Colorado Legislative Council Staff

STATE and LOCAL

CONDITIONAL FISCAL NOTE

TABOR Refund Impact

State General Fund Revenue and Expenditure Impact

Local Revenue Impact


Drafting Number:

Prime Sponsor(s):

LLS 98-235

Sen. Arnold

Rep. Pfiffner

Date:

Bill Status:

Fiscal Analyst:

January 29, 1998

Senate Education

Janis Baron (866-3523)

 

TITLE:            CONCERNING TAX INCENTIVES TO PROMOTE EDUCATION IN COLORADO.



STATE FISCAL IMPACT SUMMARY

FY 1998/99

FY 1999/2000

State Revenues

General Fund


Reduced Revenue Cannot Be Quantified

State Expenditures

General Fund — Public School Finance Act, Total Program


Reduced Expenditures Cannot Be Quantified

FTE Position Change

None

None

Local Government Impact — See Local School District section of this fiscal note.


            The bill includes the following provisions related to educational income tax incentives:

 

               establishes a nonrefundable income tax credit (beginning on or after January 1, 1998) for:

                 —      persons who give voluntary cash contributions to a school tuition organization, not to exceed $500;

                  —     persons who pay fees to a public school located in the state to support extracurricular activities, not to exceed $200; and

                 —      persons who spend money to purchase instructional materials for nonpublic home-based educational programs, not to exceed $200;

               disallows the credit for donations to a school tuition organization if the person is an individual and his or her dependents directly benefit from the donation;

               defines a “school tuition organization”; and

               requires a school tuition organization to provide scholarships or grants to more than one such school in this state.


            The bill is effective at 12:01 a.m. on the day following the ninety-day period after adjournment sine die of the General Assembly, or on the date of the official declaration of the vote of the people as proclaimed by the Governor, if a referendum petition is filed pursuant to Article V, Section 1 (3) of the State Constitution.

 


            Similar Legislation — Arizona. In 1997, Arizona enacted House Bill 2074 allowing two separate income tax credits related to K-12 schools which: (1) reduce an individual's state income taxes up to $200 for fees paid to a public school for extracurricular activities (and allows taxpayers to claim the credit against fees paid for such things as band uniforms, varsity athletic equipment, or science lab materials); and (2) reduce an individual's state income taxes up to $500 for donations made to a "school tuition organization”. The fiscal impact of the legislation was originally estimated at $4.5 million net revenue loss to its General Fund in FY 1998-99. This impact was the result of:

 

               Revenue Decrease — $5,978,100 less individual income tax revenue

               Expenditure Decrease — $1,520,000 less moneys appropriated for basic state aid to education


            As of January 29, 1997, staff from the Arizona Joint Legislative Budget Committee indicate that it will take two full budget cycles to fully realize the impact of House Bill 2074. In its recent state revenue projections for FY 1999 through FY 2001, it uses three scenarios to estimate the impact of its educational tax credits, with emphasis placed on the $500 tax credit for donations made to a school tuition organization. It is presumed that this credit will be used the most by taxpayers and have the greatest impact on the state’s General Fund revenue. [See Table 1 under State Revenues section of this fiscal note for Arizona’s revenue projections.]


            The status of the legislation in Arizona is unclear. The tax credit for scholarship donations was challenged earlier this year as an unconstitutional use of public funds to benefit private schools. The Arizona Supreme Court heard arguments in December 1997, although no ruling has been made to date. Additionally, the Arizona Department of Revenue adopted a broader interpretation than the Arizona General Assembly on what constitutes extracurricular fees, leading to a larger fiscal impact on General Fund revenues than originally estimated. At the time the bill was being considered, fiscal impact was based on the assumption that the credit for fees would be limited to parents who paid a fee directly for a child participating in an extracurricular activity; the Arizona Department of Revenue interprets the bill to allow the credit for these fees in addition to such items as child care fees paid to a school and miscellaneous donations unrelated to an extracurricular activity.



State Revenues


            The income tax credits established in the bill will reduce General Fund revenue. However, the level to which it will be reduced cannot be quantified:

 

               Cash Contributions to a School Tuition Organization — The number of person who will claim a tax credit based on cash contributions to a school tuition organization is unknown.

               Fees Paid to Support Public School Extracurricular Activities — The number of persons who will claim this tax credit is unknown.

               Moneys Spent on Instructional Materials for Nonpublic Home-Based Educational Programs — The Department of Education reports there are currently 8,490 home-schooled students in Colorado. Assuming 80 percent of these children represent an individual household, then 6,792 tax credit claims may be filed, resulting in a $1.4 million loss to the General Fund (6,792 x $200 = $1,358,400) for home-schooled students.


            Table 1 identifies the current methodology and assumptions used by the Arizona Joint Legislative Budget Committee to estimate revenue impact and expenditure impact to basic state aid to education, relative to the tax credit for cash contributions to school tuition organizations for FY 1999. Given demographic similarities between Colorado and Arizona, revenue impact to Colorado may be comparable, presuming the assumptions are valid.


Table 1: Arizona Revenue Projections Under Educational Tax Credit:

Cash Contributions to School Tuition Organizations


FY 1998-99

High

Medium

Low

Total Private School Students Statewide

Total Households With (HW) Private School Students

     % of HWs that will donate $500

     % of HWs that will donate $300

     % of HWs that will donate $100

     Total % of HWs Participating

50,000

39,333

5%

8%

12%

25%

40,000

26,687

3%

5%

7%

15%

30,000

20,000

1%

2%

3%

6%

Total Households Without (HWO) Private School Students

     % of HWOs that would donate $500

     % of HWOs that would donate $300

     % of HWOs that would donate $100

     Total % of HWOs Participating

1,666,687

2%

2%

2%

6%

1,673,333

1%

1%

1%

3%

1,680,000

1%

1%

1%

3%

Total Estimated Revenue Impact Before Basic State Aid Savings

10% Goes to Students Currently in Public School

Number of Students Leaving Public School on $2,500 Scholarship

Basic State Aid Savings ($4,000 per student)

$ (24,500,000)

2,450,000

980

$ 3,920,000

$ (16,046,667)

1,604,667

642

$ 2,568,000

$ (7,772,000)

777,200

311

$ 1,244,000

NET REVENUE IMPACT

$ (20,580,000)

$ (13,478,667)

$ (6,528,000)



TABOR Refund Impact


            Section 20 of Article X of the Colorado Constitution, limits the maximum annual percentage increase in state fiscal year spending. Once total state revenue from all sources that are not specifically excluded from fiscal year spending exceeds these limits for the fiscal year, the state constitution requires that the excess shall be refunded in the next fiscal year unless voters approve a revenue change as an offset. Based on the current Legislative Council economic forecast, it is projected that the state will be in a TABOR refund position during each of the next five fiscal years. Any increase or decrease in state revenue from changes in fees, fines, licenses, or other revenue sources will affect the amount of the state revenue to be refunded.



State Expenditures


            Department of Education, Public School Finance — A tax credit may reduce the need for state moneys for public education. Students that leave the public school system to enroll in private schools lessen the need for state school finance funding. The number of students who will leave public schools to enroll in private schools cannot be quantified at this time.


            Arizona estimates that for FY 1998-99, it will save between $3.9 and $1.2 million in school finance moneys because fewer students will be in public schools (980 students x $4,000 per pupil operating revenue = $3,920,000 in savings).


            Department of Revenue. The department indicates that although HB 98-1185 will require changes to the state’s income tax forms and instructions, these changes will be made as part of the annual rewrite. Any costs due to adding these tax credits can be absorbed within existing appropriations.


 

School District Impact


            To the extent that the tax credits allowed in the bill result in students leaving public schools to attend private schools, the need for state moneys for public education would be reduced. Thus, funding to school districts under the Public School Finance Act would be reduced.



Spending Authority


            The fiscal note indicates no need for additional moneys in FY 1998-99.



Departments Contacted


            Education

            Revenue