Governor Polis recently signed into law a Joint Budget Committee (JBC) sponsored bill that changes the availability of two of the state’s most significant tax credits.
House Bill 25-1335 was prompted by a pair of cautious forecasts conducted by the Legislative Council Staff (LCS) and the Governor’s Office of State Planning and Budgeting (OSPB) in March.
Despite its best intentions, the bill could end up exacerbating future budget shortfalls, which are expected to come due to the state’s structural budget challenges, coupled with ongoing overspending by the legislature.
The JBC created HB 1335 to provide more stability for recipients of the Family Affordability Tax Credit (FATC) and the Earned Income Tax Credit (EITC).
Before the bill, the triggering of the tax credits was conditional on the actual amount of money that the state collected, so a sudden dip in revenues due to economic volatility in one year could immediately reduce or even turn off the credits.
Now, under HB 1335, the triggering of the tax credits is based on forecasted growth rather than actual growth. In other words, the tax credits are no longer dependent on actual revenue meeting the triggering threshold.
Rock meets hard place
As I previously explained, the meteoric increase in tax credits in the last several years played an understated, but meaningful role in this year’s budget shortfall.
The legislature loves to use tax credits to encourage individuals to engage in specific, government-approved behaviors or actions, despite the resulting revenue loss.
This was easy to do when Colorado still had Federal ARPA funds rolling in, rapid growth due to higher inflation, and strong economic forecasts.
However, lawmakers now must reconcile evaporating COVID-19 funds, cooling inflation, and increasing economic uncertainty due to tariffs, as well as the seemingly insurmountable national debt.
Let’s suppose that an economic downturn were to occur. Because of the changes enacted with HB 1335, the legislature would be obligated to maintain funding for the FATC and EITC tax credits, even if the state doesn’t actually collect sufficient revenue to cover the cost.
That would mean the legislature would need to pull funding from other sources in order to maintain funding for the tax credits.
Coupled with the fact that the state’s budget woes are expected to worsen, primarily due to increasing healthcare costs, HB 1335 has the potential to exacerbate looming “budget shortfalls.”
The JBC managed to balance this year’s budget by transferring funds, eliminating expensive programs before they could be implemented, and eliminating underutilized funds and programs.
It is unlikely that the coming years will provide such relatively painless solutions, especially now that it will be more politically difficult to reduce funding for tax credits that people increasingly rely on.
Tax deals breaking the bank
As I mentioned earlier, special interest tax breaks are one of the reasons the state experienced a budget shortfall this year.
The Taxpayer’s Bill of Rights (TABOR) limits the growth of a portion of the state budget to a formula of population growth plus inflation, with over-collected funds refunded back to all taxpayers.
However, targeted tax breaks allow the state to instead funnel the over-collected money towards narrower and narrower special interests, instead of returning it to everyone who paid, thereby undermining TABOR.
Instead, the legislature should eliminate these special interest tax breaks in favor of the more equitable TABOR refund, or even better, a buy-down of the state income tax rate.
Rather than being over-taxed, Coloradans of all income levels could keep more of their own hard-earned money in their pocket from the beginning.
As the legislature may soon experience, it will not be politically pleasant to reduce the EITC, FATC, or any of the other “essential” programs currently funded if the state experiences an economic downturn and push comes to shove.
Coloradans must be ready when legislators inevitably blame TABOR instead of themselves for overpromising and overspending taxpayer money.
In the meantime, be thankful that Colorado at least has a balanced budget requirement, because this kind of policy is precisely why the federal government has accumulated so much debt.
Nash Herman is a fiscal policy analyst at Independence Institute, a free market think tank in Denver.
