Democratic legislators are poised to unveil a quartet of bills next week that could decouple Colorado law from hundreds of millions of dollars in new federal tax breaks, end tax exemptions on downloadable-software sales and rein in several long-standing corporate deductions.
The bills, written in cooperation with the Colorado Fiscal Institute, are largely a reaction to last year’s federal passage of the “One Big Beautiful Bill” that offered significant corporate tax breaks and blew a hole in Colorado’s budget, CFI policy manager Caroline Nutter said. Because Colorado conforms its tax code to federal code, any cut in income produced by federal changes reflects in revenue reductions to the state government as well, leading to a $1.2 billion loss in revenue this fiscal year and contributing to next fiscal year’s $850 million budget shortfall.
Thus, the four-bill package has several aims, Nutter explained to the Colorado Chamber of Commerce Tax Council on Feb. 6. It seeks to restore state income-tax revenue that otherwise would be lost and direct it to credits for needy families in order to keep the changes revenue-neutral and avoid running afoul of the Taxpayer’s bill of Rights. And it seeks to reflect the increasing divide between Coloradans and federal Republican leaders on how states operate their tax systems and what they view as their priorities.
“It does have some more than just only technical changes,” Nutter said in speaking about one of the four bills in particular, though her statement reflects the tenor of the quartet of proposals. “Some of them are changes to align the tax code with sponsors’ values and what we believe Coloradans want.”
“Universal” impact on Colorado businesses
While business leaders are waiting to see details when the bills are introduced, which Nutter said could be as soon as Tuesday, many are raising concerns that the proposals will deal another significant blow to Colorado’s business atmosphere. Early-stage companies won’t be able to write off as many losses, any firm buying online software will be forced to pay more and companies with international operations may have to pay more in taxes to Colorado, potentially threatening their presence here, they said.
“This could impact future investments and future opportunities in the state,” said Rhonda Sparlin, Colorado partner-in-charge for tax and financial-consulting firm RubinBrown. “There’s something in here that will impact every business. This is universal across small businesses and large businesses.”
The first bill will seek to decouple Colorado tax code from multiple provisions of the OBBB. So, while Colorado companies will still get federal breaks, they would have to add the money they saved from those provisions back into their state income to determine their taxable Colorado income, which will boost the income tax they owe the state.
Tax breaks that would be decoupled, rolled back
Provisions the bill seeks to decouple include a quickening in depreciation of business personal property that the OBBB made permanent, newly allowed depreciation of qualified property, expanded research-and-experimentation tax breaks and expanded business interest deductions. These changes are expected to generate about $150 million for the state, which would put the new revenue to the Earned Income Tax Credit for low-wage earners and the Family Affordability Tax Credit for lower-earning families with kids — tax credits that are being reduced now because of the decrease in revenue caused by the OBBB, Nutter said.
The second bill would make several changes to current Colorado taxes, Nutter said. It would reduce the limit for the corporate tax deduction for executive compensation from $1 million to $500,000 and would eliminate the alternative minimum tax for high earners. It also would pare the deduction for corporate net operating loss from 80% of losses carried forward for as long as 20 years to 70% of losses carried forward for no more than 10 years.
A third bill in the package would eliminate the current sale-tax exemption on downloadable software — an exemption that currently is not allowed on similar packaged computer software that is bought at a store. Sponsors of last year’s House Bill 1296 attempted to include that change in their package of tax changes, but they couldn’t find the support to get that provision through the House Finance Committee.
Changes to the 80/20 rule
Finally, the fourth bill would be a sort of tax-cleanup bill but would include provisions beyond those recommended by an interim committee that examines state tax laws. Those include changes to tax breaks permitted in lower-income-area enterprise zones — such as elimination of a tax break for employers of at least 50 workers that provide health insurance — and elimination of some discounts still offered to certain vendors that calculate and remit state taxes, Nutter said.
That final bill also is set to end what’s known as the “80/20 rule” — a provision that states that international companies that operate in Colorado but derive at least 80% of income from overseas don’t have to include international profits in calculating Colorado taxes. Moving the state to a worldwide-combined reporting rule would mean that more profitable international business would add to the revenue on which Colorado taxes the firms and could lead to higher tax bills for global companies with offices in this state.
All the bills reflect what CFI leaders, who already are part of the coalition to pass a ballot initiative to switch Colorado to a graduated income-tax system, believe would be a fairer tax system for the state. Nutter pointed to the downloadable-software tax exemption as an example of an unnecessary break that takes money from core government programs.
“It does not treat certain goods in a way we would like a sound tax system to treat them,” she said.
Why business leaders fear tax changes will hurt the state
But Phil Horwitz, a director at Moss Adams and chairman of the Colorado Chamber Tax Council, said the proposal includes changes that are a “huge deal” for the state in the way businesses must calculate and pay taxes. As Colorado is losing ground in national business rankings and a Chamber-commissioned study found it is the sixth-most-regulated state in America, any boost to employers’ tax obligations could make the state less competitive for job expansions, he said.
He pointed particularly to the proposed change in net-operating-loss deduction, which is a common tax break taken by startup companies to help absorb losses they incur before they can market goods and services profitably. Without that lengthy deduction, companies could struggle to recoup early losses and find it harder to sustain themselves in the long run, he said.
“There’s nothing inherently negative about the net operating loss. The point is that businesses should be able to recover losses from prior periods,” Horwitz said after learning about the bill package. “The idea that we should shorten the time they have to recover losses is indefensible.”