CO Budget May Roll Back Some of Last Year’s Tax Changes; Budget Office Finds $75 Million

April 7, 2011

The Colorado General Assembly has reached a tentative budget compromise which would increase the states reserve fund, lessen cuts to public schools, and make a few tax changes. Some of the tax changes are rollbacks of changes made in the last couple of years, some of which were covered in a Tax Foundation Fiscal Fact from February 1, 2010. The budget will head to the Senate floor for approval.

The budget would increase the state’s general fund reserve to 4% from the current 2.3%. The deal also reduces the proposed cuts to public education. Gov. John Hickenlooper had proposed cutting $332 million from K-12, but the budget deal reduces that to $250 million in cuts, a priority for Democrats. Republicans added a prohibition on cash transfers from dedicated, fee-based funds.

The tax changes include reinstating the state’s sales tax vendor fee that is paid to retailers as compensation for collecting the state’s sales tax. The vendor fee, normally 3.3 percent of sales tax collected, was suspended during the recession earlier in the 2000s and again in the last few years. The deal would bring back the vendor fee, at 2.2 percent for three years and then back to the full 3.3 percent. This is probably a good idea: businesses are performing the job of tax collector for the state, and should be compensated. But whether vendor fees are good policy or bad policy, the policy should be consistent over time. It is hard to argue that vendor fees are the right thing to do when the state has a surplus and the wrong thing to do when the state has a deficit. “We need revenue” is not sufficient justification for eliminating it, and calling it a “business tax break” is misleading.

The budget also restores a small number of sales tax exemptions for business inputs used in agriculture. We wrote against the policy of taxing business inputs in Colorado when it was passed last year, and repealing this is the right choice. A retail sales tax should only apply to sales to final users, and exclude business to business transactions. Again, this policy is not properly called a “business tax break,” since it is a fundamental part of any properly structured retail sales tax. Unfortunately, many of the other business inputs that were made taxable last year, such as fuels and electricity used in manufacturing, are going to continue to be taxed.

The budget also restores the sales tax exemption for standardized software. Again, here the big question is whether the software is sold to businesses or consumers. Last year we noted that

In an ideal world, all standardized software that was both sold to an end user and sold by a retailer with nexus in the state would be subject to the retail sales tax. In practice, it may be that both of these conditions are rarely met. In that case, taxing all standardized software purchases, whether they meet the conditions or not, in order to get at the minority of purchases that should be taxed would be more harmful than helpful.

One surprise that helped the budget situation a little:

An accounting glitch in the March revenue forecast from the governor’s budget office means the state has $75.5 million more in the current 2010-11 fiscal year than previously thought.

“We had an incorrect formula in a section of our revenue forecast,” said [the] director of the Office of State Planning and Budgeting. “It’s a very complicated accrual accounting adjustment.”

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