A sales tax holiday? Hope it applies to crossbows.

By Ali Mickelson

CFI Director of Legislative and Tax Policy

The Colorado Capitol has been rumored to host a variety of undead characters, including a Victorian lady who presents herself outside the Senate gallery, invisible horses who amble up the marble staircase and the scorned mistress of a former legislator who frequents the golden dome.

But scarier than ghosts that haunt the Capitol’s halls are the zombie tax policies that awake from the dead and creep out from both chambers every session. These resurrected tax policies claw their way out of the graveyard of bad ideas, stumbling from committee to committee, searching for new brains to feed upon with faulty policy intentions and ghastly political goals.

For example, there’s the surprisingly appealing “school supply sales tax holiday” zombie that, despite its relatively harmless demeanor, is actually hollow and rotten underneath its dapper clothing. This proposal, which would create a temporary timeout from sales tax for those who purchase school supplies on a select weekend, is merely an opportunity for retailers to take advantage of consumers by increasing prices. It disproportionately benefits wealthier individuals and hasn’t been proven to create any savings for small businesses or struggling families. It is, in essence, a zombie in sheep’s clothing.

There’s another zombie that would eliminate the tax on business personal property. The business personal property tax is a tax on tangible property like computers, desks and equipment owned by businesses, that, while almost universally unpopular, is a major funding source for schools, especially those in rural Colorado. Each year the idea of eliminating the business personal property tax is revived from the dead, bringing with it a $1 billion hit to education funding. While this zombie is one of the easiest to kill, its persistence means you can’t ever put down the crossbow.

Finally, the most sophisticated of the zombie hierarchy, the “dynamic modeling zombie.” Dynamic modeling is a way to estimate the impact of tax and budget changes on the economy and revenue system. This arcane zombie is often popular with its haunted peers, the transparency apparitions, and will be often be resurrected multiple times in a session or even a hearing. In reality, dynamic modeling is an often misguided and inaccurate way to model economic policy. This zombie has been known to possess the alluring ability to allow anyone it meets to justify their conclusions. In fact, the dynamic modeling zombie may have even been supporting economic zombies from Kansas when they were revived in the state.

CFI combats many zombie tax ideas, like the three mentioned above, each year. We fight with our fiscal weapons — economic theory, budgeting considerations and strategic tax principles — attempting to take out the zombies before they can cause permanent damage to Colorado families and the overall economy.

Yet the frequency with which zombie tax policies claw their way out of the grave is terrifying. And they always have that telltale stench of decomposed ideas — ideas that are unproven, inequitable, ineffective and inefficient. They’re downright scary, and they want to devour efforts to create an economy that works for everyone.

We hope someday tax policy zombies will join the Capitol ghosts as only folklore, remembered only in scary stories we tell around a campfire as we enjoy the warmth of shared prosperity.

Whatever happens, we can’t let these zombies cross the border from Kansas.

By Chris Stiffler

CFI Economist

Want a sure-fire way to capture votes for public office? Promise voters they can have their cake and eat it, too. This is what Kansas Gov. Sam Brownback did in 2012 when he promised Kansas voters that he could drastically cut taxes without having to make commensurate cuts in vital public services.

How exactly can you cut taxes and still have the same amount of money to spend on education and other building blocks of economic growth? By believing in “Zombie Economics” — dangerous doctrines repeatedly slain by the truth, yet still walking among us.

The notion that tax cuts will increase tax revenue by stimulating economic growth has been killed over and over. But that didn’t stop Brownback from running this, to use the governor’s words, “real-live experiment.” What makes this particularly scary is that these zombies are at our border.

So how did “Zombie Economics” get unleashed in Kansas? In 2012, Brownback won large cuts in state income tax rates.  Another piece of legislation set in motion future cuts. When the plan is fully implemented in 2018, the top rate will have dropped to 3.9 percent from 6.45 by 2018.

This was supposed to energize the Kansas economy.  But, so far, the results confirm that this zombie idea should have stayed dead. Instead of generating more tax revenue like the “Zombie Economics” theory purported, the tax cuts caused drastic shortfalls. In fact, Kansas saw the largest decline in tax collections of any state – a whopping 21.9 percent drop from the same period in 2013 to 2014, according to a new national report from the Nelson A. Rockefeller Institute of Government.

To make matters worse, employment growth in Kansas is below the national average; the state faced a debt downgrade by Moody’s and Standard & Poor’s; and Kansas lawmakers were forced to tap into the state’s reserves to fund important public services while making cuts to colleges, schools and help for struggling families.

The fallout of this zombie idea is taking quite a toll on working Kansans.  A higher portion of state revenue now must be generated through sales taxes, which are borne most heavily by low-income families, since they spend all or most of their income on taxable items (compared to the wealthiest, who are able to save or invest a greater share of what they make in a year).Plus, some of the shortfall in tax receipts was filled by ending tax rebates for food and child care, again, coming down most heavily on working families.

Often the most terrifying scary movies are those whose plots the audience can imagine actually occurring in real life. As the Kansas example shows, a zombie apocalypse, driven by seemingly killed theories, can happen right next door if no one stands up to stop it in time.

This is second of three blogs for CFI’s “Zombie Economics” week.   Stay tuned for the conclusion:  zombies in our state capitol.  

Scarier than movie zombies, economic zombies are real.

Editor’s note: This is first of three blogs that kicks off CFI’s “Zombie Economics” week. Stay tuned for our blogs about the zombies at our borders and the zombies in our state capitol. 

By Chris Stiffler

In scary movies a zombie is a corpse that comes back to life. Even scarier in the real world is “Zombie Economics”: dangerous doctrines repeatedly slain by the truth but still walking among us.

The reanimation of these refuted theories occurs because they often serve a political purpose by appealing to people’s preconceptions. The notion that cutting taxes on the rich will create additional tax revenue by promoting increased growth is a classic example of Zombie Economics (a term coined by economist John Quiggin). Tax cuts inevitably lead to less revenue not more, but the idea lingers on because it is such an attractive sell for politicians.

Perhaps the most resilient economic zombie is “trickle-down” or “supply-side economics” — the notion that lowering taxes, particularly for the wealthiest, will free up money for investment and that this will help the rest of us.

The supply-side theory incorrectly argues that if producers pay lower taxes they will make more things, and hire more people. This happens to be the opposite of how the world really works. Common sense tells you it doesn’t matter how low taxes are on your business; if you don’t have customers you won’t have a successful business, and you won’t expand. Yet “trickle-down theory” still lives on because to many people think it sounds just plausible enough as a justification for tax cuts. Just like a scary movie, the more you want to believe it the more real it seems.

Fortunately there are numbers to illustrate the real failure of trickle-down.

From 1947 to 1979, before trickle down took hold, American workers from the richest to the poorest saw their earnings double. In contrast, income growth from 1979 to 2007 (during the period of trickle-down policy) was far less equal. The richest 20 percent of Americans enjoyed a 71 percent increase, compared to just 7 percent for the bottom 20 percent.

The bottom line is that more and more money is flowing to the wealthiest in the form of growing profits while the share of income going to workers’ wages is declining. Sixty-six percent of the nation’s economic output went to labor in 1973; by 2012 it was down to 58 percent.

The stagnating incomes of working men and women are bad for everyone because consumer spending is so important to our economy. Less disposable income in the pockets of people means less economic benefit for all businesses. And lower tax revenue means fewer dollars to investment in what really builds the economy, long term:  schools, transportation, safe communities, and more.

The zombies in the movies can’t hurt us, but “zombie economics” can and does.

The Associated Press today ran a national story focusing on income inequality and how it has affected states’ revenues. The story also looked at how a number of states, including Colorado, rely heavily on income tax for revenue. Because income tax fluctuates so much on account of capital gains, it has proven to be a volatile revenue source for the state.

CFI was quoted in a local AP companion story that ran with the national story. We noted how TABOR prevents lawmakers from adjusting the tax system at all, even if the changes were revenue neutral. Moreover, the state moved to a flat income tax in the 1980s, exacerbating inequality.

Read that article here.

By Thamanna Vasan

CFI Fiscal Policy Analyst

Colorado is one of only eight states to experience a decline in the unemployment rate since June, figures released from the U.S. Bureau of Labor Statistics show. The July report also shows 30 states experienced an increase in unemployment, and 12 states reported no change [i]. While Colorado is experiencing increased job creation and low unemployment rates the recovery from the Great Recession remains slow. Colorado unemployment rates are higher than those of previous recessions and job creation is not rapid enough and remains below pre-recession levels.

Unemployment

In July, Colorado experienced a slight decrease in the unemployment rate from 5.5 percent in June to 5.3 percent in July. The state unemployment rate is 1.4 percentage points lower than a year ago. The last time the unemployment rate was 5.3 percent in Colorado was in October 2008. The national unemployment rate saw a slight increase from 6.1 percent to 6.2 percent. While Colorado’s unemployment rate continues to decline and remains below the national average (Figure 1), it only ranks 16^th among states [ii].

Employment and the Labor Force

In addition to a steadily decreasing unemployment rate, Colorado is experiencing a growth in job creation. In July, 5,500 new jobs were created in Colorado. Many of the industries responsible for this growth are the same industries that suffered the largest job losses in the wake of the Great Recession. The construction industry, for example, has lost 31,000 jobs since December 2007. However, the industry has experienced a significant amount of growth over the past year with the addition of 7,700 new jobs. The rate of job growth in many industries has also been greater in Colorado when compared to national rates. Coupled with the decrease in the unemployment rate, these trends are encouraging.

Unfortunately, despite these new jobs, recovery remains slow and inadequate. Following the recession, Colorado experienced 26 months of job loss and has since recovered 101,700 jobs. This job creation has not kept pace with the growth in the population of working age Coloradans, resulting in a high job deficit.

In order to keep up with the 10.7 percent growth in the working age population, an additional 150,300 jobs must be created. In order for Colorado to return to pre-recession rates and keep pace with population growth, the state will need to create 7,000 jobs over the next three years.

In addition to a great job deficit, unemployment rates are still significantly high when compared to those of the past two recessions.

In the period of recovery following the 1990 recession, the unemployment rate at 79 months was 3.5 percent compared to the current 5.3 percent.

Similarly, the unemployment rate 79 months from the start of the 2001 recession was 4 percent.

[i] Regional and State Employment and Unemployment June 2014, U.S. Bureau of Labor Statistics

_{[ii] Economic Policy Institute analysis of U.S. Bureau of Labor Statistics Current Employment Survey Data}

CFI economist Chris Stiffler has created a handy infographic that shows what has happened to school finance over the last three decades with the interactions of the TABOR, Gallagher and Amendment 23 constitutional provisions.

Click on the graphic above to enlarge it, or check it out here:  Colorado school finance timeline

By Ali Mickelson

Beware of changes to tax credits masquerading as reforms. Sometime the proposed “reforms” transform what was originally a worthwhile effort to help individuals, create jobs or support the broader economy into giveaways for the well-off. We have seen examples of this at both the state and federal level in 2014.

Congress is currently debating something somewhat misleadingly called the Child Tax Credit Improvement Act. This Act includes an expansion of the Child Tax Credit, which supports working families with children and which CFI has long supported. The problem is this legislation would make more well-off families eligible for the credit while failing to extend improvements enacted in 2009 that supported low-income working families. By failing to make permanent the 2009 improvements – which are set to expire in 2017 — the modifications would make many relatively affluent families better off while cutting off millions of low-income working families from the credit.

A more local example of changes made to a tax credit that fundamentally altered the intended policy is Colorado’s Job Growth Incentive Tax Credit, which was modified in the 2014 legislative session. This credit was created in 2009 to encourage businesses to create jobs in Colorado. Its passage required many compromises from both business and employee advocates, including wage standards and a requirement that businesses receiving the credit attest that “but for” the credit, the jobs wouldn’t have been created.

Unfortunately, some of the beneficiaries of the tax credit felt the hard-won compromises impeded business recruiting, so they worked to amend the bill in 2014. The changes reduced the wage standards and changed the “but for” requirements in the original bill to make it less meaningful. The result is a credit that rewards companies for creating lower-wage jobs, with less of a guarantee that they even needed the credit to create the jobs in the first place. The change also increases the amount of money that is likely to be diverted from public priorities like schools and colleges.

Throughout our history, CFI has been a vocal advocate for efficient and effective spending through the tax code. We use a set of principles to evaluate all tax credits and work hard to ensure that the credits we support advance an economy that works for everyone, not just the wealthiest few. As a result of our evaluations, we know that not all tax credits are created equal. They can be structured to promote or thwart widespread prosperity.

Even credits that are already in place can undergo slight modifications that change the scope or beneficiaries in dramatic ways. These two examples show that it is not the name of the credit that determines whether it contributes to an economy that works for all, but the details of how the credit is applied and who benefits from the credit. That is why it is so important to see through the tax credit masquerade.

World-renowned political economist and former U.S. Secretary of Labor Robert Reich spoke at the 2014 Colorado Fiscal Forum hosted by CFI in January. Reich is leading the national discussion on income inequality and how it threatens not just the economy, but our very democracy. We’ve culled some of the best moments from his talk and distilled them into a short video. Please watch and share.

Coloradans are consuming about half as much retail marijuana as state economists predicted before voters approved special taxes on recreational pot in 2013, and many state residents have instead stuck to using medical marijuana, taxed at a significantly lower rate.

That was one of the key revelations to come from the June revenue forecast released last week by the Colorado Legislative Council and the Office of State Planning and Budgeting. The forecast also showed the Colorado economy continues to grow faster than the national economy, though the growth is by no means even across the state.

Coloradans 18 or older and who get a doctor’s recommendation can register to purchase medical marijuana, which is subject only to the state’s regular 2.9 percent sales tax, not the special sales and excise taxes voters approved in Proposition AA last year for retail marijuana. Anyone, state resident or otherwise, who is 21 or older can purchase retail, or “recreational,” marijuana.

Legislative economists in 2012 estimated the sales and excise taxes on retail pot would bring in $67 million in the 2014-15 fiscal year, and in March, they dropped that estimate to $54 million.

But now they have dropped that estimate even further – to $30.6 million.

“We sort of expected that the adult-use (recreational) market would cannibalize the medical marijuana market,” legislative economist Larson Silbaugh told lawmakers last week. “So far, there isn’t any evidence that the medical marijuana market is sort of shrinking with people going to the adult-use market.”

Economists had estimated that Colorado consumers would purchase an average of 3.5 ounces of retail marijuana per year. Tax collections so far haven’t born out those assumptions, Silbaugh said, and economists have now lowered their estimates to 1.9 ounces per consumer per year, a 45 percent decrease from original estimates.

He noted that some marijuana users have said it is cheaper for regular consumers to go to a doctor and get a recommendation for a medical marijuana card than to purchase retail pot. In fact, the “red card” registry has continued to grow since January, when recreational sales became legal, he said. Legislative economists have also noted that the cost of a medical marijuana registry card has dropped from $35 to $15.

Silbaugh cautioned that the state had only collected four months of data and that more numbers would mean better predictions for a product whose legal sales economists have never been able to measure until now.

Economists now predict the state will close out fiscal year 2013-14 with $94.8 million more than previously projected, $25 million of which will stay in the general fund. The remainder will be transferred to the Colorado Conservation Board Construction Fund, the State Education Fund, the Capital Construction Fund, the Hazardous Substance Site Response Fund and the Economic Development Fund. The fiscal year 2014-15 general fund budget is anticipated to be 0.3 percent, or $31.4 million, higher than budgeted in the 2014 legislative session. The fiscal year 2015-16 budget is also expected to be higher than anticipated, with an increase of $630.7 million, a 6.8 percent increase from what was budgeted for fiscal year 2014-15.

Even with higher-than-anticipated revenue, the state has not restored pre-recession spending levels for K-12 education and a number of other programs.

In fiscal year 2013-14, the Referendum C cap will equal $11.8 billion. Legislative Council estimates that revenue subject to TABOR will be $354.3 million below the Ref C cap in fiscal year 2013-14 and $264.7 million below in fiscal year 14-15. However, total state revenue will be an estimated $2.8 million above the estimate published in the Blue Book voter guide in 2013, when the marijuana tax was approved by voters. So even though pot taxes are bringing in less than expected, and even though economists’ predictions about overall revenue collections were only slightly off, because of TABOR, there is a possibility that the $2.8 million will be needed to refunded to voters.

Legislative Council staff expected a decision on refunds wouldn’t be made until the 2015 legislative session.

The possible refunds are another example of the limitations of TABOR.  Marijuana taxes have been approved by the voters twice; however, the constructs of TABOR may require voters to once again vote to permit all marijuana revenues to go to capital construction for public schools. And, while revenue for schools is what the voters have clearly chosen at the ballot – twice –  TABOR may instead require a rebate.

This again highlights one of the many glitches written into TABOR, a measure that supporters claim is intended to carry out the will of the people but often does the opposite.