and the Child Tax Credit will support Colorado’s recovery from the pandemic recession. “We know it helps those most in need, and the data we’ve seen at JBC indicates we are in a decidedly ‘K-shaped’ recovery. The well-off are stable or improving, and low-income [families] have had a difficult time and struggling as we come out of it,” with high unemployment rates, lots of housing pressure and struggles to cover basic necessities. That’s part of the urgency to get the EITC and Child Tax Credit on the books.

How HB1311 is paid for: capping certain itemized deductions for taxpayers with adjusted gross incomes at $400,000 or more; eliminate the capital gains deduction; and eliminate what’s known as a “pass through” deduction of 20% of business income; created under the federal Tax Cuts and Jobs Act in 2017.

The changes to business taxes is something of a fresh look, Hansen said, in an effort to improve tax efficiency.

The major provision on HB 1312 is the change to the business personal property tax for small businesses. Under HB 1312, the business personal property tax would go away for small businesses with less than $50,000 in real property. The tax is assessed against any “movable” property a company uses to conduct business, such as furniture, computers, machinery, tools or phones. In Colorado and under current law, any personal property with a value of $18,000 or less is exempt from tax liability. The taxes, which are paid to counties, would be backfilled by the state under the bill.

“It’s wildly popular on both sides of the aisle,” according to Hansen. Both parties have long sought a pathway to change business personal property taxes, something that has a big impact on small businesses. What’s been the struggle, he explained, have been proposals, led by Republicans, that said “change it and we’ll pay for it later.” This has a clear “pay-for” mechanism, which he called fiscally responsible.

How it’s paid for: a laundry list of changes in taxes, including some for specific industries. “We started looking last summer at tax expenditures that are outdated, outlived their usefulness, or aren’t delivering for the taxpayer, and using those changes to pay for a substantial change in business personal property tax,” Hansen said.

And Hansen hinted that he’s looking at options to go even higher on the tax cap for business personal property. “Changing this has a real positive impact on job growth and recovery. We know small businesses are the engine of job creation, so if we can come up with something more efficient on a tax filing standpoint and less tax burden on business personal property tax, it will have a material boost to the recovery.”

Insurance companies with home or regional offices in Colorado would pay for the biggest tax changes under the bill. Under current law, those companies have been getting tax breaks, worth as much as $200 million per year, according to Hansen, as a jobs incentive.

Hansen said it hasn’t turned out that way, and the time has come to make some adjustments in what’s known as a premium tax credit. Under current law, the credit is equal to 1% of the premiums collected in Colorado. HB 1312 requires those companies to have at least 2.5% of their workforce in Colorado or lose the credit. The bill also eliminates a tax exemption tied to the sale of annuities.

“We took a hard look at it” under the idea of bang for the buck. What is the state getting for its tax expenditure, and the answer that came back was not encouraging, Hansen said. It had gone from $100 million to $200 million in expenditures without any discernible change in Colorado employment. So the criteria will be adjusted under HB 1312.

Hansen said they’re continuing to talk to the insurance companies and chambers of commerce to ensure this is the best way to structure. “We think this is a workable proposal,” and the goal is to maximize the benefit for taxpayers. “If we’re going to have tax [breaks], they have to have a clear tie to local employment.”

Another set of changes is in line for the oil and gas and coal industries, applied to tax deductions they currently take. Hansen said that coal companies have been getting breaks on severance taxes that have been on the state books since 1977. It hasn’t produced the benefit for taxpayers, which is to encourage investment and employment, Hansen said.

“I felt it was appropriate to make that change, and from a tax policy-incentivizing policy, it also is not a good fit, since we’re trying to transition away from coal.”

The proposal is a five-year phase-in, Hansen said. “It’s appropriate not to subsidize coal production,” especially at a 50% break.

The vendor fee, which is what the state pays to companies to compensate them for the work they have to do to collect state taxes, would be eliminated for companies with sales above $1 million per month.

Hansen said the bills don’t require voter approval tied to TABOR, since they make adjustments in existing tax expenditure statutes and don’t create new taxes. “We did our due diligence [with the Attorney General’s office] to make sure we’re not violating any of the constitutional restrictions. We feel we’re in very safe ground when it comes to that question.”

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