Colorado’s tax code is broken.
It is full of billions of dollars in tax breaks and cuts and credits for the few that are funded by the overall taxes paid by the many.
Colorado lawmakers have wisely targeted a handful of these tax expenditures for elimination or reduction in an effort to raise $1.2 billion over four years for K-12 education. The coronavirus economy is now in a recession from the shock of shuttered businesses and lost jobs. It has left Colorado’s state budget with about $3.3 billion less than expected.
House Bill 1420 – introduced by Reps. Emily Sirota, Matt Gray, Dominick Moreno, and Chris Hansen – is a clever bill that targets tax expenditures known to have been deemed to have little or questionable efficacies while also carrying a huge price tag.
The bill has passed the Colorado state House and was likely to be considered in the Senate Friday evening or Saturday. It’s a good bill that should become law.
But it’s unclear if Gov. Jared Polis would sign the measure as it had passed the House. Polis is not wrong in his advocacy for broader tax reform that cuts tax credits and uses some of that money to reduce the overall tax burden of individuals and businesses – because that’s needed too.
We hope the two sides can work out a compromise before the legislature closes for business until January. Obviously, the broader tax reform needed is not going to happen in the next 48 hours, but the question is can this smaller proposal be made amenable to the governor and become law on its own.
Given that some of these tax reforms are needed to avoid reduced revenue from tax breaks dolled out in the federal CARES Act, we think it’s important that lawmakers pass something now.
When we spoke to Polis on Friday, he floated the idea of a special session this fall to take up broader tax reforms – we love the idea of a session dedicated to cleaning up Colorado’s tax code, although such a maneuver has it’s own costs associated with bringing folks back to work.
The bottom line is that true tax reform is often impossible. Americans love their personal tax break and are surprisingly not that concerned that others might be getting more or less of a break on their taxes. Consider the Tax Cuts and Jobs Act – in an ideal world, the goal would have been for the tax reform to be revenue neutral. Eliminating tax breaks and reducing the tax rates by a comparable amount. That proved impossible once the special interests started defending their little piece of the tax avoidance pie and instead we walked away with a $1.3 trillion reduction in federal revenue – lower taxes and hardly any meaningful reduction of tax loopholes and breaks.
Colorado luckily isn’t at risk of such a budget busting trap – we’re in the middle of a recession and the state budget must be balanced.
So, what’s the proper way to eliminate bad tax policy? Polis says his goal would be to have the revenue from the elimination of tax breaks go a third to help with the state’s dire budget needs, a third reduce the taxes of those who lost the tax break and a third to making Colorado’s tax policy less regressive. That’s reasonable.
House Bill 1420 would increase the state’s Earned Income Tax Credit with some of the revenue brought in by the elimination of tax breaks for some and it would expend about $193 million over four years, a small portion of the more than $1 billion raised by the tax cuts.
There’s room for both sides to give a little in this debate.
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