The Ritter Business Tax Reforms

Governor Ritter is proposing three major changes in business taxation in the state, and has lined up sponsors for each of the proposals in the General Assembly.  He would eliminate the business personal property tax for the state for 30,400 small businesses, would simplify the formula used to determine Colorado’s share of corporate taxes from interstate businesses, and would end sales taxes on aircraft built in the state and sold to purchasers out of state — the same treatment that applies to most other sales.  The cost to the state of these changes would be negligible, but they represent major tax simplification for businesses.Business Personal Property Tax Cuts

According to the most recent annual report of Colorado’s Department of Local Government, which maintains state property tax statistics, 11.75% of the state’s property taxes are assessed on business personal property, like industrial equipment and computers, as opposed to real estate.  About 42% of the taxed business personal property in the state ($3.7 billion worth) is “state assessed” meaning that it belongs to airlines, railroads, pipeline companies and utilities. 

About $3.1 billion of personal property is “commercial” such as office equipment, restaurant equipment, and computers.  Another $1.2 billion in “industrial” and roughly $0.7 billion in the mining and timber industries.  Agriculture makes up only $7 million (about 0.01% of the total) as it is largely exemplt from the business personal property tax.

The National Federal of Independent Business, a small business lobbying group called the tax: “One of the most onerous and burdensome taxes Colorado small-business owners have to comply with is the business personal property tax.” They’re right.  The amounts collected from small businesses can be very small, but the cost of collecting the tax can be great.  The process of valuing business equipment is far less transparent than the process of valuing real estate where every single sale is reported to a county assessor creating a comprehensive database.  Also, the range of property types involved is much more narrow for real estate than for personal property.

Colorado has roughly half a million businesses.  But, it isn’t entirely clear how many of them currently pay the tax.  Many that are required by law to do so, do not, either intentionally, or out of ignorance of the law.

According to the Denver Post‘s analysis:

In contrast, the plan to raise the threshold for the business personal property tax from the current $2,500 to $7,000 over the next five years will cost the state a modest sum – estimated at $126,400 in 2012 – to offset the amount that local schools will lose in tax collections on the computers and other equipment deployed by small businesses.

Counties will also lose modest sums, but should reap offsetting savings by no longer having to chase after these penny-ante payments. The Arapahoe County assessor, for example, reports spending 60 percent of its auditing budget on small businesses subject to the personal property tax – while collecting just 8 percent of its revenue from that source.

In the long run, counties, cities, school boards and special districts will simply shift the revenue lost from these small personal property tax collections from the small business personal property tax collections to the real estate and larger business personal property tax base.

Many groups have pushed for a total elimination of the tax, but that would have a huge negative impact on the revenues of areas like Morgan County, where the personal property of big businesses make up much of the local tax base.  A 2001 study found that business personal property “accounts for 20% or more of local property tax revenues in 45 [taxing] districts.”  In all there are 1,300 such districts in the state.

Corporate Tax Changes

In Colorado, like most states, corporations that do business in multiple states first calculate their total taxable income and then apply a formula to determine what percentage Colorado should receive.  There is only the most modest federal guidance regarding how that should be done.  According to Governor Ritter, right now, in “Colorado, companies may choose one of two apportionment formulas to calculate its Colorado corporate income tax liability:

Two-Factor Method: Equally weighted sales factor (50 percent) and property factor (50 percent).

Three-Factor Method: Equally weighted sales factor (33.5 percent), property factor (33.5 percent) and payroll factor (33.5 percent).”

He proposes to replace that with a formula that looks at sales alone, following a national trend in that direction.

Governor Ritter claims that this corporate tax proposal, along with some other unidentifed simplifications, is revenue neutral.

The Fly Away Tax

When you buy a book from Amazon, you don’t pay sales tax in Washington State.  When you live in Denver and order a car from Aurora, you don’t pay Aurora sales taxes.  In principal, some of the time, you should be paying Colorado “use taxes” on purchases from out of state, but most people don’t.

The same rule usually applies to Colorado sales taxes.  But, there is an exception to the general rule for aircraft.  If an airplane is built in Colorado, the state asserts a right to collect taxes on the sale of that plane.

This exception is largely meaningless right now, because there have only been a handful of planes built in Colorado in the last couple of decades.  But, this is about to change.  Several general aviation companies have decided to make Colorado their home.

The Denver Post is very likely wrong when it states that: “no planes are manufactured in Colorado – and they aren’t likely to be while this discriminatory tax is in effect.”  Colorado’s aircraft companies have already made major commitment to build small private planes in Colorado.  But, they are right in describing the “fly away tax” as unfair to a new manufacturing industry that Colorado would like to encourage.

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Andrew Oh-Willeke

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