Date: 01/13/2009
Final
Presentation On Tax Policy Changes
HOUSE COMMITTEE ON FINANCE
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09:31 AM -- Presentation On Tax Policy Changes
Representative Frangas, Vice Chairman, called the meeting to order and welcomed Mr. Todd Herreid, Chief Economist, Legislative Council Staff, to the committee meeting. Mr. Herreid began the presentation by discussing the Legislative Council Staff quarterly economic forecast and commented on nonfarm employment growth in Colorado. Despite the nation's recession, jobs are being created each month in Colorado but overall, job growth in the state for 2009 will decline. Mr. Herreid noted that as new firms open, economic activity results in a dynamic process that continues to create jobs. However, the gross job gains in Colorado will be offset by more job losses in 2009.
Mr. Herreid distributed a memorandum entitled Jobs Related to Infrastructure Investment (Attachment A). He noted that based upon multipliers developed by the Bureau of Economic Analysis (BEA), a million dollar increase in construction spending would generate about 19.7 jobs across various industries, such as construction, manufacturing, retail trade, health services, and professional and business services.
Mr. Herreid shifted the presentation to the December 2008 economic forecast. The current revenue forecast was lowered and is $632 million below the amount allowed by the Arveschoug-Bird 6 percent limit. Legislation that reduces General Fund revenue will impact the baseline December 2008 forecast. Mr. Herreid pointed out that this change is captured in the fiscal note of each bill that lowers General Fund revenue. When legislation provides a tax savings to individuals or businesses, such as in the case of a tax credit for new jobs, the policy change works to stimulate the economy. Mr. Herreid noted that the challenge is to determine the incremental change or the gain that is realized by the inducement.
Mr. Herreid discussed the factors that add jobs and drive the labor force. There are numerous factors that influence business investment. Again, the challenge is to isolate the effect of the specific change on direct job creation. Mr. Herreid continued the discussion by talking about the effect of leakage that occurs when tax benefits are given to multi-state companies. One concern is that when tax benefits are given by Colorado to multi-state companies based in another state, the tax savings that is paid for by Colorado may be expended in a state other than Colorado. Mr. Herreid noted that the revenue impact of these tax benefits reduce General Fund revenue. When the state does not have the revenue to increase spending by the 6 percent limit, bills that further reduce General Fund revenue reduce money that would otherwise be spent on programs under the 6 percent limit. Mr. Herreid closed by pointing out that the fiscal note will identify these economic impacts.
Mr. Mike Mauer, Legislative Council Staff, joined the discussion and commented on the costs identified in fiscal notes that are tied to bills that provide tax incentives to businesses. Mr. Mauer noted that some costs in tax credit bills can be partially offset by revenue gains. He briefly discussed the multiplier effects of tax incentives in other states and noted that Louisiana's tax incentive for the film industry resulted in the state spending more money than it took in given the taxes that were generated from the incentive.
The committee engaged in a brief discussion on tax policy changes aimed at job creation. Mr. Mauer responded to the discussion by talking about the difficulties of determining the effectiveness of tax incentives. It is very difficult to isolate the factors that determine whether a given tax incentive will result in new jobs or whether the job growth would have occurred anyway without the tax incentive.