The Oprah Effect
Tax Credits = Free spending
The legislature is considering more than 20 bills to give tax breaks to select groups of Coloradans. Some of the measures would affect large numbers of people — such as 55,000 low-income working families. Others would give special treatment to just a handful — 12 space industry companies, for example. The total estimated cost of these bills, if all were approved, would be more than $200 million in fiscal year 2016-17, the first year most of the proposals would have an impact.
But real costs of this type of “tax code” spending take more several years to set in. One bill, a tax credit to companies for jobs they create, would cost state taxpayers $500,000 in fiscal year 2016-17 but $55 million in fiscal year 2027-28. Another that would give a tax credit for the costs of private schools would cost $59 million next year and grow to $284 million in 20 years. The General Assembly seems to want to hand out tax credits the way Oprah hands out cars. One big difference, though, is that Oprah is spending her own money while tax credits spend everyone’s money. Another difference is that Oprah does her lavish gift-giving publicly on TV, while state tax credits typically are passed quietly — and usually with little media coverage — at the statehouse.
Spending on schools, human services and health care is scrutinized every year by the budget committee. The full legislature votes to approve the budget based on estimated public revenues and whether spending fits into those revenues.
Tax code spending, in contrast, goes largely unmonitored. There is no committee responsible for reviewing tax data to see if specific tax credits are working. There are no public hearings in which citizens can request that tax breaks be re-prioritized or spread out for greater impact. Because credits affect the amount of revenue the state collects each year, funding those credits trumps all the “appropriated” spending in each year’s budget. In other words, tax favoritism get first priority. It’s the fiscal woodwork that, despite its high price tag, rarely gets noticed.
Don’t get me wrong — using the tax code to motivate behavior isn’t always a bad thing. Other states have had enormous success using tax credits to help low-income working families pay for child care and encourage farmers to donate excess food rather than letting it go to waste. Those forms of tax code spending yield tangible public and economic returns.
But other states also have experience with tax credits that don’t work, including sales tax holidays for purchases of school supplies as proposed in HB 1097. While promoted as cost savings to consumers, experience in other states shows that retailers tend to increase prices during sales tax holidays and that many families cannot postpone purchases until the tax free days. The conservative Tax Foundation sums it up best, “experience shows that the claims of economic stimulus, increased revenue and consumer savings are greatly exaggerated. States see little net economic activity as a result of sales tax holidays; the holidays instead represent a costly-to-administer revenue loss for the government.”
The question is whether limited public dollars in Colorado should be used to yield largely private returns, such as profits for companies and their investors. Should the creation of a job by a company warrant a tax break?
In the last few years, we slashed school budgets to the roots. And this year, proponents of restoring those cuts are being told the state can’t commit to ongoing investments because revenue growth is too tentative. We should proceed prudently on investment and spending. We should think about the future as we evaluate where to spend the tax dollars we have in hand. It is that very prudence that should guide all decision-making on using public dollars, including proposed tax credits.
Tax dollars are extremely limited. And the demand for public investments is high, particularly after back-to-back recessions have hindered our ability to support our schools and maintain our roads. Colorado’s General Assembly has a long pattern of adopting new tax credits when revenues are growing, then having to cut spending or repeal other tax credits when the economy stalls. The standards we apply to crafting our annual state budget should be the same standards for tax code spending. Public expenditures should, at a very minimum, be transparent and equitable, regardless of the relative vitality of the economy.
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