Colorado Legislative Council Staff

STATE and LOCAL

REVISED FISCAL IMPACT

(replaces fiscal impact dated January 24, 1999)

Drafting Number:

Prime Sponsor(s):

LLS 99-0392

Rep. Hefley

Sen. Musgrave

Date:

Bill Status:

Fiscal Analyst:

February 10, 1999

House Appropriations

Harry Zeid (303-866-4753)

 

TITLE:            CONCERNING THE REDUCTION OF TAXES.



Fiscal Impact Summary

FY 1999/2000

FY 2000/2001

State Revenues

General Fund


-$10,623,557


-$21,068,144

State Expenditures

General Fund


 


$67,290

FTE Position Change

0.0 FTE

0.0 FTE

Other State Impact: TABOR Impact

Effective Date: Upon signature of the Governor.

Appropriation Summary for FY 1999-2000: None

Local Government Impact: Statutory cities and counties and other districts that are statutorily authorized to impose a sales tax will experience a revenue reduction in the collection of local sales tax revenue on items exempted by the bill. Home rule cities would be unaffected by the bill.



Summary of Legislation


            This bill, as amended in the House Appropriations Committee, reduces taxes in two categories: elimination of the state income tax “marriage penalty” for income tax years beginning on or after January 1, 2000; and exempts agricultural compounds used to promote the health of livestock, and semen used for agricultural or ranching purposes from the state sales and use tax.


            The bill eliminates the marriage penalty by:

 

               for taxpayers claiming the basic standard deduction on a joint federal income tax return, the bill reduces Colorado taxable income by the difference between an amount equal to twice the federal basic standard deduction for an individual who is not the head of a household and the amount of the federal basic standard deduction for joint filers; and

 

               for taxpayers claiming itemized deductions on a joint federal income tax return, the bill reduces Colorado taxable income by the difference between an amount equal to twice the federal basic standard deduction for an individual who is not the head of a household and the amount of the itemized deductions claimed.


            The bill will reduce state and local revenues and have a state expenditure impact. Therefore, the bill is assessed as having state and local fiscal impact.



State Revenues


            Elimination of the state income tax “marriage penalty”. Elimination of the state income tax “marriage penalty” for income tax years beginning on or after January 1, 2000 will reduce state income tax collections. The reduction in state General Fund revenues on an accrual accounting basis is projected to be $10,123,557 in FY 1999-00, and $20,568,144 in FY 2000-01. A total of 370,216 full-year income tax returns are projected to be affected by the income modification in FY 1999-00.


            Sales tax exemption for substances provided to livestock. The bill would exempt all sales and purchases of agricultural compounds to be consumed by, administered to, or otherwise used in caring for livestock and all sales and purchases of semen for agricultural or ranching purposes. Agricultural compounds would be defined to include insecticides, fungicides, growth-regulating chemicals, vaccines, hormones, and drugs used for the prevention or treatment of disease or injury in livestock.


            The items to be exempted by the bill are found in three Standard Industrial Classification (SIC) codes:

 

               Code 2879 (pesticides and agricultural chemicals, not elsewhere classified) includes insecticides, fungicides, and growth-regulating chemicals);

               Code 0751 (livestock services, except veterinary) includes artificial insemination services for livestock and breeding of livestock); and

               Code 5159 (semen, bovine, wholesale).


            It is estimated that, for these three SIC codes, $134,402 in state sales tax revenues would be exempted annually as a result of the bill. Further research conducted by the Department of Revenue indicates that in addition to the information for these SIC codes, $480,000 in sales tax was paid by companies that fit the criteria for exemption provided by the bill, but that are classified under industries other than those listed in the three SIC codes noted above. It is likely that a large portion, but not all, of the sales tax paid by these companies would be exempted by the bill. For purposes of this fiscal note, it is assumed that the value of the sales tax exemption is $500,000 annually beginning in FY 1999-00.





State Expenditures


            Elimination of the state income tax “marriage penalty”.     The bill will require a new modification line on the income tax return to record the information. In order to track the information provided regarding the amount of interest, dividends, and capital gains claimed as an income modification, the department estimates the need for 900 hours of computer programming time to make the necessary changes to the current income tax system models. At the rate of $68 per hour, the Information Technology Division will require an additional General Fund expenditure of $61,200 in FY 2000-01 to make these changes. The time necessary for the Tax Audit and Compliance Division to modify their audit programs will be absorbed within existing resources.


            The Cash and Document Processing Division will experience an increased workload to data capture the data information on the income tax return about the income modification. Based on 370,216 returns with additional information, it is projected that $6,090 in additional General Fund expenditures will be necessary annually beginning in FY 2000-01.


            The bill will not require a state expenditure in FY 1999-00. Total state General Fund expenditures in FY 2000-01 are estimated to be $67,290.


            Sales tax exemption for substances provided to livestock. There is no expenditure impact resulting from the sales and use tax exemption.



Other State Impacts


            Under current law, SB97-1 requires the diversion of 10 percent of sales tax revenues to the Highway User Tax Fund for use on highway projects. The amended bill should contain a provision that modifies the percentage of sales taxes diverted to the Highway Users Tax Fund (HUTF) to hold the HUTF harmless because a sales tax exemption reduces state sales tax collections and would otherwise reduce the diversion (see the Omissions and Technical or Mechanical Defects section of the fiscal note).


            The reduced state revenues will mean a reduction of the amount of future state funds required to be refunded to taxpayers under the terms of TABOR, and less state funds will be available for capital construction needs. Table 1 summarizes the net impact of this bill on these state obligations. The changes in Table 1 are changes from a base that includes continuing capital construction projects.



Table 1. Additional Impact of HB 99-1007 (millions of dollars)


 

FY 1999-00

FY 2000-01

General Fund Revenue

-$10.62

-$21.07

General Fund Appropriations

SB 97-1 Diversion

0.00

0.00

0.00

0.00

Controlled Maintenance Trust Fund Appropriations

Excess General Fund Reserve

0.00

-10.63

0.00

- 21.07

Federal Income Taxes Paid by Colorado Taxpayers

Additional Money Available for New Capital or Rebates

 2.08

-22.24

 4.09

0.00

TABOR Refund (from prior year)

0.00

-10.62



Local Government Impact


            Sales tax exemptions authorized at the state level also apply to statutory cities and counties and other districts that are statutorily authorized to impose a sales tax. These local governments would also experience a reduction in the collection of local sales tax revenue of items exempted by the bill. Home rule cities would be unaffected by the bill since they determine their own sales tax base.



State Appropriations


            The fiscal note implies that no new state appropriations or spending authority are required to implement the provisions of the bill in FY 1999-00.



Departments Contacted

 

            Legislative Council Staff        Revenue          Local Affairs



Omissions and Technical or Mechanical Defects


            Based on the discussion in the House Finance Committee about HB99-1007, the amended bill should contain a provision that modifies the percentage of sales taxes diverted to the Highway Users Tax Fund (HUTF) to hold the HUTF harmless because of the sales tax exemption. It is assumed that this amendment will be added to the bill in the House Appropriations Committee.