STAFF SUMMARY OF MEETING
COMMITTEE ON JOINT FINANCE
|Time:||09:05 AM to 12:15 PM|
|This Meeting was called to order by|
|This Report was prepared by|
X = Present, E = Excused, A = Absent, * = Present after roll call
|Bills Addressed: ||Action Taken:|
|Call to Order|
Presentation on Budget
Presentation on Tax Policy Changes
Presentation on Revenue Structure
Presentation by Jeff Zax
Presentation by Mr. Marostica
09:05 AM -- Call to Order
Senator Sandoval called the meeting to order and handed the gavel to Representative Judd.
09:08 AM -- Presentation on Budget
Ms. Natalie Mullis, Legislative Council Staff (LCS), began her presentation on the state budget and the Colorado economy. Members received a copy of her presentation (Attachment A).
Ms. Mullis began by explaining that the economy has been experiencing a rapid free fall. The recession was precipitated by the bursting of a major asset bubble in both the consumer and housing markets. In addition, a financial bubble burst in the commercial real estate sector. Ms. Mullis further explained that many jobs have been lost throughout the economy and it is not expected that these jobs will return. Additionally, local businesses and state government have reduced benefits and salaries for their employees. These employees are working fewer hours because businesses have reduced their need for labor, and many individuals have stopped looking for employment. Therefore, consumers have lost both wages and wealth, which has impacted consumer spending. The downturn has also hit consumers psychologically.
Ms. Mullis continued her presentation by discussing General Fund revenue projections. General Fund revenue has decreased by approximately $1 billion dollars since last year. Because consumers are not spending, a slow recovery is expected. She explained that the human recession impacts the revenue available for the General Fund appropriations. The recession is not over for the state's budget situation, she explained. Ms. Mullis also provided an overview of the drivers of General Fund appropriations. In addition, she explained other major areas of General Fund expenditures.
Ms. Mullis continued by discussing the projected revenue shortfall by the LCS September Revenue Forecast, which is a cumulative shortfall over two fiscal years. She also discussed the provisions of Article X, Section 20, otherwise known as TABOR and Referendum C. She explained that Referendum C allowed the state the retain additional revenue. She also explained that Medicaid caseloads in Colorado are higher than expected.
Ms. Mullis responded to questions from the committee. Representative Kagan asked how the revenue decline could be so precipitous in such a short period of time. Ms. Mullis explained that revenue has sharply declined in the time period since as the impacts of the recession began to impact the state. Representative Kagan also asked about the cumulative $1.2 billion shortfall from the LCS September 2009 Forecast. Ms. Mullis explained that the revenue decline is from the figures presented in the March 2009 forecast.
Representative Gerou stated that Colorado's construction industry is being hard hit by the recession, and expressed her views that the next bubble is coming in the commercial real estate market. She asked Ms. Mullis if the forecast considered these issues.
Ms. Mullis responded that markets are volatile and that the forecast did take these factors into consideration. In particular, commercial real estate was incorporated into the September forecast as a drag on the market. Additionally, small businesses, are assisted by lower values because rents often decline. This provides a counterbalance in the economy, she stated.
Senator Sandoval asked whether the number of Colorado citizens that are no longer receiving unemployment benefits was taken into consideration, and Ms. Mullis explained that the forecast includes extensions of unemployment benefits. She also explained the unemployment rate.
Senator Hudak asked about the Medicaid caseload and whether the additional money Colorado has received from the federal stimulus act in federal Medicaid matching funds had been taken into consideration. Ms. Mullis explained that it had been factored into the September forecast for FY 2009-10 but not for FY 2010-11. The forecast did consider the additional federal Medicaid funding that has already been incorporated into the budget. Senator Hudak also asked about the TABOR limit and the Referendum C time-out period. Ms. Mullis explained that the TABOR limit had a "ratchet down" impact but the Referendum C cap does not. Without Referendum C, the state would have had to refund additional revenue to Colorado taxpayers. Discussion continued about this issue.
Senator Steadman raised questions about the growth in Medicaid caseload and whether increased eligibility requirements were taken into consideration in the numbers presented. He also asked about the hospital provider fee that was recently adopted. Ms. Mullis explained that the projections are from the Joint Budget Committee. The present caseload increase is incorporated into the shortfall projection for this fiscal year, she explained.
Senator King stated that the total government spending was about $18 billion last year, and raised questions about revenue projections for total state spending. Ms. Mullis stated that the total projection for this fiscal year is about $18 billion, but that LCS does not have an estimate for future years because the forecast does not include projections for other sources of revenue. Senator King stated that it is possible that total government spending in a recession will still increase in the state. Senator King also asked whether the staff had incorporated the Governor's budget proposal, and Ms. Mullis explained the Joint Budget Committee has recently prepared this information. Discussion continued about total state spending, the Referendum C cap, and the forecast period.
Senator Romer shared his views that the economic recovery is not being spread evenly across members of the society. He also expressed his thoughts about possible budget reductions to higher education.
Ms. Mullis explained the economic indicators examined in the forecast. Representative Roberts also expressed her thoughts about the impacts of the economic downturn in the Western Slope region. Discussion ensued about these issues.
Representative Frangas asked about the unemployment rate and its impact on state revenue. Ms. Mullis explained the LCS September forecast projects flat employment growth. Committee discussion ensued about overall economic growth, the increase in Medicaid caseload, and Colorado's job market.
09:55 AM -- Presentation on Tax Policy Changes
Ms. Sharon Eubanks, Office of Legislative Legal Services (OLLS), began the presentation about the Supreme Court decision Mesa County Bd. of Comm'rs v. State.Members received a memorandum from OLLS which is included as Attachment B.
Ms. Eubanks explained that the decision involved the district level mill levy freeze for school finance purposes. The OLLS has been asked to discuss the decision as it relates to the authority of the General Assembly to enact tax policy changes directly causing a net tax revenue gain. This case is the first time the Colorado Supreme Court has interpreted this section of TABOR, which is subsection (4) (a). She explained this provision established voter approval requirements for different types of tax actions. Ms. Eubanks provided a general overview of the case, the history of the mill levy, and a legislative history.
Ms. Eubanks also provided a history of Senate Bill 07-199 and property tax limitations. This bill was challenged on several constitutional grounds. The district court found the bill unconstitutional, which was reversed by the Colorado Supreme Court.
Ms. Eubanks explained the decision and how it impacted voter approval requirements in TABOR. She stated there were no previous judicial interpretations of this provision in TABOR. Ms. Eubanks continued testifying about the court's decision. She explained OLLS has prepared the memorandum based on an analysis of the case that includes a step-by-step test for the General Assembly to consider.
Senator Romer raised questions about a tax rate change and a tax policy change. Discussion ensued. Senator Romer also asked about value-added taxation, sales taxes, and other tax policy changes. Ms. Eubanks continued by discussing the memorandum prepared by OLLS. Discussion also ensued about legal precedents related to tax policy.
Ms. Eubanks explained that the General Assembly can enact the laws it sees fit and there are considerations each time it does so. Mr. Ed DeCecco, OLLS, closed by discussing Referendum C.
10:20 AM -- Presentation on Revenue Structure
Mr. Ron Kirk, LCS, began his presentation about Colorado's revenue structure. Members received a handout that included information about tax credits, rebates, exemptions, and historical revenue data (Attachment C). Mr. Kirk provided a history of the state of Colorado's major tax policy changes and how these changes have impacted state revenue.
Mr. Kirk began by providing a breakdown of General Fund revenue sources, explaining that 95 percent of the state's General Fund revenue is comprised of state income taxes and state sales and use taxes. The income tax component, he explained, comprises about 65 percent, both individual and corporate, and the sales and use tax component is approximately 35 percent. In the mid-1970s, the balance between individual income and sales was about equal, with income taxes comprising about 39 percent of the General Fund and sales and use taxes comprising about 37 percent. During this period, the state was running budget surpluses, and as result, a number of state sales and use tax exemptions were enacted. During the same period, he explained the state also adopted a number of state income tax credits and rebates. These changes helped to reduce the budget surpluses.
Mr. Kirk continued providing a history of the state income tax and sales and use tax. In the 1980s, the state experienced a recession and the state rescinded many of the state income tax credits to generate more revenue. However, the state did not repeal or suspend any of the state sales and use tax exemptions adopted in the 1970s. There were other changes, including the major tax policy reform in 1986, which changed the state income tax from a graduated rate to a flat rate of 5 percent.
Mr. Kirk stated the effect of this change was the broadening of the state income tax base for purposes of collecting income. Because the income tax reforms were piggybacked on the federal income tax, when the federal base expanded so did the state's tax base. In addition, the sales tax base narrowed as consumers began spending more on services rather than goods. In a nutshell, these major changes have made Colorado more reliant on state individual income tax revenue and less reliant on revenue from sales taxes.
Mr. Kirk continued his presentation by explaining the tax credits tables included in Attachment C. The document includes a list of income tax credits and rebates, and state sales and use tax exemptions for the most recent year when data is available, which is FY 2008-09. The most recent fiscal year data shows that $261 million in individual income tax credits were claimed in Colorado, which declined over the previous year due to the economy. Mr. Kirk also explained the corporate income tax credits and rebates claimed, which was estimated at $48 million. Likewise, the impact of state sales and use tax exemptions was estimated at about $1.8 billion. He continued discussing these exemptions.
Mr. Kirk also explained the historical data included about individual income, corporate income, and state sales and use revenue. He concluded with a discussion about the corporate income tax.
10:26 AM -- Presentation by Jeff Zax
Mr. Jeffrey Zax, Economist at the University of Colorado, began his presentation by discussing government subsidies in enterprise zones. He explained his opinion that government subsidies do not enhance or increase growth during economic downturns. Mr. Zax also shared his analysis of enterprise zones and firms. He stated that the enterprise zone credits encourage firms to replace workers with machines. He stated that enterprise zone subsidies become more valuable as a firm ages, and the subsidies are driving up property values. This was never the intent of enterprise zone subsidies, he stated.
Mr. Zax continued expressing his thoughts about enterprise zone tax incentives. He also stated that economic multiplies have no basis in economic science. The effects of these subsidies are overrated because individuals will create businesses and ideas in the economy. The subsidies also have no accountability and are counterproductive.
Representative Kagan asked whether we know if jobs have been saved by the enterprise zone tax credits. Mr. Zax stated explained the research that had been conducted on this subject, stating that it compared these firms with firms outside of enterprise zones, and that these companies outside these zones did better. Discussion continued about these issues.
Representative Gerou asked about his thoughts about a federal bailout. He responded there is a difference in macro and micro economic realities, and the federal bailout was necessary because the nation faced either a bailout or another depression. In the end, this money needed to be spent to keep the economy on its feet.
Senator Sandoval asked whether enterprise zones can be made to work, and Mr. Zax stated that they do not. He stated it is not a public service to create jobs. The purpose of a business is to make a profit and individuals must have a claim on the public benefit. Representative Roberts asked about policy makers and the economy. Mr. Zax responded that these credits have a record of failure around the world and the idea that policy makers can direct the economy is extreme. Government should provide the public services businesses need. Rep. Roberts asked where the jobs are coming from under his scenario and Mr. Zax explained the jobs will come from individual entrepreneurs that find support for new ideas and businesses. Mr Zax stated the private sector ideas are taking the lead, and if ideas are not good, they will vanish from the economy.
Senator King asked whether he would support eliminating other tax credits, and Mr. Zax replied that he does. Discussion ensued about these issues.
10:48 AM -- Presentation by Mr. Marostica
Mr. Dan Marostica, Office of Economic Development and International Trade, began his presentation about economic development. He outlined the steps the office is taking, including reducing the business personal tax and investing in bioscience grants, among other things. He stated that as challenging as things are, Colorado is doing better than most other states, and Colorado has added jobs during this period.
Mr. Marostica explained that the Governor has proposed 13 tax policy changes that will save the state of Colorado over $134 million. He stated that having a job is a factor in quality of life. He stated that maintaining good jobs are a directive of the department. Mr. Marostica explained that tax incentives play a large role when companies are determining where they are going to locate. Without state tax credits, he stated Colorado would not have the ability to compete against other states for jobs that companies create when they locate here. He discussed the examples of businesses that located in Colorado, including Vestas and Charles Schwab.
Mr. Marostica also continued by providing background about Republic Airways' decision to locate in Milwaukee, and stated that Colorado will lose about 200 jobs. In the end, the company made their decision based on tax policy benefits in Milwaukee that Colorado did not have. Two companies decided to come to Colorado based on HB 09-1001, he said, and that if they hadn't gotten the tax credit they would not have located here. The companies must retain the jobs for over a year in order to receive the credit, he explained. He closed by sharing his thoughts about the state's budget.
Senator Brophy asked Mr. Marostica questions about removing agriculture incentives affecting pesticides and agriculture compounds. Senator Brophy shared his concerns about targeting agriculture. Discussion ensued about these issues. Representative Labuda asked if tax incentives usually exceed salaries paid to workers. Mr. Marostica stated he has not seen this occurrence. Representative Roberts asked about corporate tax credits for small businesses in Colorado. Mr. Marostica explained that companies are willing to move forward with investment capital because there is a good workforce and tax incentives.
Senator Romer shared his thoughts about the capital gains tax policy. He expressed his views about tax policy decisions and investing in higher education for the future.
11:07 AM -- Public Testimony
The committee began hearing public testimony.
11:07 AM -- Mr. Tom Clarke, representing the Metro Denver Economic Development Corporation, testified. Mr. Clarke stated he has no comment on the Governor's proposal. He also shared his thoughts about a VAT tax.
Mr. Clarke stated Colorado is going though a transformation, and that manufacturing is creating a path to the middle class. Previously, there were only two paths for middle class, which were in the medical and construction industries. Mr. Clarke stated that all exemptions had a purpose when they were adopted but may appear strange now. He said the biggest tax decrease adopted in Colorado was the Gallagher amendment, which gave individual property owners a large tax benefit.
Mr. Clarke provided comments about alternative energy and income tax policy. He shared his thoughts about single factor corporate tax policies. These are revenue neutral tax policy decisions, he said. He continued sharing his views about tax policy considerations and the potential impacts to Colorado's economy. Mr. Clarke stated that there needs to be a reallocation of resources and investment in higher education. The long-term situation looks less favorable without these investments.
Representative Frangas asked about manufacturing and whether we could compete with China and other nations in this area. Mr. Clarke stated that we will never compete with China on the price of manufacturing solar technologies, but we can compete on innovation. Senator Romer shared his thoughts about asking voters to increase tax revenue and making it a priority to fund higher education, capital construction and other areas. He asked Mr. Clarke how the General Assembly should address capital construction. Mr. Clarke stated that we need a revenue stream for capital construction and that continuing to cut this area is not where we want to go.
The following persons also testified.
11:24 AM -- Ms. Liane Morrison, representing Great Education in Colorado, testified. She introduced Mr. Glen Gustafson, Colorado Springs School District and Ms. Cheryl Wangeman. Mr. Gustafson provided written testimony, which is included as Attachment D. Ms. Wangeman shared her thoughts about the levels of local tax revenue from specific ownership taxes and property taxes.
Mr. Gustafson continued the presentation by discussing Public Employees' Retirement Association (PERA) issues affecting school districts. He provided information about a survey taken about how school districts will respond to budget issues. The survey included different options for addressing the budget. He stated that school districts would like to see all school districts treated equally.
Senator King asked Mr. Gustafson if the Colorado Association of School Executives (CASE) would be endorsing the PERA proposal. He stated that at this time, CASE has not taken a position. He expressed his thoughts about PERA benefits.
Mr. Gustafson also discussed benefits and salaries. Senator King asked how many jobs an increase in PERA benefits will cost school districts. Representative Kagan shared his views about the Governor's proposal. Discussion ensued about PERA issues.
11:39 AM -- Mr. Tony Gagilardi, representing the National Federation of Independent Business, testified. He stated that small business are the backbone of the economy, and shared his thoughts about preventing any harm to small businesses. He said everyone must do what is best for the state.
11:41 AM -- Ms. Carol Hedges, representing the Colorado Fiscal Policy Institute, testified. She shared her thoughts about cutting services and tax policy decisions. She stated the cost of tax favoritism that changes the amount of taxes paid must be weighed against the cost of cutting services. Tax policy changes should be examined with the same level of scrutiny as investments in these services.
11:43 AM -- Mr. Ben Prochazka, representing the Colorado Environment Coalition and Mr. Chris West, representing the Colorado Cattleman's Agriculture Land Trust, testified. Mr. Prochazka stated the conservation easement credit is important for preserving land and that it should be funded at the highest level. Mr. West stated the credit helps to preserve quality of life and is a tool for investment in rural communities.
11:45 AM -- Dr. Tim Byers, representing the Colorado School of Public Health, testified. He shared his views about the Amendment 35 tobacco revenue reductions for health care services and stated that cutting prevention programs will harm more individuals.
11:47 AM -- Mr. Jonah Berger, owner of a small business called the Rhythm Within, testified in support of disabled Colorado citizens and expressed his concerns about the impact of budget cuts on these individuals.
11:48 AM -- Mr. Troy Bredenkamp, representing the Colorado Farm Bureau, testified. He shared his concerns about eliminating sales tax exemptions on agricultural products.
11:50 AM -- Mr. Rich Jones, representing the Bell Policy Center, testified. He stated that the center believes that enterprise zone tax credits need to be restructured. He provided two handouts, including prepared testimony from Mr. Wade Buchanan (Attachment E) and a report prepared by the center on enterprise zones (Attachment F). He expressed his thoughts about putting all tax policies on the table for a review.
11:53 AM -- Mr. Rich Audsley, representing the United Way of Colorado, and Mr. John Arigoni, representing the Boy and Girl Clubs of Colorado, testified. They expressed their thoughts about the importance of the child care contribution tax credit. Mr. Audsley distributed a handout which is included as Attachment G.
11:56 AM -- Ms. Karen Wick, representing the Colorado Education Association (CEA) and Mr. Bruce Caughey, representing the Colorado Association of School Executives (CASE), testified. Ms. Wick stated the public education system is an economic investment and that the full impact of any reduction in public services should be examined. Mr. Caughey stated that school districts are facing more significant cuts than is understood.
11:59 AM -- Ms. Cody Belzley, representing the Colorado Children's Campaign, testified. She expressed her support for programs that provide support to children, and stated these programs help to create a stronger future for our children.
12:02 PM -- Mr. John Hummel, representing himself, testified. He shared his concerns about the impacts of budget cuts to the Department of Regulatory Agencies (DORA), where he works as a state employee. He shared his experiences as a civil rights investigator for the department and explained that caseloads are increasing.
12:04 PM -- Ms. Lori Smith, representing herself, testified. She shared her experiences as a state employee at a correctional facility in Limon, Colorado. She stated her department is the largest employer in the area and shared her concerns about the impact of potential cuts.
12:05 PM -- Ms. Ann Flores, representing herself, testified. She shared her experiences working in the health department at Pueblo Community College and urged the committee to consider the impact of reducing any additional funding.
12:06 PM -- Mr. Joe White, representing himself, testified. He shared his experiences as a teacher and parent of two school age children. Mr. White also shared his concerns about cutting school programs and removing teachers from the classroom. He also expressed his support for investing in higher education.
12:08 PM -- Ms. Carol Adams, representing herself, testified. She shared her experiences as a teacher in public education and stated that public education is the cornerstone of Colorado's society. Education helps to remove gap between the educated and less educated in society.
12:09 PM -- Dr. Elinor Christiansen, representing herself, testified. She provided a handout to the committee about a single-payer health care system, which is included as Attachment H. As a former physician, she shared her support at looking at how the state can spend health care dollars more effectively. Ms. Christiansen urged the committee to examine publicly funded comprehensive health care and the potential benefits to society.
12:10 PM -- Ms. Gerrie Frohne, representing herself, testified. She stated the state should not cut the provider rates for Medicaid and shared her experience as a parent of an ill child. She said it saves Colorado taxpayers money when citizens receive proper care and expressed her concerns about the Governor's proposal regarding provider rates.
12:13 PM -- Mr. David Myers, representing the Metro Community Provider Network, testified. He shared his concerns about the impact of budget cuts on the health care safety net. He stated his organization has closed three clinics and lost two physicians. Of the citizens that use these safety net services, 60 percent are uninsured. He stated any additional cuts will dramatically affect these services.
In addition, the Colorado Community Health Network prepared written testimony, which was submitted for the record (Attachment I).
Public testimony was closed. The committee adjourned.