After years of groundwork, 2020 was supposed to be the time for Colorado tax reform.
Democratic Gov. Jared Polis kicked off his second year in office by doubling down on his pledge to eliminate special interest tax breaks to fund broad tax cuts. A legislative study group came into the session with an agenda of its own. And the state auditor’s office in January released a damning evaluation of one of the state’s most expansive — and controversial — tax breaks, the Colorado enterprise zone program.
Two months later, the tax overhaul effort is suddenly in limbo, like most everything else. The coronavirus has uprooted the legislative session, halting deliberations indefinitely. And even if lawmakers return to their duties, it’s not clear that a tax code rewrite will be a priority when the legislature reboots.
“Right now, nobody knows what’s going to happen,” said Rep. Adrienne Benavidez, the Commerce City Democrat who chaired the interim study committee.
Even with the legislature on hiatus, the task force Polis announced in his State of the State address in January is pressing forward with its work, albeit remotely.
Polis has said he hopes to eliminate a number of “special interest” tax breaks, and use the savings to reduce the state income tax rate for individuals and businesses. Conor Cahill, a Polis spokesman, said the governor’s tax study group plans to spend several months reviewing Colorado’s tax structure, but that timeline “may get extended” given the circumstances.
While the governor’s effort is aimed at tax cuts, the legislature for years has been trying to get a handle on the $6.6 billion it awards each year in tax breaks for another reason: the financial pressure it puts on the state budget.
So while the coronavirus has created plenty of reasons to set the matter aside, it could also generate new budgetary pressure to act. The last time the economy went into a recession also was the last time the legislature eliminated a large number of tax breaks, under Democratic Gov. Bill Ritter. The measures, derided by opponents as “the dirty dozen,” raised more than $100 million annually by charging sales taxes on more types of goods.
At the legislature’s behest, the state auditor’s office is two years into a five-year review of all 208 tax breaks on the books. And in December, an legislative interim committee issued a final report that recommended six bills for consideration, including one that would create a permanent oversight committee to keep tabs on tax breaks old and new.
With social distancing and cost savings now paramount, Benavidez said it’s not clear that creating a new committee will be feasible in the immediate future. The oversight committee was expected to cost the state around $100,000 annually for staffing needs.
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Yet the cost of doing nothing may be even higher. Separate from the study committee’s efforts, lawmakers this session have introduced bills to end a $155 million annual deduction for certain business expenses and a $5.7 million tax break for coal extraction, while lawmakers on both sides of the aisle are scrutinizing a $308 million tax break for the oil and gas industry.
Then there’s the enterprise zone program.
Originally designed to incentivize business investment in struggling areas, enterprise zones now cover 75% of the state’s land and led to more than $223 million in tax credits from 2014 to 2018, many of them to large corporations like Walmart, Verizon and fossil fuel giant Suncor Energy.
A Colorado Sun analysis of the program in 2019 found little evidence that these tax breaks were producing economic activity that would not have occurred anyway, without taxpayer assistance.
The auditor’s evaluation released in January 2020 confirmed many of the Sun’s findings, concluding that “much of this business activity would have likely occurred regardless of the tax expenditures.” Among businesses receiving job creation credits, 59% surveyed by the auditor’s office said “they would have created the same number of jobs” without the tax credit.
One finding sure to irk the Democratic majority: The oil and gas industry received 15% of the tax credits from 2014 to 2018, but created just 3% of net new jobs, according to the auditor’s analysis. Utilities claimed 12% of the credits and lost jobs during the period.
Sen. Dominick Moreno, a Democratic budget writer who served on the interim committee, said that while it’s “a fairly popular program,” he believes changes are warranted. “Virtually the entire state has become an enterprise zone,” he said.
Cahill, the governor’s spokesman, said the review “identified some interesting discussion points and conclusions,” but stopped short of saying what specific changes the administration would support. “Program efficacy is the driving motivation behind all state incentive programs,” he wrote in an email to The Sun.
Eliminating the zones — or any other tax break — isn’t as simple at it sounds. The Taxpayer’s Bill of Rights, known as TABOR, requires voter approval for any new taxes, and the courts have suggested this could apply to getting rid of tax breaks as well. It’s legally murky territory, and Moreno said he believes the state Supreme Court would reject a legislative attempt to eliminate tax breaks if the primary purpose was to raise tax revenue.
In a 2018 decision, the Supreme Court ruled that the Regional Transportation District could eliminate some sales tax exemptions because they generated a minor amount of revenue — less than 1% of the entity’s budget. Otherwise, RTD would have needed voter approval under TABOR.
As a result, whatever Colorado lawmakers do may wind up looking more like what Polis wants — swapping out some companies’ tax breaks to give tax cuts to others — than what Ritter did in 2010 — eliminating tax breaks to weather a budgetary crisis. Unemployment claims have skyrocketed, and state revenue forecasters are already warning of budget deficits ahead.
“It’s not like we could decide to repeal a large package of tax expenditures for the sole purpose of raising state revenue,” Moreno said. “It really has to be more thoughtful.”