Colorado Legislative Council Staff

STATE

FISCAL IMPACT


Drafting Number:

Prime Sponsor(s):

LLS 99-0969

Rep. McPherson

 

Date:

Bill Status:

Fiscal Analyst:

April 22, 1999

House Finance

Harry Zeid (303-866-4753)

 

TITLE:            CONCERNING THE CREATION OF A COLORADO EARNED INCOME TAX CREDIT, AND, IN CONNECTION THEREWITH, UTILIZING THE EARNED INCOME TAX CREDIT AS A MEANS OF REFUNDING STATE REVENUES IN EXCESS OF THE CONSTITUTIONAL LIMITATION ON STATE FISCAL YEAR SPENDING FOR ANY GIVEN FISCAL YEAR.



Fiscal Impact Summary

FY 1999/2000

FY 2000/2001

State Revenues - Refund of Excess TABOR Revenues

General Fund


-$29,472,000


-$31,236,000

State Expenditures

General Fund


$64,922


$3,837

FTE Position Change

0.0 FTE

0.0 FTE

Other State Impact: None

Effective Date: Upon signature of the Governor; applies to income tax years commencing on and after January 1, 1999.

Appropriation Summary for FY 1999-2000:

Department of Revenue - $64,922 GF and 0.0 FTE

Local Government Impact: None



Summary of Legislation


             This bill creates a Colorado earned income tax credit for individuals who claim a federal earned income tax credit. The credit would apply to income tax years commencing on or after January 1, 1999 if the State Controller certified that the amount of state revenues for the state fiscal year ending in that income tax year exceeded the limitation on state fiscal year spending imposed by Section 20 (7) (a) of Article X of the State Constitution and the voters did not authorize the state to retain and spend all or a portion of the excess state revenues for that state fiscal year. If a resident individual claims a federal earned income tax credit, the individual would be allowed a state earned income tax credit equal to 8.5 percent of the amount of the federal credit claimed on the resident individual's federal tax return. If the credit exceeds the income taxes due, the credit would be refunded to the individual.


State Revenues


            Background. Since 1985, the average amount of the federal earned income tax credit claimed has nearly doubled every five years. The average credit was $321, $601, and $1,342 in 1985, 1990, and 1995, respectively. Since 1991 (excluding 1993 and 1994 when qualifications for the credit changed), the total amount of credits increased by an average annual rate of 17.4 percent. Eligibility in the program increased at an annual rate of 3.1 percent during the same time period. This level of growth, however, is not expected to continue in the future.


            Due to the Omnibus Budget Reconciliation Act of 1993, the maximum credit for taxpayers with children was increased at a rate higher than inflation through income tax year 1996. According to federal sources, the earned income credit for taxpayers with one qualifying child reached its permanent level in 1995 and for taxpayers with two qualifying children reached its permanent level in 1996. Therefore, it is reasonable to assume that the number of participants will continue to grow at historic rates, but the amount of the credit per return should increase by the annual increase in the Consumer Price Index. Using these assumptions, the amount of credits claimed at the national level are projected to be $34,329 million, $36,385 million, and $38,525 million in income tax years 1999, 2000, and 2001, respectively.


            The Colorado Earned Income Tax Credit. Between income tax years 1991 and 1995, earned income credits claimed by taxpayers that reside in Colorado comprised 1.01 percent of the national amount. It is assumed that this proportion will continue in the future. Therefore, it is estimated that taxpayers that reside in Colorado will claim $346.73 million, $367.48 million, and $389.11 million in income tax years 1999, 2000, and 2001, respectively.


            A Colorado earned income tax credit equal to 8.5 percent of the amount of the federal credit claimed is projected to result in a refund of excess TABOR revenues of $29,472,000 in FY 1999-00, and $31,236,000 in FY 2000-01. This amount represents an average earned income credit per qualified return of approximately $130.



State Expenditures


            The Colorado earned income tax credit would be refundable, and therefore, must be tracked by the Department of Revenue. In order to track the information provided by taxpayers about the tax credit, 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 $61,200 in FY 1999-00.


            The costs for necessary computer changes in the Fair Share section of the Tax Audit and Compliance Division in FY 1999-2000 will be absorbed within the existing resources of the division.


            The Cash and Document Processing Division will experience an increased workload to data capture the information on the income tax return about the state earned income tax credit. Based on an estimated 226,000 tax returns that will qualify for the state earned income tax credit, data entry costs are projected to be $3,722 in FY 1999-00, and $3,837 in FY 2000-01. Total state General Fund expenditures for the Department of Revenue to implement the bill is projected to be $64,922 and 0.0 FTE in FY 1999-00, and $3,837 and 0.0 FTE in FY 2000-01.



State Appropriations


            The fiscal note implies the Department of Revenue would require an additional General Fund appropriation in the amount of $64,922 in FY 1999-00 to implement the provisions of the bill.



Departments Contacted


            Revenue          Legislative Council Staff