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I_TaxEval_2019A 07/23/2019 09:30:40 AM Committee Summary

Date 07/23/2019
Bockenfeld X
Moreno *
Snyder X
Tate X
Court X
Benavidez X
X = Present, E = Excused, A = Absent, * = Present after roll call
Time 09:30:40 AM to 04:15:17 PM
Place HCR 0112
This Meeting was called to order by Representative Benavidez
This Report was prepared by Greg Sobetski
Hearing Items Action Taken
Call to Order and Discussion of Committee Activities Committee Discussion Only
Tax Expenditures and Tax Expenditure Evaluation Committee Discussion Only
Tax Expenditures in Colorado and Colorado's State Budget Committee Discussion Only
TABOR and Single Subject Considerations Committee Discussion Only
Overview of Evaluation Process and Methodology Committee Discussion Only

Call to Order and Discussion of Committee Activities - Committee Discussion Only

09:31:52 AM  

Representative Benavidez, chair, called the meeting to order.  Representative Benavidez led the committee in selecting dates for the committee's third and fourth meetings.  The committee scheduled its third meeting for Monday, August 19, and its fourth meeting for Wednesday, October 30.

Tax Expenditures and Tax Expenditure Evaluation - Committee Discussion Only

09:48:26 AM  

The committee's morning panelists introduced themselves.  These included: Katherine Loughead and Jared Walczak, of the Tax Foundation; and Alison Wakefield, of the Pew Charitable Trusts.

09:54:38 AM  

Katherine Loughead, policy analyst with the Tax Foundation, began her presentation (Attachment A).  She discussed Colorado's statutory definition of "tax expenditure," identified different types of tax expenditures including deductions, exemptions, and credits, and explained the difference between structural and preferential expenditures.

10:01:40 AM  

Ms. Loughead suggested that many of Colorado's preferential tax expenditures are small budget items because they do not strongly incentivize taxpayer behavior, and may in fact provide a tax benefit for taxpayers who would have performed the incentizied economic activity anyway.  She suggested that some of these expenditures apply so narrowly as to have have distortive market effects.

10:08:11 AM  

Ms. Loughead discussed the state's enterprise zone program. She presented a map showing that most of the state's geographic area is in enterprise zones. She suggested that businesses operating in these zones may have chosen to operate in these areas independent of the tax expenditure, which may reduce state revenue without promoting business activity in rural areas.

10:10:31 AM  

Ms. Loughead suggested that across-the-board measures to lower income tax rates would be a more successful approach to promoting economic activity in lieu of targeted tax expenditures. She argued that Colorado's economic growth is attributable to other factors beyond tax expenditures.

10:14:23 AM  

Ms. Loughead concluded her presentation. She argued that the purpose of taxation is to raise government revenue while having a minimal economic impact, and that tax expenditures do the opposite by reducing government revenue while affecting economic decisionmaking.

10:18:31 AM  

Alison Wakefield, associate manager at Pew Charitable Trusts, introduced her presentation (Attachment B).  She discussed the value of tax expenditure evaluation and how such evaluation has been conducted in other states.  She proceeded to present a history of tax expenditure evaluation in Colorado, especially Senate Bill 16-203.

10:24:47 AM  

Ms. Wakefield presented cases from Maryland and North Dakota where tax expenditure evaluation had motivated policymakers to change the structure and availability of tax expenditures.

10:26:02 AM  

Committee members asked questions of Ms. Loughead, Mr. Walczak, and Ms. Wakefield.  Committee discussion ensued regarding the availability of similar tax incentives in multiple states and interstate efforts to consolidate or eliminate certain tax expenditures.

10:36:38 AM  

Committee discussion continued regarding the empowerment of tax expenditure evaluators to make policy recommendations concerning the continuation, modification, or termination of tax expenditures.

10:42:07 AM  

The committee proceeded to discuss the effects of tax incentives in certain geographic areas on the economic performance of other areas in the state.

10:58:14 AM  

The committee discussed whether a tax expenditure could be made available to industries falling below certain economic thresholds, rather than to specific industries identified in statute.

11:09:18 AM  

Committee members asked whether panelists had studied, or were familiar with studies of, disaggregating the economic effects of a tax expenditure from the economic activity that would have occurred otherwise.  Mr. Walczak shared a study indicating that between 70 percent and 80 percent of jobs for which credits were claimed under state job incentive programs would have been created otherwise.  Ms. Wakefield's office later sent a memorandum (Attachment C) to committee members on this topic, as well as other questions raised by committee members during the hearing.

11:25:24 AM  

Committee discussion continued regarding the efficacy of the enterprise zone program.

11:41:38 AM  

The committee and panelists discussed tax architecture overall, including the utilization of broad-based tax expenditures and/or the elimination of tax expenditures and lowering of the income tax rate.

11:50:27 AM  

The committee and panelists discussed Colorado's tax expenditure evaluation process. 

11:54:22 AM  

The committee concluded its questioning of these panelists and took a recess for lunch.

Tax Expenditures in Colorado and Colorado's State Budget - Committee Discussion Only

11:55:46 AM  

Esther Van Mourik, Office of Legislative Legal Services, introduced herself and set up the discussion for the Legislative Council Staff presentation. She discussed tax structure and noted that the definition of tax expenditures is based on federal definition from 1968 and that is an alternative to direct spending or other programs. She noted that OMB does not include all tax expenditures in their list of tax expenditures like allowing some income rules for interest or trying to adjust for filing status and household makeup as ability to pay. She stated that the federal definition indicates that a tax system is better if there is a broad base and low rate, therefore fewer exemptions or expenditures lead to a better tax system.  She noted that the state auditor included 4 elements: must be a state provision enacted by state law, a expenditure for taxes not fees, must apply to only certain types of people or businesses (preferential tax expenditures), and must reduce revenue from legally collected taxes. Mr. Sobetski then began his presentation on tax expenditures in the state budget (Attachment D).  He noted that tax expenditures for sales and use taxes, income taxes, and cigarette, tobacco, and liquor excise taxes generally impact revenue into the General Fund. He state that other tax expenditures that reduce cash fund revenue include severance taxes and fuel excise. He discussed the budget implications when we are in a TABOR surplus situation and noted that, while a tax expenditure may not impact the budget in all years, a permanent tax expenditure will reduce the revenue available in some future years.

01:51:33 PM  

Mr. Sobetski continued to talk about the impact of tax expenditures on the state budget. He stated that there are some data limitations so that the state does not know precisely how much revenue is at stake. He used the example of sales taxes where taxes are not collected, there is no data so other, non-tax, data sources are used to estimate the value of the exemption. He also discussed the DOR's tax expenditure report and that there was $6.6 billion in foregone revenue because of all of the state's tax expenditures.

02:01:36 PM  

Mr. Sobetski continued and discussed that overwhelmingly the revenue from tax expenditures are structural or are not subject to legislative intent. He noted that revenue is mostly attributable to sales and use tax expenditures, but that includes structural and preferential tax expenditures. Mr. Sobetski discussed the largest structural tax expenditures.

02:08:48 PM  

In response to a committee question, Ms. van Mourik stated that the vendor fee is a fee and like an expenditure in the budget, so it does not need voter approval.

02:18:36 PM  

Mr. Sobetski continued and discussed the largest preferential tax expenditures.

02:21:15 PM  

The committee discussed 529 deductions, as well as the the fuel for home consumption sales tax exemption  The committee also discussed the inclusion of long-term rentals in the "other" sales tax exemptions and taxing services.

02:38:37 PM  

The committee discussed clarifying structural vs. preferential tax treatment in statute.

02:42:33 PM  

Mr. Sobetski noted that the General Assembly spends a lot of time talking about some of the smaller exemptions which are not near the $6.6 billion in total revenue from tax expenditures.

TABOR and Single Subject Considerations - Committee Discussion Only

02:45:28 PM  

Ms. van Mourik introduced the Taxpayer's Bill of Rights and stated that it includes a list of items that require voter approval including a tax policy change directly causing a net revenue gain to any district. She explained that this provision complicates the committee's considerations and pointed out the Mesa County and RTD vs. TABOR foundation cases for guidance. She state that, based on these cases, the Office of Legal Services will provide guidance to the General Assembly. Ms. van Mourik outlined the Colorado Supreme Court's ruling in TABOR Foundation vs. Regional Transportation District (RTD), which indicated that a tax policy change resulting in a net tax revenue gain to any district does not require voter approval if the net tax revenue gain is both de minimus and incidental.

02:53:57 PM  

In response to a question, Ms. van Mourik explained what may or may not constitute an "incidental" change to tax policy in light of the RTD decision. She explained that in the RTD decision, the Colorado Supreme Court identified the bill in question to have an incidental impact on revenue because it found the purpose of the legislation to be harmonization of the state, RTD, and Scientific and Cultural Facilities District (SCFD) sales tax base. However, Ms. van Mourik stated that the question of what other policy changes may have an incidental effect on revenue remains open based on the court's decision.

02:59:19 PM  

In response to a committee question, Ms. van Mourik  explained that the holding requires that the change be de minimus in additional to being incidental. She explained that while the holding did not explicitly define either de minimus or incidental, the holding seemed to imply that a revenue increase of less than 1 percent of the RTD or SCFD budget would be de minimus. Based on the June 2019 LCS forecast for FY 2019-20 General Fund and cash fund revenue subject to TABOR, a 1 percent de minimus threshold would be something like $153 million.

03:05:47 PM  

Ms. van Mourik proceeded to explain how the RTD holding interacts with the court's previous holding in Mesa County Board of County Commissioners vs. State of Colorado. She explained that the Mesa holding applies even if legislation is not found to require voter approval under the de minimus and incidental test in RTD. So, if a piece of legislation was determined to be both de minimus and incidental, it would still require voter approval if state revenue is expected to exceed the TABOR limit.

03:10:13 PM  

In response to a committee question, Ms. van Mourik explained that subsection (8) of TABOR prohibits a change to the definition of taxable income during the current tax year; for example, the state could not enact legislation to create an income tax deduction in the year when the bill was passed. In response to additional committee questions, Ms. van Mourik explained that her office advises that the legislature rely on the fiscal note and the economic and revenue forecast in order to make its decisions.

03:15:36 PM  

Committee discussion continued regarding forecast uncertainty, and whether a potentially inaccurate forecast ought to bind the legislature under the Mesa decision. Ms. van Mourik explained that she has laid out the best advice that her office can provide regarding the legislature's compliance with what she described as the confusing test in the Mesa decision.

03:19:42 PM  

In response to a committee question, Ms. van Mourik provided a definition of "incidental" from the Supreme Court cases. Ms. van Mourik read a passage from the RTD ruling, where the court held that House Bill 13-1272 resulted in an incidental change in revenue because the legislature's purpose in enacting the bill was to harmonize the state, RTD, and SCFD sales tax basis.

03:23:58 PM  

In response to a question of whether the court would abide by the tests it imposed in Mesa and RTD. Ms. van Mourik explained that she cannot be certain of the court's future action in this area.

03:24:55 PM  

H. Pierce Lively, staff attorney at the Office of Legislative Legal Services, introduced himself. He explained that the Colorado constitution requires that all bills, other than general appropriations bills, have a single, clearly-stated bill subject. In response to a question about case law interpreting the constitutional requirement. Mr. Lively explained that there has been extensive case law establishing the parameters of the single subject requirement on appeals of the jurisdictional decisions made by the State Title Board. Mr. Lively proceeded to identify the purposes of the constitutional single subject requirement as identified by the courts. He explained that while these purposes call for a narrow title, there are consequences of using either a broad or narrow title. He also explained that a bill sponsor may want to include a trailer if they decide to use a broad title.

03:30:47 PM  

Mr. Lively concluded his presentation by stating that the five bills referred by the committee to the Legislative Council will need to comport with the single subject requirement even if they attempt to treat multiple tax expenditures under a single bill title.

03:32:46 PM  

Ms. van Mourik explained that, in conjunction with the committee's bill requests, OLLS will make recommendations regarding which legislative concept(s) may be joined in a single bill title, but that OLLS and the committee will be bound by the constitutional single subject requirement when making such determinations.

03:34:27 PM  

In response to a question on whether the Colorado Supreme Court's ruling concerning the single subject of ballot initiative 2019-2020 #3 changes OLLS's analysis concerning a single subject, Mr. Lively indicated that the implication of this decision beyond a TABOR repeal measure is as of yet unclear.

Overview of Evaluation Process and Methodology - Committee Discussion Only

03:37:58 PM  

Michelle Colin, senior legislative audit manager at OSA, introduced herself and OSA legislative audit manager Trey Standley. Ms. Colin proceeded to discuss OSA's mandate pursuant to legislation adopted in Senate Bill 16-203 (Attachment E).

03:40:56 PM  

Ms. Colin stated that OSA has identified 226 tax expenditures, of which 50 are more than 50 years old. Of these, 21 will eventually expire if no legislation is taken to extend them, and 205 are permanent. She explained that the number of tax expenditures fluctuates according to one's interpretation of statute. For example, a statute that enacts an expenditure for one type of transaction, but treats a subset of transactions differently, may be better conceptualized as two expenditures.

03:43:43 PM  

Ms. Colin outlined OSA's definition of a tax expenditure. She proceeded to discuss the OSA evaluation schedule, which requires that all expenditures be evaluated by September 2022, in the order of oldest-to-newest, with the caveat that similar expenditures may be grouped together for efficiency. If an expenditure is expiring, OSA is required to complete its evaluation prior to the legislative session in which the expiring expenditure would need to be renewed.

03:48:16 PM  

Ms. Colin explained that OSA has published evaluations of 15 expenditures from 2018 and 45 expenditures, to date, through July 2019. Evaluations of 10 additional expenditures will be published in September 2019, including five with upcoming repeal dates. Ms. Colin thanked the Joint Budget Committee and the legislature generally for appropriating additional resources to the OSA so that it can complete all of its evaluations within the established schedule.

03:51:45 PM  

Trey Standley, legislative audit manager with the Office of the State Auditor, began his presentation of OSA's evaluation methodology. Mr. Standley explained that the OSA began by meeting with members of the JBC who had sponsored the bill, as well as Legislative Council Staff, the Office of Legislative Legal Services, the Department of Revenue, Pew Charitable Trusts, and the Colorado Fiscal Institute. He explained how OSA went about identifying the purpose of each expenditure evaluated. In many cases, the expenditure did not include a stated purpose, requiring OSA to infer a purpose on its own. OSA was then required to develop performance measures to assist in determining whether the tax expenditure had succeeded in meeting its purpose.

03:56:47 PM  

Mr. Standley explained that OSA uses qualifiers when determining whether or not an expenditure is successful. In particular, it can be difficult to disaggregate the extent to which a particular outcome was spurred by the tax expenditure versus other economic factors. OSA has attempted to control for this by asking taxpayers the extent to which the tax expenditure was a factor in their decision-making, or by using other data or information to attempt to answer the "but for" question.

04:01:39 PM  

Mr. Standley explained the different factors that play a role in OSA's evaluation process. These include, for example, examination of the presence or absence of similar expenditures in other states. He proceeded to discuss data constraints. These include, for example, expenditures for which data are never collected on a Department of Revenue form, expenditures that cannot be isolated from other expenditures, inaccurate data entered on forms by claimant taxpayers, and data changes over time as additional information becomes available (e.g. amended or late income tax returns). Mr. Standley explained that DOR was unable to provide certain information without making changes to its GenTax software system, which would require additional computer programming at a cost to the department.

04:08:18 PM  
Mr. Standley explained that due to DOR data constraints, OSA occasionally had to rely on third party data instead. He explained that these data have their own limitations, which OSA attempted to transparently identify in its evaluations.

Mr. Standley explained when the OSA would identify policy considerations. To date, OSA has identified 29 policy considerations, including 5 designated "consider repeal," 8 designated "clarify statute," 12 designated "review effectiveness," and 4 designated "administrative issues." Three of these categories are on the agenda for the committee's July 24 meeting, and the last will be discussed at the committee's August 19 meeting.

04:15:17 PM   The committee adjourned.

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