Colorado Legislative Council Staff

STATE

REVISED FISCAL IMPACT

(replaces fiscal impact dated January 30, 1999)

TITLE:            CONCERNING THE STATE INCOME TAX, AND, IN CONNECTION THEREWITH, PROVIDING A COLORADO EARNED INCOME TAX CREDIT, CREATING A SENIOR CITIZEN INCOME TAX CREDIT, AND TEMPORARILY REDUCING THE STATE INCOME TAX RATE, AND MAKING AN APPROPRIATION IN CONNECTION THEREWITH.

Summary of Legislation

            This bill, as amended in the Senate Finance Committee, provides a temporary Colorado earned income tax credit equal to 30 percent of the federal tax credit, and a temporary $100 senior citizen income tax credit.

            Colorado earned income tax credit. The bill creates a temporary Colorado earned income tax credit for individuals who claim a federal earned income tax credit. For income tax years commencing on or after January 1, 1999, but prior to January 1, 2004, if a resident individual claims a federal earned income tax credit, the individual would be allowed a state earned income tax credit equal to 30 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.

            Senior citizen income tax credit. A temporary refundable $100 income tax credit would be allowed for any resident individual who is at least 65 years of age during the income tax year. Two qualified resident individuals filing a joint return or a surviving spouse return would receive $200.

            A six-month state General Fund revenue reduction impact will occur in the current fiscal year, FY 1998-99, on an accrual accounting basis. State expenditures will occur beginning in FY 1999-00.

State Revenues

            Colorado Earned Income Tax Credit. 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 that 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.

            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.

            By converting income tax years to state fiscal years, it is projected that the value of a Colorado earned income tax credit that is equal to 30 percent of the amount of the federal credit claimed will result in a reduction in state General Fund revenues on an accrual accounting basis of $52.0 million in FY 1998-99, $107.1 million in FY 1999-00, and $113.5 million in FY 2000-01.

            Senior citizen income tax credit. A temporary refundable $100 income tax credit would be allowed for any resident individual who is at least 65 years of age during the income tax year. It is estimated that 408,890 senior citizens will qualify for the refundable credit in income tax year 1999. The projected state General Fund revenue reduction that will occur as a result of the credit is $20.45 million in FY 1998-99, $41.32 million in FY 1999-00, and $42.19 million in FY 2000-01.

            Summary. Table 1 summarizes the state General Fund revenue effects of the three provisions of the bill.

Table 1 SB99-126 State General Fund Revenue Reduction Summary

(millions of dollars)

State Expenditures

            Colorado Earned Income Tax Credit. 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 time necessary for computer changes in Fair Share section of the Tax Audit and Compliance Division 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 qualifying 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 General Fund expenditures for the Department of Revenue necessary to implement this provision are projected to be $64,922 in FY 1999-00, and $3,837 in FY 2000-01.

            Senior citizen income tax credit. The senior citizen income tax credit is refundable and, therefore, must be tracked by the Department of Revenue. The computer programming cost of adding new lines to the state income tax forms is the same, regardless of whether one or two additional new lines are added. The only additional cost for this income tax credit is the data entry costs of $8,776 in FY 1999-00, and $9,000 in FY 2000-01 to record the information on approximately 533,485 qualified filers.

            Summary. Total state General Fund expenditures necessary to implement the three provisions of the bill are $73,698 in FY 1999-00, and $12,837 in FY 2000-01.

Other State Impacts

            The reduced state revenues will mean a reduction of the amount of state funds required to be refunded to taxpayers under the terms of TABOR, and less excess revenue will be available in the General Fund reserve. Table 2 summarizes the net impact of this bill on these state obligations. The changes in Table 2 are changes from a base that includes continuing capital construction projects. A reduction in state income tax liability will also increase federal income taxes paid by Colorado individual and corporate taxpayers.

Table 2. Additional Impact of SB 99-126 (millions of dollars)

State Appropriations

            The fiscal note implies that the Department of Revenue would require an additional General Fund appropriation in the amount of $73,698 in FY 1999-00 to implement the provisions of the bill.

Departments Contacted

            Revenue          Legislative Council Staff