Business tax legislation has small business owners and leaders wondering how they’ll manage the additional fiscal burdens.
Nine bills essentially would remove tax credits on an array of items spanning from candy to computer software, bringing in about $145 million in revenue for the state. The proposals are the product of a state legislature driven by a mad grab for revenue to balance a bleeding state budget.
These bills are causing stress for businesses, enough to prompt an unprecedented, united pro-business rally at the capitol last week.
The bills passed through the House in the very early morning hours a week ago, and now are on a fast track through the Senate.
Senate Republicans have been given a chance to come up with a tax package of their own, despite the deadline for bills having passed at the state legislature.
Business leaders say they understand the state’s budget issues — but they believe they are being asked to shoulder too much of the burden, and that removing tax credits will drive some people out of business and make hiring a distant option for others.
“These bills are severe enough that they are going to be very harmful,” said Tony Gagliardi, Colorado director for the National Federation of Independent Businesses. “Those are the bills we object to.”
Gagliardi says businesses were taken by surprise by the immediate nature of the bills — most of them take effect March 1 — earlier than previously thought — giving businesses little time to react.
“We spent months talking with the governor,” he said. “And we were told that any taxes would start June 1. This is just so soon. And, as I explained to the committee — businesses are the revenue generators in the state, and state government is the spender. Let’s see some cuts in state government.”
Gagliardi said businesses have seen tax increases or tax credit eliminations every year for the last three years — the disappearance of more than $330 million. An additional $145 million is a particularly tough blow as businesses are trying to recover from the recession.
Sen. John Morse (D-El Paso) defended the bills in a letter to constituents, saying they are targeted at ending loopholes for special interests.
“As we emerge for the worst recession since the Great Depression, our state faces a budget shortfall of more than $1 billion,” he said. “Most of the shortfall will be addressed with cuts in spending of more than $700 million. As an additional step toward balancing our budget, we have introduced 13 bills this year that will adjust or end some tax exemptions and save the state $145 million this fiscal year and next.”
Morse said the legislature was targeting special interests and large corporations.
“At a time when those in Washington have chosen to offer corporate bailouts, we have chosen to end corporate giveaways and stand up for the citizens … By closing these corporate tax loopholes, we can cut waste and protect the core public services of government, all with a balanced budget and no new taxes.”
But business owners say the bill targets all business, regardless of size. David Hollenbach, owner of DSoft Technology, says that some of the bills will hinder both innovation and job creation.
“You have to be a risk taker to start a new business,” he said. “And these bills dis-incentivize the risk taker.”
His company creates software, which will face new sales and use taxes if the bills become law. In addition, he would pay taxes to larger software companies he buys from.
“At some point, it gets to be too much,” he said. “We’re going to push through it; we’re not ready to give up, but if all these pass, it’s going to be tough to expand, to grow.”
Hollenbach started his company in his basement and now has 70 employees. He said the suggested tax will place a heavy administrative burden on his small company.
“Just keeping track of it,” he said. “And, do we pay the use tax every year, or just the year we downloaded it? Software exists in computers and on servers. Is someone going to come in and see what we have, when we bought it?”
Dan Malinaric’s company has a different — and larger — perspective. He is the managing director and site manager for Atmel’s Colorado Springs operation.
His company is most worried about the bills that will tax energy in manufacturing processes. His company is Colorado Springs Utilities’ largest customer.
“We already pay $12 million a year,” he said. “These taxes will add $350,000 on to that, and once the city, county get their share, our taxes are around $850,000.”
Atmel employs about 1,400 workers, and Malinaric said that for every Atmel job, 2.4 additional jobs are created in the city.
“We are a global company so we can’t set our price to meet local taxes,” he said. ‘We have to meet our competitors’ prices. When costs go up in one place, we have to look to cut elsewhere. And we’re trying to protect those jobs.”
Malinaric said that when a company the size of Atmel has to lay off people, then there is a ripple effect in the community. Other people are laid off, too.
Even nonpartisan groups question the decisions behind some of the bills. The Tax Foundation said several of the proposals were moving the state in the wrong direction.
‘Re-examining some of the nitty-gritty tax policies buried deep within state statutes is a good idea,” said Mark Robyn, staff economist. “Target tax breaks for special interests, or ‘tax expenditures’ are really just government spending funneled through the tax code. But legislators should keep in mind that some tax exemptions exist to prevent economically damaging double taxation.”
Robyn said much of the legislation — bills to expand the sales tax base — will result in double taxes, once at the production level and again at the retail level.
He points to bills that would tax direct mail advertising materials, fuels and electricity used in manufacturing, fast food containers and bags, and various agricultural products as examples of the wrong bills.
“While state tax codes are filled with many unjustifiable special interest carve outs, all tax scholars agree that business-to-business transactions should be exempt from the general sales tax,” he said. “A properly structured sales tax applies to all consumer purchases, but not to business purchases. The purpose of this exemption is not to promote business in general, but rather to avoid the double taxation of some products.”
Robyn said taxing inputs on their way through the production line is “economically damaging.”
But legislators are heading in the right direction with a couple of the proposals, he said. The state is eliminating the alternative minimum tax, which would reduce tax complexity without sacrificing revenue and a bill to limit tax credits for fuel-efficient cars.