A large computer software tax break given to businesses in 2006 avoided broad public scrutiny in part because state law doesn’t mandate an analysis of a new regulation’s financial impact on the state budget.
A state law passed in 2003 requires that only the possible harmful effects to business be studied.
Revenue officials this week said the 2006 computer software regulation passed by the administration of former Gov. Bill Owens cost the state $60 million, based on the amount of refunds sought for tax overpayments by business.
The department hasn’t calculated how much revenue the state has forgone since it stopped collecting the tax.
Experts on government fiscal policy question why the oversight process seems to elevate the risk to businesses over the financial hit to the state.
“We find it alarming that when there is an assessment of impact, the impact on public services isn’t one of the things you have to consider,” said Carol Hedges, senior policy analyst for the Colorado Fiscal Policy Institute. “A potential price tag of $60 million would have attracted a lot of attention.”
Analysis was rejected
Current legislative leaders say they were unaware of Special Regulation 7’s passage and have criticized the Owens administration for couching the tax break in a regulation instead of pursuing the more transparent legislative process where major tax changes are typically decided. The legislative process mandates a review of fiscal impacts on the state.
Owens said lawmakers had an opportunity to examine and reject the regulation when it was later submitted for approval in an omnibus bill containing hundreds of other rules.
Bill Speckman, a former chief auditor for the state Revenue Department, said the impact of Special Regulation 7 exposes a gap in state law.
“The Revenue Department could have categorized how much businesses were paying taxes on software at least to some small degree — the same process used for legislation,” Speckman said. “That could have reflected the potential impact.”
Speckman, who opposed the software-tax exemption during a 2006 administrative hearing, asked Michael Cooke, then-director of the Revenue Department, to seek a cost-impact analysis, he said.
“She rejected it out of hand,” Speckman said.
Cost of regulation a big surprise
Cooke did not return phone calls seeking comment. She told The Denver Post earlier this week that she had no idea the regulation would cost the state $60 million.
Since the 2003 law’s inception, more than 3,000 rules have been reviewed by the department of regulatory affairs for “small business negative impact, economic competitiveness and job creation,” according to the Department of Regulatory Affairs.
Former state Sen. Andy McElhany, R-Colorado Springs, the main sponsor of the law, said he was under the assumption that state agencies almost always seek to understand the cost of rules they propose.
“There was certainly nothing in the law to prevent state agencies from doing cost impacts (on the state budget),” McElhany said.
The former legislator said he doesn’t necessarily feel he should have required a cost-burden analysis for the state.
“But I think it certainly would be valuable to know the impact on all parties. . . . If it causes revenue to go away, you need to know that.”
Miles Moffeit: 303-954-1415 or mmoffeit@denverpost.com
