Tax exemptions at heart of controversy

By Marianne Goodland
THE COLORADO STATESMAN

The battle over ending tax exemptions to help the state cover a $140 million budget shortfall is now in its second week at the state Capitol.

Sen. Greg Brophy, R-Wray, suggested the state cut salaries, citing a study that said state employees were compensated 20 percent above private sector jobs.

Lawmakers on either side of the aisles have been feuding over the package of 12 bills that would end tax breaks on such things as candy and soda, software, energy use, cooperative direct mail and agricultural products.

Thursday afternoon, Senate Republicans held a press conference to announce they had a plan to reduce the state budget, one that would negate the need for the tax package working its way through the Senate, and which might even restore the senior homestead exemption.

The proposal would ask Gov. Bill Ritter to enact 0.25 percent cut to the General Fund through cuts to state employee compensation. It would free-up $17.8 million in the current fiscal year and targets non-essential or vacant government positions and salary reductions to state employees making more than $100,000 per year.

For 2010-11, the GOP plan would ask the governor to enact a 4.4 percent across the board spending cut, by continuing to eliminate non-essential or vacant positions and salary reductions. According to the Republicans, this would free up $306.5 million and would allow the state to restore the senior homestead tax exemption.

Senate Minority Leader Josh Penry, R-Grand Junction, pointed out that the state has hired 2,300 employees since Ritter enacted the hiring freeze in 2008. He questioned during the press conference whether those hires were necessary.

Rep. Jack Pommer, D-Boulder, criticized the plan, stating that many of the hires were the result of bills Penry had supported. He also said that previous cuts proposed by the Joint Budget Committee were opposed by Penry and other Republicans when the cuts proposed resulted in closures of facilities and/or state employee job losses in their districts.

Sen. Keith King, R-Colorado Springs. The solution, he explained is to build private sector opportunity for success, which he said would lead to more public sector jobs.

The House Finance Committee approved six of the 12 bills on Jan. 27 and in the early hours of Jan. 28. Another four were passed by the Finance Committee on Jan. 29. One bill, HB 1198 that would suspend Colorado's alternative minimum tax, was killed on a 10-1 vote on Jan. 29. The last bill, HB 1200, which deals with enterprise zone investment tax credits, has not yet been heard by the House Appropriations Committee.

Legislators have continued to spend long hours at the Capitol debating the bills. After the marathon session in House Finance on Jan. 27 that lasted until 2:30 a.m., House members were back at it on Friday, with a session to review the bills for second reading that lasted until midnight.

Of the ten bills debated on Friday, nine passed on second reading and moved to a final vote for Monday. One, HB 1197, which dealt with conservation easement caps, was amended and sent back to the House Appropriations Committee.

Republican lawmakers have started referring to the package of bills as the “dirty dozen,” while Democrats countered with calling them “special interest tax credits.” House Minority Leader Mike May, R-Parker said in a Friday press release that one Democrat has said they should “call businesses’ bluff,” when it came to job losses. “When businesses come to the Capitol and tell us that they will have to cut jobs, they mean it,” May said in a Monday press release. “Calling their bluff is simply not good public policy and playing economic chicken with business owners will cost Colorado jobs.”

Senate Republicans on Wednesday launched their own salvos, accusing Democrats of attacking the Easter Bunny and Cupid, referring to HB 1194 that would restore taxes on candies given for Easter and Valentine’s Day.

“We’re asking big business to pay their fair share so that we don’t have to keep balancing the budget on the backs of teachers, police officers and fire fighters, senior citizens and the neediest who depend on our safety net,” said Speaker of the House Terrance Carroll, D-Denver, in a press release, also on Friday.

On Monday, eight bills got final votes in the House, passing largely along party lines. All House Republicans voted against the eight bills, but a few Democrats voted with them on some of the bills. Rep. Wes McKinley, D-Walsh, voted against all eight bills. The narrowest vote, 33-32, was for HB 1193, the bill that would require out-of-state retailers like Amazon.com to collect and remit sales taxes.

That bill was amended assuage concerns from Colorado-based businesses like ShopAtHome.com that Amazon and Overstock.com would fire them if the bill passed. Under the amendment, the definition of “affiliate” was changed from a person living in Colorado that solicits business by means of a “public forum,” to a person who lives in Colorado who publicly, but not including electronically, “solicits business by means of their physical presence in the state.” Rebecca Madigan, executive director of the Performance Marketing Association said in an online blog, revenews.com, on Tuesday that she interpreted it as “someone who makes a public referral to an online site or a face-to-face referral to an online site; specifically excluding an electronic solicitation of business.” However, she said the amendment did not go far enough; an online retailer would have not know whether business was originating through face-to-face interaction or through an online referral. Rather than take the risk, she said, the online retailer would just terminate the relationship.

Sen. Paula Sandoval, D-Denver, said she was not comfortable with the definition of candy in the bill. Twix or Kit Kat candy bars would be counted as cookies and hence not taxed.

The last bill to make it out of the House in the past week was HB 1190, on eliminating tax exemptions for energy used in industrial manufacturing. The bill needed technical corrections and its final House vote was delayed until Wednesday. (It passed, 35-30.) HB 1190 also was amended on second reading to exempt agriculture and off-road purposes.

As the bills went through final House votes on Monday, Sen. Brandon Shaffer, D-Longmont, and Sen. Rollie Heath, D-Boulder, vowed that the acrimony seen in the House would not be repeated in the Senate. In a press conference held Monday afternoon, Shaffer said he had met with Republican leadership from the Senate on Thursday at Katie Mullen’s, a downtown Irish pub, “just to take out some of the acrimony.” Shaffer said one of the reasons he had chosen the PERA reform bill to be SB 1 was because he had hoped it would set a bipartisan tone for the session, and hoped that spirit would continue into the coming week as the Senate took up the tax bills.

In the Senate, a little more civility

Wednesday, the Senate Finance Committee took up the first four bills: HB 1189, HB 1191, HB 1194 and HB 1196. The committee hearing lasted almost seven hours, more than three hours past the 5 p.m. deadline set by Chair Sen. Paula Sandoval, D-Denver. But the anger and harsh words heard in the House did not appear to continue into the Senate proceedings.

The debate featured many of the same witnesses who testified in the House hearings: representatives of the K-12 community, soft drink and candy manufacturers, direct mail vendors and restaurant owners.

Sen. Michael Johnston, D-Denver, pointed out that Coca-Cola had seen a five-fold increase in sales during the last 20 years, even in the 34 states that had imposed the soda tax.

Sen. Greg Brophy, R-Wray, told his fellow committee members that the bills would extend the crisis for the state, and cost the state 15,000 jobs. “It’s not too late,” he said. “We can pull these bills.” Brophy suggested the state cut salaries, citing a study that said state employees were compensated 20 percent above private sector jobs.

Sen. Keith King, R-Colorado Springs, asked if government jobs and private sector jobs were equal. “There is a fundamental choice [being made] to protect government jobs at the expense of private sector jobs,” King said. The solution, he explained is to build private sector opportunity for success, which he said would lead to more public sector jobs.

Jane Urschel, deputy executive director of the Colorado Association of School Boards, told the committee that the Agate School District school board, in Elbert County, would have to decide soon whether it would close its school for good, because of the budget cuts it faces. “When a community loses its school it loses its heart and often, its only business,” she said.

Small business owners continued to argue against lifting the exemptions. Rob McNealy, a small business owner from Aurora, said the conversation on tax exemptions worried him. “You don’t tax people who create jobs,” he exclaimed. “If you get out of our way, us private sector folks will fix the economy.” McNealy said he owned an Internet business with affiliate relationships and had received termination notices from out-of-state businesses. “You guys need to figure out if this is what you want,” he said.

The bills debated in the Senate Finance Committee Wednesday all passed along 4-3 party lines.

Gary Yeats, vice president for corporate taxes and tax counsel for Valassis Communications, told the committee HB 1189, concerning exemptions for cooperative direct mail, would not likely generate the $800,000 projected in a revised fiscal note. Yeats said his company represents a third of cooperative direct mail distributed in Colorado, and Valassis would end up with a $200,000 tax bill under HB 1189. Those taxes would be passed onto advertisers, harming their bottom line. For every dollar reduced in their businesses revenue, it would represent a loss of 4.6 percent in income tax, Yeats said. “You will collect 2.9 percent and lose 4.6 percent.” But Phil Horowitz of the Department of Revenue disputed Yeats’ estimates, saying there were more businesses that fell under the definition of cooperative direct mail than the ones Yeats was including.

The bill on ending tax exemptions for candy and soda, HB 1191, drew less than enthusiastic support even from Democrats. Finance Committee Chair Sen. Paula Sandoval, D-Denver, said she was not comfortable with the definition of candy in the bill; under HB 1191 sweets made with flour, like Twix or Kit Kat candy bars, would be counted as cookies rather than candy and hence not taxed. Horowitz explained that this was a definition used in other states, and that flour had to be mentioned prominently in the list of ingredients in order for the food to be exempted from the tax.

Chris Harr of the Colorado Beverage Association and Pepsi Bottling of Denver warned that increasing the price by 2.9 percent would reduce sales by 1.9 percent to 2.8 percent. That could result in the loss of 370 to 800 jobs, he said, and as much as $18 million in wages.

But those figures were disputed by Sen. Michael Johnston, D-Denver, who pointed out that Coca-Cola had seen a five-fold increase in sales during the last 20 years, even in the 34 states that had imposed the soda tax. Those concerns prompted an amendment to put the exemption back into effect in three years, an amendment offered by King and supported by Sandoval.

The committee’s last bill of Wednesday evening was HB 1196, on lifting an income tax exemption for purchases of certain vehicles that use alternative fuels. As of press time Thursday, the committee was scheduled on Thursday to take up four more bills, including HB 1193, the bill requiring out-of-state retailers to collect sales taxes.

Marianne@coloradostatesman.com