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The Colorado Capitol in downtown Denver, photographed on June 14, 2019. (Jesse Paul, The Colorado Sun)

Democrats in the Colorado legislature Saturday evening reached a deal with Gov. Jared Polis and business interests on legislation to eliminate a number of tax breaks and recoup money for education that was lost because of the economy’s coronavirus downturn. 

The result is a significantly pared back version of the original legislation, House Bill 1420, which when introduced on Monday drew backlash from Polis and business groups, who said it was likely impossible to remedy. 

But after several days of negotiations, all sides had settled on an agreement that keeps many of the tax breaks in place but still pours $113 million into education for the next fiscal year, which begins in July, and then $25 million in the 2021-22 fiscal year.

The original version of the measure was expected to generate nearly $250 million in the next fiscal year and then $408 million in the 2021-22 fiscal year, sending $150 million and $200 million to education each fiscal year, respectively.

The measure also still aids middle-class families by expanding the earned income tax credit, albeit not by as much as lawmakers originally had hoped.

“We felt like we still got decent size out of the final package,” said Sen. Chris Hansen, a Denver Democrat. “There was certainly a desire to have done more, but I think this is significant. It’s a great step forward.”

Hansen said Polis — who said Thursday that he wasn’t “terribly optimistic” an agreement could be reached and that he didn’t “see route for how the tax bill could become law” — is OK with the change. A spokesman for the governor confirmed Polis’ support on Saturday night.

Colorado Gov. Jared Polis speaks to reporters at the governor’s mansion in downtown Denver on June 11, 2020. “I don’t yet see a route for how the tax bill could become law,” Polis said. “At this point, I’m not terribly optimistic.” (Jesse Paul, The Colorado Sun)

Business groups told The Colorado Sun they, too, can live with the latest version of the measure.

“We are on board,” said Tony Gagliardi, Colorado director of the National Federation of Independent Business. On Wednesday, Gagliardi told reporters he didn’t see any possible way he could support the measure.

Loren Furman, a lobbyist for the Colorado Chamber of Commerce, said businesses interests have been working with Democrats on the legislation for days “trying to figure out how we could resolve the catastrophic language that was in the bill that the House introduced on Monday.”

She said those discussions proved fruitful. 

“When, I think, the Senate saw how visceral the reaction was from businesses and the effect of that debate in the House and also the governor said ‘this is not the time to raise taxes on businesses,'” she said. “I think all of those factors played into how we got to this point.”

As part of the deal, Democrats agreed to strip out the repeal of several longstanding tax exemptions that were originally in the bill. They also agreed to pare back exemptions in the state’s tax code stemming from Republicans’ 2017 Tax Cuts and Jobs Act passed by Congress. 

Under the agreement, owners of pass-through businesses — like a limited liability company, partnership or sole proprietorship — can take a deduction of 20% off their qualified business income if they have an income below $500,000 for a single tax filer and $1 million for joint filers.

The change means only about 1% of current tax filers will no longer be eligible for the break. Gagliardi says that means small businesses in the state, which used the break to hire more workers, will continue to benefit. 

House Bill 1420 originally capped the eligibility income levels for people seeking to take the deduction at $75,000 for single tax filers and $150,000 for joint filers.

The legislation did keep in place the repeal of several breaks triggered in the state tax code by the CARES Act, Congress’ coronavirus aid bill. However a big change is that the exemptions will only be eliminated for two years whereas the original bill ended most of the breaks entirely and would have netted the state billions of dollars in the next decade.

The bill will still expand a state tax break for low-income workers, known as the earned-income tax credit, making immigrants who work in the state — whether they live in the U.S. legally or illegally — eligible to receive the benefit.

But where Democrats wanted to double the state tax break to 20% from 10% of the federal credit for everyone eligible in 2023, they will now increase it to only 15%.

State Sen. Chris Hansen, a Denver Democrat. (Handout)

“We just could not afford to go all the way to 20% right now,” Hansen said. “It’s still a 50% expansion. It’s a sizable expansion, but we weren’t able to do the doubling.

Hansen said the earned-income tax credit expansion and increase has no end date, which means the legislature will have to find a way to fund the benefit in future years as the revenue generated from other parts of the bill dries up.

House Bill 1420 still requires a final vote in the Senate, where it is likely to meet Republican opposition. The House must then approve any changes made before the measure is sent to Polis to be signed. 

The Colorado Senate on Saturday also advanced a bill that would ask voters in November to increase the taxes on cigarettes and enact a nicotine tax for vaping products, which aren’t currently taxed. House Bill 1427 would generate more than $80 million in the next fiscal year and roughly $150 million in the 2021-22 fiscal year for the state.

House Bill 1420 and House Bill 1427 are aimed at helping the state recoup the multibillion-dollar hit the state budget took because of the economic impacts of the pandemic.

The legislature was originally set to adjourn on Friday. However after a flurry of last-minute bills it appears lawmakers will finish up their work on Monday.

Jesse Paul is a Denver-based political reporter and editor at The Colorado Sun, covering the state legislature, Congress and local politics. He is the author of The Unaffiliated newsletter and also occasionally fills in on breaking news coverage....