The Colorado legislature is considering a hefty tax hike on small businesses in order to spend more on K-12 education.
Colorado House Bill 1420, the Tax Fairness Act, would make several changes to the state’s tax code, Colorado Politics reports. The central element of the plan, according to the American Federation of Independent Business, is a clawback of the small-business deduction from the federal 2017 Tax Cuts and Jobs Act. The federal law allows a 20 percent deduction of business income.
H.B. 1420 would remove that deduction for small businesses with adjusted gross income of $75,000 or more for a single filer or $150,000 or more for joint filers.
The plan “is a tax increase—plain and simple,” the NFIB’s comment states.
The bill would revoke the state’s part of the tax cut small businesses received in 2017.
“At the heart of the federal Tax Cuts and Jobs Act, passed in 2017, is the 199A small-business tax deduction of 20% of business income,” NFIB states. “Because state taxes are tied to the final taxable income on an individual’s federal forms, many Colorado small-business owners also had less state taxes to pay. Gray and colleagues, Rep. Emily Sirota, Sen. Julie Gonzales and Sen. Dominick Moreno, want to de-couple state tax calculations from the federal government’s. In short, they want the 20% savings back.”
The legislation “is expected to recover about $340 million for the state budget by closing a handful of new and existing tax loopholes that benefit wealthy businesses and wealthy business owners,” argues Colorado Center for Law and Policy Communications Director Bob Mook in the Pagosa Daily Post.
Colorado Politics estimates “the bill would generate $248 million in general fund in 2020-21 and more in succeeding years.”
The small business tax deduction is not a loophole benefiting the rich but instead a wealth-generating policy, and revoking the deduction will reduce employment, pay levels, and business in the state, the NFIB states.
“’That 20 percent small-business tax deduction helped produce record highs in hiring, employee compensation, and business expansion,’ said [Colorado state director for NFIB Tony] Gagliardi, citing 46 years of small-business data from NFIB’s Small Business Economic Trends reports,” the NFIB states. “‘And, it would still be doing so had not the coronavirus pandemic hit. We’re asking small-business owners to re-open and re-hire while we’re threatening them with a tax increase, providing them no liability protection from COVID-19 lawsuits, almost ruining their economy-calming, joint-employer rule, and still asking them to conform to the taxing regulations of more than 700 entities.’”
Colorado Politics summarizes the rest of the changes in H.B. 1420 as follows:
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- net operating losses for “C” corporation businesses would be capped at $400,000 annually.
- repeals a deduction for “qualified net capital gains” effective at the end of the 2020 tax year.
- repeals a tax exemption for the sale or use of electricity, coal, gas, fuel oil, steam, coke or nuclear fuel used for industrial purposes, effective August 1. The bill allows for a sales and use tax refund of up to $1,000, and provides exemptions for agriculture, diesel fuel purchased for off-road use, and fuel used to generate electricity. The bill states that repealing the exemption does not affect the sales and use tax base for counties, cities and special districts.
- repeals a provision for insurance companies with regional home offices in Colorado that cut the tax on insurance premiums from 2% to 1%. On March 1, 2021, that goes up to 2%, the provision governing all other insurance companies.
- institutes a tax on insurance policies issued in connection with an annuity plan.
Colorado Gov. Jared Polis has not yet agreed to sign the bill.
“Polis pointed out he had run on a platform of eliminating tax loopholes, but he also ran on a pledge to lower the state’s income tax rate,” Colorado Politics reports. “‘We’re happy to negotiate on this,’ Polis said, but added that there is not yet an agreement on fiscal policy.”