Colorado Legislative Council Staff

STATE

REVISED FISCAL IMPACT

(replaces fiscal impact dated March 18, 1999)

TITLE:            CONCERNING AN ADJUSTMENT IN THE COMPUTATION OF THE AMOUNT OF FOREIGN SOURCE INCOME TO BE APPORTIONED TO COLORADO FOR STATE CORPORATE INCOME TAX PURPOSES TO ALLOW A PERCENTAGE USED IN SUCH COMPUTATION TO REFLECT THE EFFECTIVE FEDERAL CORPORATE INCOME TAX RATE FOR THAT CORPORATION.

Summary of Legislation

            This bill, as amended in the Senate Finance Committee, adjusts the computation of the amount of foreign source income to be apportioned to Colorado for the purposes of computing state corporate income taxes. Under current law, the amount of foreign source income to be excluded is based on a formula using the total of taxes paid or accrued to foreign countries and United States possessions as the numerator, and 46 percent of the foreign source income as the denominator. Effective for income tax years commencing on or after January 1, 2000, this bill will modify the method of determining the amount of foreign source income to be excluded. The numerator will remain the same, but the denominator will be computed using the applicable federal corporate income tax rate, as defined by Section 11(b) of the Internal Revenue Code for the tax year multiplied by the amount of foreign source income for the corporation.

            The bill will reduce state General Fund revenues on an accrual accounting basis beginning with the second half of FY 1999-00. Therefore, the bill is assessed as having state fiscal impact. State expenditures will be unaffected by the bill.

State Revenues

            Foreign source income included in federal taxable income is reduced by excludable foreign source income. The exclusion amount is calculated as: Foreign Source Income multiplied by Total Foreign Taxes Paid divided by 0.46 multiplied by Foreign Source Income. Under the bill, the exclusion amount would be computed as: Foreign Source Income multiplied by Total Foreign Taxes Paid divided by the Federal Corporate Tax Rate multiplied by Foreign Source Income.

            Assuming that, on average, foreign source income is taxed at a rate of 25 percent by a foreign taxing entity, the Department of Revenue projects that the difference between current law and the new method identified in the bill will result in an increase in excludable foreign source income of 31.4 percent. Based on the FY 1994-95 Department of Revenue sample of corporate income tax returns (latest available), it is estimated that the change in computing the apportionment of foreign source income will reduce corporate tax receipts by $1,490,902 in FY 1999-00 for the six-month period from January 1, 2000 through June 30, 2000 on an accrual accounting basis, and $3,046,673 for FY 2000-01.

State Expenditures

            State expenditures will be unaffected by the bill.

Other State Impacts

            The reduced state income tax revenues will mean a reduction of the amount of future state funds required to be refunded to taxpayers under the terms of TABOR. 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. A reduction in the state income tax rate will also increase federal income taxes paid by Colorado corporations.

Table 1. Additional Impact of HB 99-1125 (millions of dollars)

Spending Authority

            The fiscal note implies that no new spending authority or appropriations are required to implement the provisions of the bill.

Departments Contacted

            Revenue          Legislative Council Staff