Special interest giveaways burden Colorado taxpayers, muddy tax code

March 12, 2014 by admin · Leave a Comment
Filed under: Opinion Editorials, Publications 

Last fall, Colorado officials claimed a $1 billion tax increase was needed to save the state’s public schools. Voters did not approve the tax increase. If officials were telling the truth, one would expect that this year they would be directing every extra budget dollar toward K-12 education.

This is not happening. Instead, bills currently before the Legislature include an estimated $75 million in special interest tax giveaways.

The Office of Economic Development and International Trade will enjoy a $3.7 million increase. It works closely with the Colorado Economic Development Commission, which awards business grants from the taxpayer-financed “strategic fund.” In August 2013, the Colorado Economic Development Commission approved a $200,000 loan to “small, rural movie theaters that are facing financial pressure.” Given that almost all businesses face financial pressure, it is no wonder a Denver Post study showed nearly one-third of the businesses the commission funded had ceased to exist as independent entities.

Other economic development giveaways include $5 million in special rewards for television and film producers and a $5 million slush fund for the Advanced Industries Accelerator Program. The program benefits people involved with currently fashionable businesses like aerospace, bioscience and electronics.

The problem with taxpayer-funded grants, tax credits and tax exemptions is that one man’s tax preference is often another man’s tax burden. The Governor’s Office says the state needs $24.1 billion to run its government. Yet when favored businesses and individuals receive grants or tax exemptions, the businesses and individuals out of political favor are required to pay more. The state ends up taking money from successful businesses and individuals — money that might have been used to develop successful new enterprises — so it can fund business proposals it thinks might produce tax revenue in a decade or so.

Giving tax deductions for the interest on government bonds but not private ones biases investment decisions in favor of lending to governments rather than private businesses. Providing tax credits to businesses that create 20 new jobs at 110 percent of the county average wage biases the tax system in favor of businesses that hire high-wage employees at the expense of those who hire lower-wage employees.

Worse, such special interest preferences make it almost impossible to maintain a “clean” tax base. Clean tax bases seek to raise revenue while avoiding special preferences for particular types of consumption or investment. They tend to be easier to comply with and understand than ones with tangled labyrinths of special-interest concessions. Simple tax laws with a low general rate often raise more revenue than do complicated laws with a higher general rate and lots of special exemptions.

Lower rates in a simple tax system are also beneficial because they are less likely to trigger wasteful tax avoidance schemes.

As a rule, the political system is incapable of distinguishing legitimate economic arguments from illegitimate ones, and often distorts economic decisions by picking winners and losers on the basis of political power or emotional pleading.

Tax breaks blessing certain special interests at greater cost to the rest of us persist. Meanwhile, lawmakers scarcely have considered a liberating and cost-saving use of tax credits.

The current political practice favoring the consumption of K-12 education via public schools biases educational decisions. Nonprofit scholarship-granting organizations could serve more needy elementary and secondary students with private tuition aid if the organizations’ donors received a tax credit for their contributions. Children leave the public system to receive a quality education. The state comes out ahead because the scholarship costs less than the per-pupil amount for students remaining in public schools.

Colorado citizens already pay plenty of taxes. Before officials come back with additional proposals for tax increases, they should stop expanding the system of special tax rates for special groups and start rolling back existing ones. At the same time, they should look at enacting tax credits that provide a general educational benefit while reducing the expense to taxpayers.

Without reforms, Colorado voters have every reason to continue to say no to new taxes.

Linda Gorman is an economist at the Independence Institute, a free market think tank in Denver.

Amendment 66: More Spending Doesn’t Buy Higher Student Achievement

October 25, 2013 by admin · Leave a Comment
Filed under: Issue Backgrounders, Publications 

IB-I-2013 (October 2013)
Author: Linda Gorman

PDF of full Issue Backgrounder

Introduction:
Parents spend their money to benefit their children. School bureaucrats spend other people’s money to benefit the schools and those who run them. Amendment 66 raises taxes to take money from working Coloradans. It gives the broken public school bureaucracy more to spend and leaves parents with less. Taking money from parents harms children.

Amendment 66: Spend More, Get Less (Part 2)

October 25, 2013 by admin · Leave a Comment
Filed under: Issue Backgrounders, Publications 

IB-H-2013 (October 2013)
Author: Linda Gorman

PDF of full Issue Backgrounder

Introduction:
More spending does not create better schools. Many well-funded districts have lower graduation rates. Colorado Springs spent $1,500 less than Denver. It graduated 76 percent of its students, while Denver only graduated 46 percent. If passing Amendment 66 lets Denver spend $4,000 more, it might end up matching Indianapolis’s 30 percent graduation rate.

Amendment 66: Spend More, Get Less

October 10, 2013 by admin · Leave a Comment
Filed under: Issue Backgrounders, Publications 

IB-G-2013 (October 2013)
Author: Linda Gorman

PDF of full Issue Backgrounder

Introduction:
Amendment 66 will take the money you spend to benefit your children and give it to public education bureaucrats. Education bureaucrats do not necessarily use higher funding to benefit children. They will spend it on things that they like – generous pensions, higher salaries, and more educational consultants.

A Billion Dollars Worth of Bad Ideas: Amendment 66 Tax Hike

October 3, 2013 by jlongo · Leave a Comment
Filed under: Issue Papers, Publications 

A Billion Dollars Worth of Bad Ideas: The Amendment 66 Tax Hike Leaves Kids and Teachers Behind, Harms Colorado’s Working Families, Enriches a Broken Bureaucracy

IP-7-2013 (October 2013)
Author: Linda Gorman

PDF of full Issue Paper

Introduction:
Amendment 66 would replace Colorado’s flat income tax of 4.63 percent of federal adjusted gross income with the two bracket system shown in Table 1: Colorado Income Tax Rates if Amendment 66 Passes. Passing Amendment 66 also passes SB13-213, the new 141-page state school finance law.

PERA’s Problems in 2013

September 18, 2013 by admin · Leave a Comment
Filed under: Issue Papers, Publications 

IP-6-2013 (Sept. 2013)
Author: Joshua Sharf

PDF of full Issue Paper

Introduction:
The trajectory of the Public Employee Retirement Association of Colorado’s (PERA) financial condition has been anything but linear. From times of seeming excess to times of projections for failure, the public employee pension scheme has changed radically over time. As of 2013, expected improvements to the system’s outlook have not materialized, and PERA is once again in crisis. While far from alone in the government employee problem, Colorado may be facing one of the worst current circumstances.

Will increasing Colorado’s top income tax bracket by 27 percent affect incomes?

August 6, 2013 by admin · Leave a Comment
Filed under: Opinion Editorials, Publications 

At present, everyone in Colorado pays the same marginal income tax rate, 4.63 cents out of every additional taxable dollar earned. Colorado officials and their allied interest groups support a constitutional amendment both to increase the state’s income tax and to create two tax brackets. They say the additional funding will improve K-12 education, although it is surprisingly difficult to find definitive evidence from other states showing that increasing spending from current levels will improve educational achievement.

What officials don’t talk about is the fact that higher state taxes may affect average incomes. The highest tax bracket would be 5.9 cents out of every additional taxable dollar earned by households with incomes above $75,000 a year. Households with taxable incomes of $75,000 or less will pay a marginal tax of 5 percent, 5 cents out of every additional dollar earned.

But people have all sorts of ways to adjust their taxable income. They can work less. They can increase mortgage deductions by buying a bigger house. They can shift their savings into tax-free bonds. And if one state’s income taxes are just too much, they can change their residence.

The following chart shows the historical relationship between federal marginal tax rates and average real income. It suggests that raising tax rates may affect income. When marginal taxes fall, average incomes tend to rise and vice versa. Given the strong correlation between parental income and school achievement, the children might be better off if their parents keep the money.

Source: Emmanuel Saez. 2004. “Reported Incomes and Marginal Tax Rates, 1960-2000: Evidence and Policy Implications,” Tax Policy and the Economy, 18, 117-173.

This article originally appeared on Complete Colorado Page 2, August 2, 2013.

Denver’s proposed disposable bag ‘fee’ obviously a tax

August 5, 2013 by admin · Leave a Comment
Filed under: Opinion Editorials, Publications 

Members of the Denver City Council are proposing an ordinance that would impose a 5-cent charge on disposable (paper and plastic) bags used to carry purchases at point of sale at grocery and convenience stores with “over 1500 square feet” of retail space.

Proponents call this bag charge a “fee.” But with even a little scrutiny, the ordinance is obviously much closer to a tax than it is to a fee. The difference between the two is hugely significant. New fees can be passed by the City Council, while under Colorado’s Taxpayer’s Bill of Rights (TABOR), new taxes must be approved by voters through the ballot.

Here’s what the Colorado Supreme Court had to say about the difference between a fee and a tax in the 2008 case Barber v. Ritter:

If the language discloses that the primary purpose for the charge is to finance a particular service utilized by those who must pay the charge, then the charge is a “fee.” On the other hand, if the language states that a primary purpose for the charge is to raise revenues for general governmental spending, then it is a tax.

The drafters of the Denver ordinance are very careful to include that “No disposable bag fees collected in accordance with this article shall be used for general governmental purposes.” This is apparently the clumsy justification, based on at least one part of the Supreme Court’s definition, that the bag charge can’t be a tax.

But that alone doesn’t magically make a tax a fee.

The draft ordinance goes on to describe thirteen different, and often vague, city activities that can be funded with the new revenue, including studies, education campaigns, community cleanups, a website and the hugely ambiguous “Any other activities determined by the manager [of the Department of Environment] to mitigate the effects of trash associated with disposable bags.”

So while the money might not be used for general government spending, it can be used quite broadly, and with significant discretion. This hardly satisfies the fee requirement that the charge be used to “finance a particular service utilized by those who must pay the charge…”

The disposable bag money is also going to fund the giving away of reusable bags to “food store customers” and (again at the discretion of the manager of the department of environmental health), “to other appropriate locations.”

In other words, among many other things, the city will be using the money paid by people using disposable bags to give away reusable bags to people who aren’t paying the cost; a redistributive give-a-way program on (literally) someone else’s nickel.

How does that possibly satisfy the “particular service utilized by those who must pay the charge” fee definition? How is that not a tax?

Moreover, what Denver politicians are calling a fee is actually treated the same as a sales tax in both its collection from the consumer and its remittance to the city. Like with a tax, grocery stores are required to collect the money from customers at the point of purchase. Like with a tax, stores keep a portion (two cents of each five cents collected up to a defined amount each month) of the money collected to offset the cost of complying with the law. Like with a tax, there are penalties and interest charges for stores failing to file and remit on time.

To call a charge that so closely resembles a retail sales tax a city government fee depends on a convoluted and insultingly obvious attempt to redefine the traditional understanding of the difference between a fee and a tax.

In fact, a similar disposable bag fee passed in Aspen is currently being challenged in Pitkin County District Court as a violation of TABOR.

The plaintiffs’ attorney, Jim Manley from Mountain States Legal Foundation notes in his motion for summary judgment, “The revenue stream provided by the bag tax may be small, but the legal principle at stake is significant.”

The stakes are indeed significant. If politicians in Denver or Aspen or anywhere else in Colorado find they can bypass voters by simply calling what is obviously a tax a fee instead, then there are really no longer any meaningful limits on the ability of Colorado governments to reach into their taxpayers’ pockets.

There is a solution to all of this. Denver City Council could simply err on the side of respecting the Colorado Constitution (which should be their default setting anyway) by recognizing the proposed ordinance for the tax that it is, and referring it to the ballot for Denver voters to decide.

This article originally appeared on Complete Colorado Page 2, August 2, 2013.

The Colorado Government Pension System Introduction and Basic Organization

April 22, 2013 by admin · Leave a Comment
Filed under: Issue Backgrounders, Publications 

IB-B-2013 (April 2013)
Author: Joshua Sharf

PDF of full Issue Backgrounder

Introduction:
Colorado’s Public Employee Retirement Association (PERA) is the State’s largest pension plan, with more than 483,000 members as of 2011. Government contributions exceeded $1 billion in FY2011.

A Thumbnail Guide to Colorado State Government’s Spending Problem

February 26, 2013 by jlongo · Leave a Comment
Filed under: Issue Backgrounders, Publications 

IB-A-2013 (February 2013)
Author: Linda Gorman

PDF of full Issue Backgrounder

Introduction:
Colorado state government has a spending problem. Although inflation-adjusted per capita personal income in Colorado is still below its 2003 level, state spending has risen every year since 1999. State tax revenue has risen, but it cannot keep up with the spending.

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