Colorado lawmakers started shining a flashlight into the dense state tax code earlier this year, looking for special-interest loopholes they could plug to prevent the budget crisis from deepening.
They found dozens of industry tax breaks that could potentially be nixed or scaled back, according to a report circulating at the Capitol.
Some are shallow pools of potential revenue, such as exemptions on bull-semen sales — estimated to cost the state $3.2 million this year. Others are deeper, such as $600 million worth of breaks expected to go to manufacturing companies for the purchase of component parts.
Ultimately, legislators eliminated only two loopholes by the 2009 session’s end, resorting to their usual practice of slashing expenditures instead.
But now that revenues are projected to take another plunge — extending the worst financial slide since the Great Depression — General Assembly committees are revisiting the roster of tax credits and exemptions that could hold nearly $2 billion in budget-fixing possibilities.
The smart approach to addressing the $385 million shortfall, some experts say, is to modify industry tax benefits to spare further cuts to education and services for vulnerable populations.
“Other states have done this when dealing with their problems,” said Carol Hedges of the Colorado Fiscal Policy Institute, which successfully lobbied the legislature to nix breaks on cigarettes and capital-gains taxes this year. But if Colorado government keeps its focus on cutting expenditures, “people will say, ‘Whoa, wait a minute. What other options do we have?’ ”
Advocates for the business community, meanwhile, say a shrewd approach to reviewing tax incentives must be taken so that jobs and stressed businesses are spared damage.
“Decisions like this can’t be made in a vacuum,” said Tamra Ward, senior vice president for the Denver Metro Chamber of Commerce, stressing that business leaders are studying the target list and plan to be aggressively involved in any discussions to change them. “There are long-term impacts associated with each choice the assembly might make, and some of those tax credits have direct relationships to job growth.”
The state, Ward says, has had a long history of relying on tax credits to create and sustain businesses. A move in the last legislative session to approve five new breaks for business was “critical” to helping the economy rebound from the recession.
Altogether, special-interest groups benefit from nearly 150 income-tax and sales-tax breaks, according to Department of Revenue figures. More than 71 exemptions on sales or use taxes will cost the state $1.8 billion this year, and another 70 state income-tax credits or rebates could cost state coffers about $40 million, if last year’s figures are any indication.
Some breaks, such as enterprise-zone credits for corporations, have lingered on the books despite a series of critical studies over the past 15 years questioning whether they spur economic growth.
The state’s enterprise program, which paid out about $50 million last year, extends tax perks to businesses to locate or expand in “economically distressed” zones, but those areas, as defined by state officials, have expanded to 70 percent of Colorado’s land mass.
The Fiscal Policy Institute believes that credit is too hefty to dole out during a recession.
The group also is asking lawmakers to consider modifying at least six tax benefits changed by other states in recent years to help plug budget gaps.
For instance, the institute proposes limiting the amount companies can earn from the “net operating loss deduction.” That deduction allows corporations to carry net losses forward for 20 years to offset taxable income. California has suspended the benefit, expecting to raise $1.8 billion over 2008 and 2009.
Ward said the chamber isn’t prepared to comment on specific targets, such as enterprise zones or corporate tax deductions, until more research is done. But she said their importance must be considered because Colorado lags behind other states in providing cash incentives to corporations. Tax benefits, she said, “help close the deal.”
Still, Sen. Chris Romer, D-Denver, who led the charge last session to repeal the capital-gains-tax exemption on state assets, wants virtually all the special tax exemptions on the table for a look.
“It’s not a panacea, but it’s something we haven’t really delved into in the past — it’s a muscle we haven’t used,” he said. “We can’t just close colleges.”
The legislature, he said, could consider temporary changes to a broad swath of tax breaks. A few, such as sales-tax exemptions for prescription drugs, he said, should be off limits to avoid hurting “the most vulnerable people.”
Miles Moffeit: 303-954-1415 or mmoffeit@denverpost.com
Five tax breaks and recent estimates of their impact:
$594 million
Exemption on sales of materials
that become part of a manufactured product
$43 million
Enterprise-zone tax credits
$3.2 million
Exemption on sales of bull semen and agricultural compounds
$210 million
Exemption on sale of gasoline and special fuel
$8 million, corporate
$90 million, individual
Gross conservation-easement credit
Sources: Colorado Department of Revenue and the General Assembly staff
This article has been corrected in this online archive. Originally, due to a reporting error, a chart at the bottom of this article depicting the impact of five tax breaks did not include the conservation-easement credit benefiting individuals, valued at $90 million.
