HB 11-1104: Concerning Tax Expenditure Report
Rich Jones, Director of Policy and Research
The Bell Policy Center
Feb. 24, 2011
Thank you for the opportunity to speak to you today. I am Rich Jones, the director of policy and research with the Bell Policy Center. The Bell is a non-partisan, non-profit research and advocacy organization dedicated to making Colorado a state of opportunity for all. We have worked on state fiscal issues for nearly a decade because we know having an effective public sector partner is essential to building the state of opportunity we envision.
The Bell Policy Center supports HB 11-1104 to require the Department of Revenue to prepare an annual tax expenditure report. This report will provide important information so policymakers can make better-informed decisions about tax credits and exemptions. In addition to showing the statutory authority and purpose for each expenditure, it will also present data that can be used to evaluate the effectiveness of tax expenditures in accomplishing their public policy goals. The tax expenditure report will also increase the level of public transparency around tax credits and expenditures.
The legislature enacts tax credits and exemptions as a means of accomplishing specific public policy goals. In many cases, tax credits and exemptions have been and continue to be an effective mechanism for implementing public policy. There are a number on the books in Colorado today that we believe to be sound and vital, and there are some that make the overall effect of taxation in Colorado less regressive.
However, unlike spending decisions, which are carefully scrutinized and reviewed by the governor's budget office and legislature's Joint Budget Committee every year, there is limited review of tax exemptions and credits. We enact them and then forget about them. Yet they account for more than one-quarter of our General Fund revenue and are paid "off the top," before we fund any other aspect of state government.
In addition, the cost of tax expenditures is determined by the number and value of credits claimed by those eligible and can grow beyond the value estimated when they were enacted. Spending decisions, on the other hand, are limited to the amounts appropriated.
For these reasons, most public finance experts argue that tax expenditures should be carefully reviewed by policymakers and the public. The National Conference of State Legislatures recommends that tax expenditures be reviewed with the rest of the state budget. "They (tax expenditures) are not subject to the examination that formal budget items regularly encounter. Comprehensive budget review should include them, and individual tax expenditures should be reviewed just as other state expenditures are."
We believe in fact-based decision-making and find that policymakers are most effective when they have solid data on which to base decisions about public policy alternatives.
It is equally important for the public to have reliable and easily accessible information so they can weigh the costs and benefits of various policy proposals and draw their own conclusions about the policies being put forth. Doing so makes public policy more transparent and accountable for the general public.
This bill directs the Department of Revenue to produce an annual report describing various aspects of Colorado's tax expenditures, including the statutory authority for each tax expenditure, a description of the expenditure, an estimate of the reduction in revenues for the current year and next three years, the purpose of the tax expenditure and an analysis of whether the expenditure is achieving its intended purpose.
It creates a mechanism for gathering and presenting information on tax expenditures that will give policymakers and the public solid data with which to assess the expenditures' value in accomplishing the public policy objectives they were intended to achieve. This information would be helpful in identifying those tax expenditures that are working and could be expanded as well as those that are not and should be restructured or repealed.
The report will be similar to those produced by 30 other states and will contain the type of information that budget policy experts recommend should be included in tax expenditure reports. Among the western states that produce tax expenditure reports that meet many of the criteria suggested by budget experts are Arizona, California, Idaho, Kansas, Montana, Nebraska, North Dakota, Oregon and Washington.
Colorado does not currently produce an annual tax expenditure report that meets the criterion set out by budget experts. The Department of Revenue produced the Colorado Sales Tax Exemption Study 2002, which listed each exemption, its statutory authority and its estimated value. The department indicated it produced the report to provide decision-makers with a tool to use "when evaluating the magnitude of Colorado sales tax exemptions." The department also indicated that the estimates in the report "will be revisited after the publication of each major census year. For years in between, the value of exemptions will be updated by applying an appropriate price index." The most recent update available on the department's web site contains information on the value of sales tax exemptions in 2006. This report presents valuable information but does not include data on Colorado's income tax credits or the costs of conforming to federal income tax changes.
Other recent reports on Colorado's tax expenditures include the Legislative Council staff's State Income Tax Credits, Rebates, and Modifications & State Sales and Use Tax Exemptions, which listed each tax credit and exemption, the value of each and when it was enacted. The Center for Colorado's Economic Future at Denver University published Colorado Tax Expenditures, A Compendium in November 2009. This report lists every tax expenditure and provides an explanation of each expenditure, its statutory citation, year enacted, significant amendments and estimated value.
While these reports provide valuable information, there is no assurance that they will be regularly updated or published in a way that makes them easily accessible to the public. However, unlike the tax expenditure report established under this bill, they do not present information assessing the effectiveness of tax expenditures in reaching the public policy goals they were created to achieve.
The National Conference of State Legislatures finds that a high-quality revenue system is accountable to taxpayers. They state that "tax expenditure budgets (a term synonymous with tax expenditure reports) are ways of enhancing accountability. A tax expenditure budget shows the costs, expressed in lost revenue, of a tax credit or exemption that is intended to benefit some group of taxpayers or encourage a public policy goal. It shows revenue losses just as a regular budget shows expenditures."
Therefore, to ensure that policymakers have the necessary information to fully assess the value of tax expenditures in accomplishing public policy goals and to ensure there is public transparency and accountability for Colorado's tax expenditures, we urge the Colorado General Assembly to enact HB 11-1104.
1) Principles of Sound State Budgeting Practices, National Conference of State Legislatures, June 1995.
2) Promoting State Budget Accountability Through Tax Expenditure Reporting, Jason Levitis, Nicholas Johnson and Jeremy Koulish, Center for Budget and Policy Priorities, April 2009.
3) Colorado Sales Tax Exemption Study 2002, Ann Duenas, Office of Research and Analysis, Colorado Department of Revenue, June 2007.
4) Colorado Sales Tax Exemption Study, Colorado Department of Revenue, accessed Feb. 23, 2011.
5) State Income Tax Credits, Rebates, and Modifications & State Sales and Use Tax Exemptions, Colorado Legislative Council Staff.
6) Colorado Tax Expenditures, A Compendium, Tom Dunn, Center for Colorado's Economic Future, University of Denver, November 2009.
7) Principles of a High-Quality Revenue System, National Conference of State Legislatures, Fourth Edition June 2001, updated June 2007.