Study: Colorado Tax Proposals Push State Away from Proper Tax Base

Sales Tax Expansion Would Include Business-to-Business Transactions, Soda and Candy

Washington, DC, February 1, 2010 -- Colorado legislators are scheduled to vote on a handful of tax proposals today that, if enacted, would lead to double taxation of many products and unfairly punish select industries, according to a new Tax Foundation report.

Two proposals would move the state's tax system in the right direction, according to the Tax Foundation's analysis: a bill to eliminate the state's alternative minimum tax, which would reduce tax complexity without sacrificing a lot of revenue ($5.5 million in FY 2009), and a bill to limit tax credits for fuel-efficient cars.

"Lawmakers should be commended for their willingness to reexamine targeted tax breaks, but unfortunately, much of the legislation they're considering today would move the state farther away from sound tax policy," said Tax Foundation Staff Economist Mark Robyn, who authored the new report, "Handful of Proposals Would Push Colorado Away From the Proper Tax Base." The report is No. 208 in the Tax Foundation's Fiscal Fact series and is available online at http://www.taxfoundation.org/legacy/show/25779.html.

Several of the proposals would expand the sales tax base to include various business inputs, in effect leading to double taxation: once at the production level and again at the retail level. These bills include taxes on direct mail advertising materials (HB 1189), fuels and electricity used in manufacturing (HB 1190), fast food containers and bags (HB 1194), and various agricultural inputs (HB 1195).

Another bill (HB 1191) would rewrite tax law to exclude soda and candy from the sales tax exemption for groceries. While a proper broad-based, low-rate sales tax that includes all end-user purchases should apply to soda and candy as well as all groceries, the Tax Foundation report notes that it's clear soda and candy were singled out as politically popular targets.

HB 1192 would reclassify certain types of standardized software as tangible personal property and thereby subject them to the sales tax, regardless of whether the software was both sold to an end user and sold by a retailer with nexus in the state. Finally, HB 1193 would enact a so-called "Amazon tax" to force online retailers to collect sales taxes. Such laws greatly expand the power of state government to collect taxes from out-of-state businesses and should be avoided, according to the report.

"Reexamining some of the nitty-gritty tax policies buried deep within state statutes is a good idea," Robyn said. "Targeted tax breaks for special interests, or 'tax expenditures,' are really just government spending funneled through the tax code. But legislators should keep in mind that some tax exemptions exist to prevent economically damaging double taxation."

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

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Tax Foundation Fiscal Fact No. 208, "Handful of Proposals Would Push Colorado Away From the Proper Tax Base," is available online at http://www.taxfoundation.org/legacy/show/25779.html. To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.