Exemption suspensions generate nearly $12M for state budget

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Spurred at least in part by the suspension of certain exemptions, state sales tax revenues rose more than 8 percent in the second quarter compared to the previous year.

The Colorado Department of Revenue reports that sales tax revenue jumped to $461.5 million from $426.5 million the previous year. The suspension of exemptions on items ranging from candy and soda to software and pesticides alone generated $11.8 million more in sales taxes, an increase of more than 15 percent in those areas from the same quarter last year.

Gov. Bill Ritter signed nine bills earlier this year repealing the exemptions, most of them temporarily, in an effort to help close the state’s budget gap.

Contentious at the time, some of the outcry over the suspensions has apparently since dissipated — to a degree.

“We got a ton of e-mails when it happened,” said Sen. Rollie Heath, D-Boulder, who sponsored some of the bills. “But since February, it’s been absolutely quiet. I’ve heard no complaints: No e-mails, no phone calls, nothing.”

Heath might want to call the Greater Colorado Springs Chamber of Commerce.

Locally, the rescission of exemptions for software companies and industrial energy use have had the greatest impact, said Stephannie Finley, head of the governmental affairs division at the chamber.

“What it’s doing is creating the feeling of uncertainty in businesses,” Finley said. “I recently met with a small-business owner who said she could put 15 people to work right now but she doesn’t know what the government plans to do.”

That said, companies in the targeted industries appear to have adjusted.

“When it went into effect, we looked for ways around it, to be honest,” said Dave Hollenbach, managing partner at Dsoft Technology, a Colorado Springs software company. “We purchase software for the federal government, which is usually (tax-)exempt. We wanted to make sure we’re in compliance, and sent two letters to the Department of Revenue to confirm that but never heard back. It really hasn’t been on my radar since.”

While some companies have managed to bypass the tax hike, others have felt the pinch, especially in agriculture.

“Anytime you increase taxes, it comes out of the bottom line because farmers don’t set the price of commodities,” said Shawn Martini, spokesman for the Colorado Farm Bureau. “Reducing profits limits what they’re able to pay themselves and reinvest in their business.”

As a result, Martini said some have discussed other options.

“You hear producers mentioning crossing state lines to go to Nebraska to buy compounds, because those are usually bought in considerable bulk to cover themselves for the year,” he said. “I don’t know anyone personally who has (crossed state lines), but there’s talk that it’s easy to do.”

Yet with businesses either circumventing the taxes or adapting, experts say there’s little risk businesses would consider moving out of Colorado.

“They may not like the tax, but the cost of moving is immensely greater,” explained Scott Peterson, executive director of the Streamlined Sales Tax Governing Board, an organization that promotes uniformity across state sales tax codes. “There are so many things that go into the decision of where to locate a business that are much more expensive than tax structure, and to the extent that people use taxes as a decision, I think Colorado remains quite competitive.”

Perry Swanson, spokesman for the nonpartisan Colorado Fiscal Policy Institute, said Ritter had little choice in the matter.

The state, facing a $1 billion revenue shortfall, addressed its deficit with about $600 million in cuts and found ways to generate an extra $250 million in new revenues, including the sales tax exemption suspension.

“Repealing exemptions were not the preferred strategy for anyone, but something had to be done, and this seemed like the best available road,” Swanson said.

That argument may stem calls from a new House Republican majority to repeal the tax bills, which had narrowly passed a party-line vote in the Finance Committee.

“It’s going to be interesting to see what happens in the House,” Martini said. “We only have to pick off a couple votes.”

Meanwhile, with some sales tax exemption repeals not scheduled to take effect until 2011, and other temporary suspensions expiring within the next few years, it is difficult to discern whether the sales tax measures are living up to initial expectations. Proponents had said the measures would help the state raise up to $140 million a year, which would amount to $35 million a quarter, far more than the $11.8 million seen in the second quarter.

Officials at the Department of Revenue and independent analysts at nonpartisan groups say tracking revenue generated from the suspension of sales tax exemptions hasn’t been easy. Because individual items are not tracked and are instead lumped together in certain categories, they say it is not possible to determine where the revenue came from.

In other words, if Sears starts to collect sales tax on candy and soda but its aggregate sales tax collections fall short of expectations, that doesn’t necessarily mean the suspensions fell short. The shortfall could be related to a number of reasons, including — in this example — unusual lows in sales of hardware items and appliances.