Count on a Denver Democrat to say the thing no lawmaker in Taxpayer Bill of Rights Colorado wants to say. In the face of the state’s mounting budget crisis, state Rep. Joel Judd plans to introduce two bills next month that would dissolve tax-free business “enterprise zones” and that would levy taxes on services across the state.
“The question is: Do we provide education for children or do we get to go to a salon without paying a tax?” Judd told the Colorado Independent. “Nobody is going to feel good about it, but are we going to weigh the pain? Because it’s either cutting schools or making people pay that tax.”
Judd admitted that he expected his bill would fail to pass. Even now, amid an historic budget crisis, there’s just not the political will to make it law, he said. Yet he said he has at least one compatriot in Denver Senator Chris Romer.
More hard cuts and even less revenue
Gov. Bill Ritter has proposed cutting the K-12 education budget by 4.6 percent or roughly $260 million. He has also proposed cutting $25 million from Medicaid and $145 million from general fund money allocated to higher education, which comes on top of $80 million in cuts made to the higher ed budget earlier this year. Although some of that funding has been backfilled by federal stimulus dollars, that money will not last.
Judd sees the need for not only cutting inefficient programs but also increasing revenue in order to maintain vital programs. To him, that means taxes and the elimination of subsidies.
The state currently does not tax the majority of services provided by businesses. It mostly taxes products. It doesn’t tax haircuts, for example, but it does tax iPods. There are exceptions. Telephone and electric services are taxed by the state.
“We’d like to draw out the [tax] base, so that the state’s 2.9 percent sales tax applies across the board,” said Judd. He noted that his plan would avoid taxing health care and other vital services.
In fact, he said, the legislation would most likely take the form of a luxury tax. And even a tax on luxury services could be made more palatable. A mechanism would be put in place that would allow consumers of luxury services to spend $1000 before the tax kicked in.
No one wants to raise taxes, he said, but higher education in the state alone costs $500 million a year.
“Are we going to be the first state in the country to eliminate funding for higher education?” Judd said.
Legislative council is currently tallying the revenue that could be generated by a state tax on services.
The Taxpayer Bill of Rights seems to dictate that tax hikes be approved by voters at the ballot box. But Judd said when things are this bad, TABOR doesn’t fully apply.
“In Ritter v. Mesa County Board the Supreme Court says a change in tax policy resulting in a net increase in revenue needs go to the voters only when revenue will exceed the TABOR limit. Currently, we’re about $1.5 billion under the TABOR limit. Eliminating business tax subsidies associated with enterprise zones produces less than $50 million. So no vote required there,” he said.
But applying a 2.9 percent state sales tax to services would produce more than $1.5 billion in revenue and so would require a statewide vote.
“There are a number of other options,” Judd said. “We could broaden the tax base to include services and simultaneously reduce the sales tax rate to stay under the TABOR limit. Or, again, we could extend the sales tax only to luxury services.”
Judd has his sights set on the tax exemptions and credits provided to various businesses around the state. He’d like, in particular, to see the $60 million a year doled out to businesses located in the state’s enterprise zones eliminated. Citing Jeffery Zax, an economics professor at the University of Colorado, Judd said that the touted enterprise zones aren’t generating economic growth.
“Governor Ritter to his credit created a budget that does in fact take a look at these exemptions and credits to the tune of about $132 million, which is a good start. But that still leaves a couple billion dollars untouched.”
Ritter cut 13 tax credits and exemptions from the state budget proposal that amounted to $132 million. In his most recent proposal, Ritter called to slash $17.5 million in enterprise subsidies.
“That’s good. I say wipe them out. Get rid of the enterprise zones,” said Judd.
CU economist Zax participated in a joint committee hearing a few weeks ago that explored cutting as much as $2 billion in tax breaks.
“Government subsidies to business don’t encourage employment and they don’t encourage economic growth,” Zax told the committee. Although the tax breaks may draw businesses initially, the cost of location rental quickly increases, driving down wages and profitability. The process in Colorado, he wrote, takes about three years.
Enterprise zone companies end up preforming no better than non-enterprise zone companies in Colorado, Zax said. In fact, they employ fewer workers and tend to be more fragile. He elaborated in a written statement:
They probably have fewer workers because Enterprise Zone subsidies for the use of capital encourage businesses to replace workers with machines. They are probably more fragile because they receive fewer Enterprise Zone subsidies as they age.
Still, Judd and Zax have a long way to go on the road to persuasion. Don Marostica, decidedly non-ideological former Republican state representative turned state economic development director, disagreed with Zax at the committee hearing. Marostica said that in many cases it was the subsidies provided by enterprise zones that bring business to the state.
Judd said that discussion misses the point. He would prefer to provide teachers with jobs than to continue subsidizing businesses, as he put it.
“If we cut $100 million out of School Finance Act, that represents about 5,000 teaching jobs. Those paychecks stimulate the economy like any other paycheck. Yet when we throw teachers out the door, we are simultaneously depriving our kids of a good education.”