Prepared Testimony to the Joint Meeting of the House and Senate Finance Committees
Prepared Testimony to the Joint Meeting of the House and Senate Finance Committees
Colorado General Assembly
President, The Bell Policy Center
November 12, 2009
Thank you for the opportunity to speak to you today.
I am Wade Buchanan, and I am president of 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. And we know that to be that effective partner, the public sector needs adequate resources to do the things we as citizens ask it to do.
First, we want to thank you for holding this hearing and for beginning the process of evaluating the scores of tax exemptions that have accumulated in Colorado law over the years. We also want to thank the Governor for proposing limiting, suspending or repealing some of these exemptions in his proposed budget for next year.
This conversation is timely given the financial strain our public systems face in this economy. Times like these require a balanced approach to closing the gap between what we want our public systems to accomplish and the resources we give them to get the job done. But it is a conversation that is timely regardless of the economic situation, because such a balanced approach is important every year.
Others are testifying today about specific tax exemptions and programs. To that discussion we would add the issue brief we prepared earlier this year that offers a thorough review of the research on enterprise zones. I have submitted copies to you of this brief, entitled "Enterprise Zones in Colorado," by our policy analyst Dr. George Awuor. This brief finds that enterprise zones in Colorado have resulted in minimal investment and job creation and have produced few significant economic benefits.
While we endorse the premise of encouraging businesses to locate and create jobs in economically challenged areas, we also believe in fact-based decision making. And the facts show enterprises zones have not worked as intended. In Colorado, we forgo tens-of-millions of dollars in revenues – and therefore tens-of-millions of dollars that could go to support our schools or community colleges or other programs – in order to fund tax breaks that research shows are not achieving their intended goals.
And that brings me to the main focus of my comments today.
As I said a moment ago, much of the testimony you are hearing today focuses on specific issues and constituencies. That testimony is compelling and worthy of your serious consideration.
But speaking for an organization that does not represent a specific constituency nor focus on a specific issue area, my purpose today is the bigger picture. My hope is to provide you with a context or a framework in which to evaluate all that you hear today.
And that is this basic premise:
Each and every public purpose for which the state uses tax policy and tax revenues should be reviewed regularly by the legislature and evaluated on its own merits. The mechanism by which a previous legislature chose to pursue that public purpose should not shield the policy from regular scrutiny nor confer upon it a higher value or priority or level of protection.
If the public purpose still is a high enough priority and the mechanism has been effective in achieving that purpose, then the policy should continue. But if the purpose is no longer a priority or the mechanism has been shown to be ineffective, the policy should be changed or dropped. And it should make no difference whether the mechanism a previous legislature chose involved a budget appropriation or a tax exemption.
The Legislative Council projects the state will receive $6.63 billion in income, sales and use tax revenues in the current year. For the record, that's 3.2 percent of the state's estimated $207 billion economy.
Legislative Council data presented to the Long-Term Fiscal Stability Commission this summer also showed the state will forgo about $2.17 billion this year in income, sales and use tax revenues due to tax exemptions.
In other words, existing tax rates alone would generate about $8.8 billion in income, sales, and use tax revenues this year. But the state will not receive nearly a quarter of that revenue because of exemptions enacted by previous legislatures.
There is nothing fundamentally wrong with that fact. Tax exemptions have been and continue to be effective mechanisms for implementing public policy. There are many 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.
But what is fundamentally wrong is that these exemptions are in effect year in and year out without any real process of review or reconsideration. Every year the Governor's budget office and the legislative Joint Budget Committee carefully scrutinize the policies and mechanisms by which the state spends the revenues it receives. And every year our elected officials wrestle with questions of which programs should take priority and what level of expenditure is appropriate given available resources.
None of that happens with tax exemptions. We enact them, then we forget about them. In essence, we spend almost a quarter of General Fund revenues every year without any review or debate about priorities or levels or effectiveness.
And we make these tax expenditures a first priority. With the exception of tax credits that are dependent on TABOR surpluses, every tax exemption is fully funded every year before any traditional program receives a penny in appropriations.
We believe we need to find a way to make the tax exemption side of the ledger more transparent, and we need to find a way for the legislature to be able to weigh the relative importance of both tax exemptions and traditional appropriations on a level playing field.
We have two simple suggestions for how to start to create that transparency and move toward a more balanced review of all the uses of General Fund revenues.
First, we suggest the Legislative Council Staff be more explicit about the value of the state's many exemptions in its quarterly revenue projections and in other key budget documents. Right now, for instance, the revenue overview projects the net revenues to be received. We suggest that in the future these overviews start with the gross revenues that would be generated by simply applying existing tax rates to taxable income or gross sales, and that there then be an accounting for the amount of that revenue that will not be received because of the tax exemptions in effect at the time.
And at least once a year these documents should contain a more detailed account of the value of each tax exemption, similar to the data the Legislative Council Staff presented to the Long-Term Fiscal Stability Commission at its first meeting.
The idea is to give citizens and policy makers the full picture on a regular basis. No part of the budget should be out of sight, and therefore out of mind.
Our second recommendation is to institutionalize a regular review process of tax exemptions. I do not know whether it is practical to expect the legislature to be able to review every exemption every year, as it does with appropriations. But the review should be frequent. The first step in this process should be legislation to automatically sunset all existing and future exemptions and to establish a formal process – perhaps through the finance committees – of review, evaluation, revision and reauthorization.
In other words, let's find a way to effectively review all the uses of state revenues, regardless of the policy mechanism. If something is important and works, let's keep it. If not, let's do something more important and effective with those resources.
Thank you for the opportunity to share our thoughts with you, and thank you again for raising these important questions. We are happy to discuss our ideas in more depth, and we look forward to working with you on this.