A story in The New York Times shows that a new report from the Berkeley Center for Labor Research and Education confirms on a national scale what a recent Colorado Fiscal Institute study found: Large employers have been shifting their costs onto taxpayers by creating legions of low-paying jobs.

The Berkeley study estimates that U.S. taxpayers are on the hook for $152.8 billion in spending on public assistance for people employed by large companies at poverty-level wages. These are people who frequently are working full-time but still cannot get make ends meet without public assistance.

Read the Berkeley study here.

Read the CFI report here.

By Ali Mickelson

Director of Legislative and Tax Policy

Just past the halfway point in the 2015 legislative session, the Colorado Fiscal Institute is pulling some surprising wins out of a divided legislature.

CFI’s biggest success has come in the House, where one of our priority bills, House Bill 15-1205, was passed unanimously and without opposition in House Finance, Appropriations and on the House floor. The bill creates a first-ever process to evaluate tax expenditures — deductions, credits, exemptions and incentives.

Under the bill, the state auditor would evaluate all 186 of our tax expenditures to determine if they are achieving their purpose in the most effective way possible. The bill has received bipartisan support, with Rep. K.C. Becker and Rep. Lori Saine sponsoring it in the House and Sen. Mike Johnston and Sen. Owen Hill sponsoring it in the Senate. In addition to CFI, the legislation is also supported by the National Federation of Independent Businesses and the Denver Chamber of Commerce. No one has testified in opposition to it.

The bill will next be heard in the Senate. We’re optimistic this bill will go all the way to the governor’s desk and become law.

Another CFI-supported bill failed in committee but arguably won the battle for public opinion and lived to fight another day. The Senate Finance Committee defeated Senate Bill 15-118, sponsored by Sen. Michael Merrifield, on a 3-2 party line vote. The bill would have restructured Colorado’s 529 college savings plan to increase the tax deduction for the middle class.

After nearly an hour of great discussion hinging on savings from a cap for Coloradans in the top 1 percent of income being used to boost the benefit for middle-class Coloradans, the bill died. But in the aftermath, The Denver Post did a story on how the bill worked and how it died, prompting a significant amount of attention to a piece of legislation aimed straight at the middle class. Even better, the spotlight on the bill was so strong, it is being reintroduced in the House by Rep. Brittany Pettersen in April. Please let us know if you would like to be involved with this bill as it moves in the House.

As usual, CFI has also been playing its fair share of defense against a few of the 20-plus tax credit bills that have been introduced this legislative session, including two especially egregious proposals. The first is a bill to give tax breaks to “data centers,” which most folks might call server farms — warehouses full of computer servers. These facilities create very few jobs, and companies have been locating them in Colorado for years without getting tax breaks.

The other is a bill to monetize an enterprise zone tax credit for renewable energy. Both these bills are reincarnations of equally as bad bills that died last year. Currently, both bills are waiting to be heard in House Appropriations.

Despite a healing economy, not all Colorado families are feeling the recovery from the Great Recession. Many hardworking Coloradans have seen their wages stay flat or actually decrease.That’s why the Colorado Earned Income Tax Credit (EITC) is more important than ever.The EITC puts cash in the pockets of Colorado working families, rewarding families who are often working multiple jobs and are just trying to make ends meet. It’s an investment in Colorado that encourages and rewards work while helping to offset the impact of stagnant wages. The federal Earned Income Tax Credit (EITC) is a refundable tax credit for working families. Nearly 350,000 Coloradans — 15 percent of the population — benefit from the federal EITC, putting more than $750 million back into the hands of Colorado workers to spend in the local economy. Colorado’s state-level EITC is equal to 10 percent of the federal tax credit, but lawmakers will need to activate it for it to become effective in 2015. House Bill 15-1195 fast-tracks the EITC and makes it a permanent tax credit now. The passage of HB 1195 will allow Colorado families to the take the EITC in tax year 2015. Click here to find out how to help! Click here to sign-on to our coalition!

The EITC benefits Colorado families across the entire state

The EITC supports military families:  In 2010, roughly 25,000 Colorado military families received the federal EITC.

The EITC helps working mothers:  In 2010, about 290,000 Colorado mothers received the federal EITC.

The EITC helps rural Colorado: In 2010, 18 percent of the EITC recipients were families in rural Colorado.

The EITC benefits middle-class families that have been hit hardest by the recession and who have benefited the least from the economic recovery. These are families that are still struggling to make ends meet. The EITC can make the difference in their family budgets.

The EITC is a vital step toward creating a Colorado economy that works for everyone, not just the wealthiest few. That is why we need the EITC in 2015!

Support working families! Support the Colorado EITC in 2015!

By Thamanna Vasan

Economic Policy Analyst

As Colorado grows so does the need to fund programs that will better serve our communities. However, with limited dollars in areas such as education and transportation, governments are being forced to do more with a whole lot less.

To ease this burden, legislators in Colorado and beyond are looking to alternative funding mechanism in the form of public-private partnerships, also known as Pay for Success (PFS).

Pay for Success is a model in which philanthropic and private entities are given the opportunity to invest in innovative public programs. From homelessness to education, these programs address important priorities that might otherwise be too risky or unpopular for government to undertake with public dollars. However, this isn’t a privatization of public priorities. Instead, governments and stakeholders establish expected outcomes, performance targets and standards. If the programs don’t meet these outcomes, funders don’t see returns on their investments and state money remains untouched.

In 2010, the Pay for Success model was first piloted in the United Kingdom. Since then the model has made its way across the world and the United States. Utah is currently executing a PFS program focused on expanding the Utah High Quality Preschool Program. Part of the Clinton Global Initiative America, the $7 million contract between Goldman Sachs, J.B. Pritzker, and the United Way of Salt Lake is the first early childhood education PFS in the United States.

The PFS would expand services for at-risk youth in the Granite and Park City school districts. The idea is that targeted early childhood education will result in fewer students requiring special education or remedial education down the road. The students in the program will be given standardized tests following preschool and those that test below average will be tracked through the 6^th grade. For every year a student doesn’t need to enroll in special education, the state returns 95 percent of the savings and 5 percent base interest to J.B. Pritzker and Goldman Sachs. However, if school readiness standards aren’t met and special education services aren’t decreased, private funders will not see a financial return.

Critics of Pay for Success still remain suspicious of the structure, despite increased popularity. They find the lack of transparency, high base interest rates, displacement of public employees and lack of innovation involved in some of the current programs to be problematic. Many of these issues are tied to the fact that private entities take on the financial risk of funding these programs, suggesting a greater likelihood to cut corners and unwillingness to approach very innovative programs that are more likely to fail. After all, if the programs fail to produce expected results and savings, no returns are seen.

However, with a proper stakeholder process around PFS legislation many of these pitfalls can be avoided. Requiring states to ensure public access to contracts, allowing for public comment, limiting the rate of return, ensuring public employees aren’t displaced and requiring governments play a central role in accountability are all examples of best practices that can ensure successful PFS contracts.

These well-thought-out PFS contracts could prove to be powerful tools, especially in Colorado. Often times spending for public programs is deemed too risky because populations or issues served are unpopular and the upfront costs are too high. This means that, in a state with constitutional limits on spending of taxpayer dollars, the state doesn’t have the resources or support to pay for innovative, cost-saving programing. The new pool of private funds expands the pie and governments can provide new programming while shifting risk away from taxpayers.

Despite these advantages, PFS is not a fix-all. It is merely one of many innovative ways to ensure better social outcomes. In the meantime, discussions around increasing flexibility in spending in Colorado must continue to ensure economic prosperity for all Coloradans.

Note: Capitol Gains is a regular feature on fiscal happenings in the Colorado legislature.

By Ali Mickelson

Historically, when revenue is increasing, lawmakers have been eager to increase spending of tax dollars through the tax code in the form of tax credits, exemptions and deductions. The 2015 General Assembly has been no exception.

With 12 new tax credits introduced in the first month alone, lawmakers appear to be taking a page out of the Colorado revenue-reduction history books and charging ahead with unprecedented tax credit vigor. Lawmakers from both parties have introduced such proposals.

As always, this prompts us at the Colorado Fiscal Institute to brush off our Tax Principles. CFI evaluates all tax credits using a set of principles that the nonpartisan National Conference of State Legislatures has developed to describe a tax system that provides enough resources and does so equitably. These principles include efficiency, effectiveness, equity and evaluation. We don’t suggest that all tax credits are bad. We simply want to make sure that we spend our limited state tax dollars in the most productive and sustainable ways possible.

CFI’s principles for evaluating tax credits, deductions and exemptions:

1. Is the tax expenditure effective?  When evaluating a new tax credit, deduction or exemption, CFI considers whether it has been proven to meet a targeted goal. CFI also considers the return on investment from the tax expenditure when compared to the benefit and cost of investing in other state priorities.

Example of an effective tax expenditure: The Earned Income Tax Credit (EITC) is an example of an effective tax expenditure. The EITC was created to reward work and help move families out of poverty. Since its enactment, it has become the No. 1 most effective anti-poverty tool, lifting more families out of poverty than any other program, and it has been proven to increase the amount of work, income, educational and health benefits of its recipients and their children. It is an incredibly effective tax credit.

Example of an ineffective tax expenditure:  An example of an ineffective tax expenditure is a temporary sales tax exemption, or “holiday,” for school supplies. Research shows that tax holidays are ineffective because retailers often increase their prices during the holiday or don’t offer discounts they otherwise would have, and local spending isn’t stimulated because consumers merely shift normal purchasing patterns to a different time of year. Furthermore, many consumers don’t benefit from tax holidays because they don’t have the flexibility to shop during one particular timeframe during the year.

2. Is the tax expenditure economically efficient?  CFI evaluates all tax expenditures from an economic standpoint. A good tax expenditure will produce the intended outcome without significant additional cost or disruption to public spending or the economy. CFI also considers the behavior the tax expenditure is intended to incentivize and if this behavior would occur anyway. Tax expenditures are often used to incentivize certain behaviors but should never be given to reward behavior that would have happened anyway.

Example of an efficient tax expenditure: An example of an efficient tax expenditure is the federal tax credit for electric vehicles. The federal government has established that the purchase of electric cars should be incentivized because of long-term environmental benefits. Research by the Congressional Budget Office shows that the tax credit is frequently the deciding factor for purchasing an electric vehicle. Therefore, because of the credit, people are buying electric vehicles, and the credit is incentivizing the intended behavior.

Example of an inefficient tax expenditure:  The state “Vendor Fee” is an example of an inefficient tax expenditure. This program allows vendors to keep a portion, or “fee,” of the sales tax they collect from customers — even though businesses are already required by law to collect sales tax.This is an inefficient use of taxpayer dollars.

3. Is the tax expenditure equitable?  Equity in evaluating tax expenditures focuses on who benefits from the favored tax treatment proposed by the credit, deduction or exemption. All tax expenditures create winners and losers in the tax system, and CFI evaluates the impact of the expenditure in two ways. First, we consider horizontal equity, which occurs when similarly situated taxpayers are treated in a similar manner. Second, CFI assesses vertical equity, or who pays taxes in light of who currently shoulders the largest tax responsibility. CFI evaluates the equitable distribution of the tax benefit based on ability to pay and other principles of equity.

Example of an equitable tax expenditure: The sales tax exemption on food for home consumption is an example of an equitable tax expenditure because it benefits low- and middle-income families who pay more of their income in taxes than higher income families. Since low- and middle-income families spend a greater portion of their income on groceries than wealthier families, the exemption offsets some of the regressivity that is built into the tax system and creates more equity.

Example of an inequitable tax expenditure:  The state income tax credit for the Business Personal Property Tax is an example of an inequitable tax credit because businesses in low-millage jurisdictions receive a smaller state tax credit than those in high-millage districts, even if the businesses are all the same size.

4. Will the tax expenditure be regularly reviewed and evaluated?  Tax expenditures, just like any general fund appropriation, need regular review to evaluate whether they are working and to let taxpayers know how their money is being used. In order to determine if a tax expenditure is achieving its targeted goal and is the best use of taxpayer dollars, they must be reviewed and evaluated regularly based on a clear set of objectives. CFI always considers the measures of transparency and accountability that are included in any new tax expenditure or economic incentive.
5. Will the tax expenditure lift up the middle class?  The middle class in Colorado is still struggling to recover from the recent recession. Tax expenditures can impact this recovery by either supporting targeted middle-class growth, or by shifting support to other priorities. CFI considers whether a credit supports middle-class families and an economy that works for everyone.

We encourage lawmakers to consider these principles when developing new tax policies. Not all tax credits are created equal, and we count on the General Assembly to make sure that they spend our limited resources in the best, most impactful ways possible. This includes spending through the tax code. 

Here are the materials for the 2015 Colorado Fiscal Forum, presented by the Colorado Fiscal Institute.

Agenda:

2015 Fiscal Forum Agenda

Speaker bios:

2015 Fiscal Forum Speaker Bios

CFI Staff contacts:

Colorado Fiscal Institute Staff Contact 2015 Fiscal Forum

CFI Resource List:

Colorado Fiscal Institute Resource List 2015 Fiscal Forum

Tax Basics:

Colorado State Tax Basics 2015

Budget Basics:

Colorado State Budget Basics 2015

Who really pays a greater share of their income in taxes in Colorado? The rich or the poor? We answered this question by using the latest data from the Institute on Taxation and Economic Policy. The New York Times featured ITEP’s latest data in a national story today as well.

The 2015 Fiscal Forum: Presented by the Colorado Fiscal Institute

Friday, January 9, 2015

Colorado Convention Center

Meeting Rooms 601, 603, 605

AGENDA

7:45-8:30 a.m. Breakfast and Networking

8:30 a.m. Welcome

Carol Hedges, Executive Director, Colorado Fiscal Institute

8:45-9:30 a.m. Revenue Prospects for the Next Couple of Years

Natalie Mullis, Chief Economist, Colorado Legislative Council Staff

Ms. Mullis will provide insight and context for the Colorado Legislative Council December 2014 Economic Forecast, including details on economic trends and their impact on state revenue.

9:30-10:15 a.m. What We Can Expect from the 114th Congress

Ellen Nissenbaum, Senior Vice President for Government Affairs for the Center on Budget & Policy Priorities

Ms. Nissenbaum will preview tax and budget issues facing the 114th US Congress with a special focus on health care and other issues that directly affect state budgets.

10:15-10:45 a.m. Looking Beyond the Current Revenue Forecasts: The Structural Deficit

Phyllis Resnick, Ph. D., Lead Economist, Colorado Futures Center, Colorado State University

Ms. Resnick will provide results of the analysis prepared by the Colorado Futures Center on the trajectory of state spending and revenue generation. This groundbreaking research illuminates the size and causes of the structural deficit facing the State of Colorado.

10:45-11:00 a.m. Networking Break  — Snacks and Beverages

11:00-11:30 a.m. Legal Challenges: Prospects for Changing the Fiscal Environment

David Skaggs, Senior Strategic Advisor and Independent Consultant, McKenna Long and Aldridge, LLP

Mr. Skaggs will provide an update on Kerr v. Hickenlooper, a federal district court case challenging the constitutionality of Colorado’s TABOR amendment.

Kathy Gebhardt, Executive Director, Children’s Voices

Ms. Gebhardt will provide an update on Dwyer v State of Colorado, a state district court case challenging the constitutionality of the Colorado General Assembly’s use of the “negative factor” to limit state funding for K-12 schools.

11:30-12:00 p.m. Update on GPI and Reminder of TABOR options

Chris Stiffler, Economist, Colorado Fiscal Institute

Mr. Stiffler will provide the 2015 update of CFI’s Genuine Progress Indicator for Colorado, an alternative measure of economic well-being for the state.

Carol Hedges, Executive Director, Colorado Fiscal Institute

Ms. Hedges will outline current legislative policy for distributing TABOR rebates to tax payers that are created when state revenue exceeds the constitutionally mandated revenue cap.

12:00-1:00 p.m. Understanding the Public’s View of Economic and Fiscal Issues

David Winkler, Vice President and Director of Research, Project New America

Mr. Winkler will share results of recent public opinion research on Coloradans’ attitudes following the 2014 election with a special focus on attitudes about the economy, taxes and state investments.

Joseph Grady, Ph. D., Principal, Topos Partnership

Mr. Grady will outline Topos’ research on public attitudes about the role of government, taxes and public investments. He will highlight the work Topos is undertaking in four states, including Colorado.

Printable verision of the 2015 Fiscal Forum Agenda

By Chris Stiffler

CFI Economist

Income inequality, or the growing gap between the rich and poor, has become a fairly hot topic, and a lot of that has to do with the growing recognition that income inequality is bad for the entire economy, not just some people.

The biggest reason that inequality is an economy-wide problem is that the middle class, faced with stagnating wages, doesn’t have the disposable income to support the consumer spending that has historically been a driver of the economy. Working families have less to invest in their future, which means fewer opportunities for investments in education and fewer opportunities to start businesses, which has long-term effects on the economy’s potential.

But there are also other harmful side effects of income inequality, and some of them are a bit less apparent. For example, economists and policy wonks are now beginning to link income inequality to increased volatility in tax revenue collections.

Now, most people don’t lose sleep because our state economists are having a harder time predicting how much revenue Colorado will collect each year, but it is something that should cause some concern.

Let me show you why.

Inequality is linked to more frequent boom-and-bust cycles that make our economy more volatile. Even the International Monetary Fund has noted the relationship between inequality and economic instability. And in a recent study, Standard & Poor’s warned that income inequality contributes to greater booms and busts in the economy because the lower and middle classes, faced with declining or stagnating wages, have had to rely on increased debt to maintain their living standards.

A side effect of this volatile economy means unstable and unpredictable tax revenue collections.  A new report from the Nelson A. Rockefeller Institute of Government shows how forecasting errors have increased over the past decade which means that tax revenue is more unpredictable.

As anyone who has prepared a household budget knows, if you don’t know how much income you will have next month, it makes it especially difficult to know what you can and can’t afford.  It also makes it really difficult to plan for the future or it forces you to make unnecessary cutbacks.

The same is true with government. If policy makers can’t count on revenue next year, it makes it extremely risky to hire new teachers, make the kinds of long-term commitments needed to build roads and infrastructure, or give more state aid for higher education. Consider also the impact of cuts in state programs that occur because of volatile revenue streams.

In a political environment like Colorado, where our elected officials already lack the flexibility to adapt to changing economic conditions, it is important that we remove as much uncertainty from the budgeting process as possible. Not only would addressing the growing gap between the rich and the poor improve the entire economy, it would also make it less vulnerable to booms and busts while simultaneously reducing revenue uncertainty. With greater certainty, policy makers can more effectively and efficiently plan our state budget that funds policy priorities like Medicaid, transportation and education. This is another reason why addressing income inequality would be good for the entire economy, and it reaffirms that the economy does better when everyone does better.