Lawmakers eye tax breaks with yearning

Coloradans keep $2.1 billion in tax credits, and that's not (all) bull semen

By Jason Kosena

In America, tax breaks are a way of life.

At the federal level, Americans receive tax credits on such important purchases as homes and hybrid vehicles.

It’s no different at the state level. In 2009, Coloradans will save on taxes when they buy farm equipment and manufacturing supplies — and also when they pay for smaller necessities such as prescription drugs, food and child care.

But hidden in the state’s 71 tax breaks and credits — which allow Coloradans to hold onto billions of dollars annually that would otherwise feed the state’s general revenue fund — are some more controversial exemptions.

Exemptions on the sale of bull semen, gold bullion and silver coins ring hollow to some observers. Others — such as breaks on the purchase of newspaper and direct-mail advertising and on bingo and raffle equipment — seem to favor small special interests groups.

In total, the state will dole out more than $2.1 billion in tax exemptions and credits in 2009, all with the approval of the Legislature.

But as Colorado heads into another horrific budget year, with deficits expected to reach hundreds of millions of dollars, some lawmakers and policy experts are questioning the state’s tax-break largesse.

“The last comprehensive tax study was in the 1950s,” said Scott Downes, communications director for the Colorado Fiscal Policy Institute, a nonprofit research agency. “Some of these tax exemptions have been on the books for 30 or 40 years and are no longer applicable, while others were passed during economic boom times and might not be the best use of revenue at this point.”

Downes said research indicates the exemptions should be examined in light of state revenue.

“Traditionally, there has been a focus of studying the spending side of things, but we think it would be appropriate to examine the state’s revenue as well,” he said.

A walk down memory lane

Breaks on corporate and individual income tax make up less than half of the state’s tax giveback. The majority of the $2.1 billion comes from exemptions on sales and use taxes. According to projections released last month by Legislative Council staff, more than $1.6 billion will go to individuals and businesses in 2009 through sales and use tax exemptions.

Colorado’s sales and use tax exemptions originated during the 1930s to offset expenses of the state’s manufacturing, mining and agricultural industries.

The earliest sales and use tax exemption in Colorado dates back to 1935, when the state exempted the sale and purchase of personal property that becomes a component of a manufactured product or a service. This seminal tax break is still widely used, and it’s estimated that it gave nearly $600 million back to Coloradans in 2009.

A couple of years later, in 1937, exemptions for the sale and use of electricity, coal, gas and nuclear fuel were passed, as were exemptions for materials used in the construction of irrigation ditches and telegraph and radio communications, among others. Also in 1937, exemptions on paper and ink for use by newspaper publishers were written into the code.

The trend to provide tax exemptions on material and services needed by industry continued in the 1940s, when the Legislature approved tax breaks for the sale and storage of livestock and for the purchase of feed, seed and orchard trees.

In the 1960s, Colorado lawmakers started focusing on social and consumer needs, passing tax breaks for prescription drugs and on all sales made to public schools.

But the boom in sales tax exemptions didn’t really begin until the 1970s, when the number of exemptions written into law more than doubled. Residents benefited from tax breaks on everything from stock securities, to the purchase of certain cars, to insulin sales. It was also in the 1970s that the sale of food for domestic consumption was exempted, as was the purchase of manufactured housing.

In the 1980s, the Legislature continued passing exemptions that helped reduce the cost of manufacturing and business, at the same time easing taxes on food stamp sales. The 1980s, which saw an increase in domestic air travel, also brought exemptions on the purchase of commercial aircraft and aviation parts.

The Internet craze that propelled the largest economic boom in the nation’s history during the 1990s brought forth its own set of unique exemptions. Tax breaks for the sales of wireless equipment were added in 1996. In 1998, tax exemptions for the sales of Internet service were included.

But it was during the economic tidal wave of 1999 through 2001 that the Legislature pushed some of its most exotic tax breaks to date. As Colorado rode the technology bubble through the end of the century, tax revenue flowed into state coffers at record levels. The TABOR amendment, however, capped the rate the state government could grow and forced lawmakers to return money to residents in record sums.

“With so much money coming into the state, the Legislature was finding ways to give it back under TABOR,” Ron Kirk, a member of the Legislative Council staff, told The Colorado Statesman last month. “That is when a lot of the sales tax exemptions that the media likes to talk about were passed.”

Among the more controversial tax breaks passed between 1999 and 2001 were exemptions on the sale of bull semen, food sold through vending machines and the sale of precious metal coins and gold bullion. It was also during this time that tax breaks were added for the sales of bingo and raffle equipment.

Looking for new standards

Sadly, the times of easy money and fast refunds are over, and Colorado is facing the sort of hard times not seen since the Great Depression. The Legislature was hamstrung this year trying to balance a budget featuring a $1.1 billion deficit, and another $1.8 billion shortfall in total is predicted in the 2009-10 budget.

With such large deficits on the horizon, some lawmakers are beginning to think it might be wise to raise revenue by repealing some tax exemptions.

This option came into play only recently. Because TABOR requires a vote of the people to raise taxes, the Legislature was unable to repeal any tax exemptions since 1992. But a recent Colorado Supreme Court ruling that upheld the mill-levy freeze Gov. Bill Ritter and a Democratic Legislature passed in 2007, gave state lawmakers some flexibility to repeal tax exemptions without a vote of the people.

“Until last year, we have had no legislative authority to go through the exemptions and decide which ones we should keep and which ones aren’t as useful,” Sen. Chris Romer, D-Denver, told The Statesman this week. “Now that we have that capacity, we should do that.”

Romer said with Colorado’s education funding ranking among the lowest in the country and with new budget realities in place, the time has come to take a hard look at the exemptions and decide which ones have outlived their usefulness.

“Life was not as good, and our economy is not as strong as we thought it was going to be (when the Legislature implemented these exemptions) in 1999 or 2000,” Romer said. “I am not in favor of raising any of these taxes until the current recession is over. But once it is, we need to have a conversation about which exemptions need to change. It’s easy to pick on thebull semen and gold bullion because they are easy for residents to understand. But why, exactly, do we have an exemption for that?

Colorado Springs Democrat and Senate Majority Leader John Morse agreed.

“I don’t think there is any question that we should be looking at them,” Morse said. “Some of them were put into place in 1999 and 2000 in a way that wasn’t saying ‘Here here is way we can stimulate the economy’ but were more just a result of having extra money. So the Legislature found a way to give that money to special interest groups through tax exemptions.”

Morse acknowledges, however, that it won’t be easy to repeal tax exemptions. In Colorado, attempts to increase revenue inevitably create legislative turmoil.

“Once somebody gets a tax exemption, taking it away from them is very, very difficult,” Morse said. “So this will be a very interesting conversation.”

Not all Republicans are against having the conversation, however. Most members of the GOP interviewed by The Statesman said they believed a review of the tax exemptions is an important step in responsible budgeting. The same members, however, said they won’t be as quick as their Democrat counterparts to repeal exemptions simply for the sake of raising additional revenue.

“I think it is completely appropriate to review the status of tax exemptions and tax credits, but I think it’s wholly inappropriate to raise more money in the state coffers simply to raise more money,” said Rep. Frank McNulty, R-Douglas County.

“The bottom line is that the reason we are having the discussion now is not to determine whether the purpose for the exemptions is still needed, but because Bill Ritter and the Democrats want to spend more,” he continued. “That is not a reason to go back and take a look at any group of exemptions and see if they are still valid.”

McNulty isn’t alone in his criticism. Rep. Kent Lambert, R-Colorado Springs, said he always has been in favor of putting Sunset clauses on tax exemptions so they can be reviewed regularly. He added, however, that he doesn’t believe the repeal of tax exemptions to gain more revenue is the right solution for today’s budget deficits.

“I think this talk about exemptions shows a real lack of foresight and leadership among the majority party over several years,” Lambert said.

“We should not be facing this problem as quickly as we did,” he continued. “There has been extravagant spending during the last three years, while we knew there was going to be a downturn in the economy, and now we are there. Nothing was done in the rainy day fund, nothing was done to control spending, and now they are following the same game plan.”

Some exemptions already are gone

Despite the criticism, repealing tax exemptions isn’t a new idea. This year the Legislature temporarily repealed the Senior Homestead Exemption as well as the exemptions on vending machine and cigarette sales.

Although the cigarette and vending machine sales exemptions were relatively uncontroversial, the one-year repeal of the Senior Homestead Exemption was not. Members on both sides of the aisle were uneasy about the move during floor debate before the measure passed. The heartburn could continue.

During a Democratic caucus meeting at the Governor’s Mansion Tuesday night, Joint Budget Committee members said the Dems should brace for another bill next year that will repeal it further.

“The Homestead Exemption, which I know a lot of us did not want to vote for — but, being fiscally responsible, we had to — (will be coming back),” said Sen. Moe Keller, of Wheat Ridge. “Remember, it’s all of the other taxpayers who are paying for the seniors’ portion when (the seniors) aren’t paying the full property tax. They can’t afford to do it anymore. I personally don’t see us bringing that back for a long time.”

Although Republicans agree they don’t want to see taxes raised during the recession, there is one credit that most of them would like to see eliminated — the Gross Conservation Easement.

The conservation easement credit, worth nearly $100 million in 2008, offers tax incentives to keep undeveloped land as open space. The credit is hailed by environmentalists and has been protected by Democrats, but many conservatives see it as a luxury during tough budget times.

“I think the conservation easement tax credit is bad because the system has demonstrated that it is corrupt over and over again,” Lambert said. “The fact is, it is very problematic. And there are questions that it is working at all, especially considering that real estate isn’t being bought and sold (for development) in the first place. If we took a two- or three-year timeout from those conservation easement tax credits I think it would have no impact on the state, but it would save a lot of money.”

Making cents of it all

Although talk of repealing tax exemptions has gotten louder recently, some lawmakers, including Ritter, are warning that the repealing tax exemptions can do only so much to ease the budget crisis.

During the Democratic caucus meeting Tuesday night, Ritter was asked how much additional revenue from eliminating exemptions can help. Although Ritter said his staff is combing the exemptions looking for merit, he also acknowledged that only one exemption, the one benefiting manufacturing, is big enough — at $583 million — to make a real difference.

“The biggest one is the manufacturing tax credit — it’s worth over $500 million. But we have to think about two things here,” Ritter said. “One is that no state in the country, we think, lacks it, and if we want to compete in job creation that (credit) will (improve) our ability to attract companies that want to create jobs here.”

And, it’s that slow and easy approach to repealing tax exemptions that has Ritter looking good to some members of the business community.

Although the Denver Metro Chamber of Commerce said it understands the difficult budget requirements facing the state and that the business community will have to sacrifice like everyone else during the economic downturn, the group of associated businesses is happy to see the slow and moderate approach that Ritter is taking on tax exemptions, said Tamara Ward, senior vice president of public affairs and communications.

After all, tax incentives often are the deal-breaking or deal-making factor as businesses decide whether to locate in Colorado.

“I think the governor’s team is being very thoughtful on how they approach this,” Ward said. “We think it’s important to have a good understanding of what those credits are doing and to make sure we do our homework to see what the benefit of the credits are to the state and the economy.”

And it’s the consequences, not the benefits, of repealing many of the exemptions that concerns moderates. When asked by The Statesman last week if repealing exemptions is prudent, former Republican state lawmaker Don Marostica — newly named to head Ritter’s Office of Economic Development and International Trade — said “no.”

“I have gone through every one of the tax exemptions, and every single one has unintended consequences,” said the former Joint Budget Committee member. “Are there some that can be eliminated? Sure, but they are not the big ones. We have some manufacturing exemptions out there that have jobs attached to them, and they are important. In the end, there are substantial consequences to each and every one of them.”

Or, as they say in construction, measure twice and cut once.