Colorado businesses will not be losing some $450 million in tax breaks that looked as good as gone one week ago, after the Senate Finance Committee, under pressure from Gov. Jared Polis, killed two significant rollback measures on Monday afternoon.
House Bill 1221 sought to pare back two state tax breaks — one offering tax deductions to companies for executives’ salaries and the other allowing businesses that sustain losses to write part of those operating losses off in future years when they make profits. And HB 1222 sought to decouple state tax policy from four recently expanded federal tax deductions speeding depreciation of manufacturing equipment, manufacturing facilities and research-and-development expenses and expanding a business interest deduction.
Both bills — along with HB 1223, which seeks to end a sales-tax exemption for downloadable software — passed out of the House on May 4 on strong, largely partisan votes. However, during their initial Senate committee hearing on Thursday, only HB 1223 moved forward, and that did so only after members reduced its hit on businesses by continuing exemptions for software that is either governed by a negotiable license agreement or developed for a particular user.
Combined, the three bills looked to raise $545 million for a new Family Affordability Credit to supplement the Family Affordability Tax Credit that is expected to be turned off for years until the budget-short state again exceeds tax revenues allowed under the Taxpayer’s Bill of Rights cap. Like with the FATC, which reduced the number of children living below poverty level in Colorado by 37% in one year, the new credit would go to families making less than $100,000 annually.
Governor plays big role in halting rollback of tax breaks
That plan came to a screeching halt Monday, however, when the sponsors of HB 1221 and HB 1222 went before the Senate Finance Committee and asked its members to kill their bills. While Sen. Judy Amabile, sponsor of HB 1221, said that she was aware that too many of the committee members didn’t support her bill, Sen. Cathy Kipp, sponsor of HB 1222, pointed the finger more directly at one person for its death.
“Given that it’s clear this bill will be vetoed unless we agree to use a portion of the revenues to reduce the state income tax, which I consider irresponsible, I ask you to postpone HB 1222 indefinitely,” the Fort Collins Democrat told the committee.
Polis indeed has pushed his party, as it’s looked to raise revenue by cutting back on business tax breaks, to use some of the proceeds to reduce the state’s 4.4% income tax rate, as he has called the income tax a deterrent to productivity. Not only have many Democrats pushed back on this,, but a cadre of them have vocally supported a proposed ballot initiative that would replace Colorado’s flat tax rate with a progressive system in which businesses and individuals making more money pay at higher rates.
The three-bill package represents the most significant attempt to roll back tax breaks in many years. HB 1222 would have generated $329.2 million for the new FAC, while HB 1221 would have generated $124.1 million, most of that coming from capping the executive compensation tax deduction at $250,000 rather than the $1 million rate it’s at now.
Money aimed at lower-income families
Even the significant tax flow from the three bills was slated to be less than the $865 million that FATC distributed in 2024, when it reached 48% of Colorado children and offered an average payout of about $2,800 per receiving family. But it was important, Amabile said, because it would have helped to close the growing wealth gap in Colorado and sent a statement about Colorado’s values.
“The overriding goal was to get at this problem in our state, and in our country, of people who are at the bottom not being able to make it and people who are at the top having a lot,” Amabile told the committee Monday. “We need to think about who we are giving preferential treatment to. We are giving preferential treatment to corporations and CEOs, and we are not giving preferential treatment to the people who are working every day.”
But by increasing the amount of taxes that businesses are paying to the state, the package sought a 50% increase in corporate tax income above the $1 billion that Colorado now brings in, Colorado Competitive Council lobbyist Patrick Boyle noted. And by making it more expensive to open a factory or buy major equipment here than in other states that haven’t decoupled from the federal tax breaks, Colorado would be sending signals that it doesn’t want businesses to consider expanding here, said Rep. Max Brooks, R-Castle Rock.
Repeal of software tax break still advancing
HB 1223 appears still to be on its way to the desk of Polis, who has expressed support for it, but it also took a bit of a haircut in the finance committee Thursday. The continued exemption for specific business-to-business sales of downloadable software first reduced the amount coming into the state from $92 million down to $77 million. And then the addition of two diversions of that revenue — to help struggling restaurants via sales-tax and energy-cost deductions — moved $15 million more away from the FAC to those breaks.
Now, according to the fiscal note for HB 1223, the biggest payouts from the FAC will be around $250 for a child under the age of six in families making less than $40,000 annually — a break that is much smaller than the average break granted by the FATC.
And Senate Republicans complained that the remaining tax break rollback in HB 1223 is one that particularly goes after small businesses, which must purchase software to remain competitive and don’t have the finances to buy the still-exempt version that is specially designed for them.
Restaurants getting new tax breaks in bill
“This bill would raise the cost of software at a time when these products are no longer niche products or luxury goods. Those products are now a part of the everyday running of businesses,” Sen. Byron Pelton, R-Sterling, said during Senate debate Monday night. “We should be especially careful about taxing software that helps small businesses become more productive.”
But what no longer is on the table, at least for this year, is the reduction of tax breaks like the net-operating-loss deduction that Phil Horwitz, state and local tax director and Baker Tilly and chairman of the Colorado Chamber of Commerce Tax Council, said is vital for startups.
And while a reduction of $77 million in business tax breaks — albeit a reduction that offsets $15 million of that total by boosting breaks for restaurants, food trucks and caterers — won’t appeal to a lot of employers, it is far smaller than the $545 million in tax changes on the table last week.