Colorado Legislative Council Staff

FISCAL IMPACT

TITLE:            CONCERNING THE REFUND OF STATE REVENUES IN EXCESS OF THE CONSTITUTIONAL LIMITATION ON STATE FISCAL YEAR SPENDING FOR FOUR CONSECUTIVE FISCAL YEARS, BEGINNING WITH FISCAL YEAR 1998-99, THROUGH THE TEMPORARY REDUCTION OF SCHOOL DISTRICTS' PROPERTY TAX RATE LEVIED FOR THE OPERATION OF PUBLIC SCHOOLS.

Summary of Legislation

            This bill establishes a mechanism to refund excess state revenues -- moneys in excess of the constitutional spending limit (TABOR) -- for four fiscal years: fiscal years 1998-99 through 2001-02. The mechanism established in the bill is to refund the excess through a temporary reduction in school district mill levies. School district mill levies would be reduced by the percentage that the excess is of property taxes collected under the school finance act. The reduction in levies would occur in the fiscal year following the fiscal year in which the excess revenues were generated.

            The process for effecting the levy reductions is as follows:

            •    the State Controller certifies the amount of excess revenues by the September 1 following the end of the fiscal year in which the excess revenues were generated;

            •    the State Auditor reports on the results of an audit of the certification of excess revenues by the September 15 following the State Controller's certification;

            •    the Department of Education provides the Property Tax Administrator with an estimate of the number of mills each district will levy by December 10;

            •    the Property Tax Administrator calculates the percentage reduction in school district property taxes and notifies each individual school district of the amount of its property tax reduction by December 15.

            The bill contains provisions for adjusting the amount of the school district property tax reduction in the event a ballot question is approved that permits the state to retain and spend all or a portion of the excess. The bill also exempts state expenditures for school district property tax reductions from the state TABOR spending limit and the state six percent General Fund appropriations limit.

State Revenues

            The bill provides a method of refunding excess state revenues that the voters have not authorized the state to retain and spend for fiscal years 1998-99 through 2001-02. The amount of annual excess revenues will depend on the amount of revenues received by the state in each of the four fiscal years, and could be affected by tax rate reductions, credits, income modifications, and other tax exemptions that may be established by law in the future. Therefore, the amount of the TABOR refund has not been estimated. Table 1, in the "School District Impact" section, identifies the impact of the bill on school district property taxes, assuming current law (no tax law changes).

            State income taxes. Because property taxes can be deducted for federal income tax purposes, and federal taxable income is the basis for calculating Colorado income taxes, a reduction in school district property taxes will increase Colorado income taxes for taxpayers who itemize property taxes at the federal level. This increase is estimated to be $9.56 million in FY 1999-00 (six-month impact) and $19.18 million in FY 2000-01, the first full year impact of the property tax reduction on state income tax receipts. State individual income taxes would increase by about $8.7 million annually for the four-year period, while business income taxes would increase by about $10.6 million annually.

            Federal income taxes. A reduction in property taxes will decrease deductions for Colorado taxpayers who itemize property taxes on their federal income tax returns. Assuming the property tax reductions in Table 1, federal income taxes would increase approximately $102.8 million annually for the four fiscal years the bill is in effect. Individuals would pay about 40 percent of the increase in federal income taxes, while business would pay the remaining 60 percent.

State Expenditures

            The bill requires the General Assembly to appropriate the entire amount of state excess revenues under TABOR as state aid under the school finance act. This appropriation would be in addition to, and not a substitute for, moneys otherwise appropriated by the General Assembly for school finance. The projected excess TABOR revenue for FY 1998-99 through FY 2001-02 would be appropriated for school finance in FY 1999-00 through FY 2002-03. The amounts of the excess TABOR revenue range from $575.2 million in FY 1998-99 to $582.9 million in FY 2001-02 (See Table 1).

School District Impact

            Table 1 provides an estimate of the dollar and percentage reductions in school district property taxes under the school finance act that would occur as a result of Senate Bill 99-8. These estimates assume current law for both the school finance act and the state's tax structure. Senate Bill 99-8 requires the General Assembly to increase the state aid appropriation for school finance to offset the amount of the property tax reduction. Therefore, state aid to school districts would increase by $575.2 million in FY 1999-00.

Table 1: Estimate of School District Property Tax

Reductions Under Senate Bill 99-8 ($ in millions)

State Appropriations

            The provisions of the bill imply an increase in the FY 1999-00 General Fund appropriation for the Department of Education, Public School Finance, Total Program, of $575,200,000.

Departments Contacted

                  Legislative Council Staff              Education       Local Affairs              Revenue

Omissions and Technical or Mechanical Defects

            The distribution of specific ownership taxes may be affected by the bill since the distribution of specific ownership tax revenues are based on the proportionate share of each local government's total property tax revenues. A reduction in school district property tax revenues would reduce school district specific ownership tax receipts, and increase the specific ownership tax receipts to other local governments accordingly. This issue is believed to be technical in nature in that it can be rectified through an amendment to the bill.