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HOUSE OF SUBSIDIES: Part I


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State legislators extend tax credit programs for corporations, spur dispute but hope to improve economy

Note: CU News Corps took a close look at this year’s major tax credit bills in the Colorado General Assembly and analyzed their impact on the state’s economy. Over the course of the next three stories, we will focus on the three biggest bills designed to incentivize businesses. In Part I, it’s the Enterprise Zone program tax credits. A fourth story examines crop insurance subsidies.

By Lars Gesing
CU News Corps

In the midst of Colorado’s economic recovery, the state’s lawmakers worked hard during the 2014 session to keep that trend growing.

Colorado ranks fourth in job creation nationwide, and it’s unemployment rate of 6.2 percent is lower than the national rate. According to the Colorado Department of Labor and Employment, the state’s number of employed workers grew by 61,000 from March 2013 to March 2014.

The General Assembly’s most widely used tool to boost that growth even more — providing companies with tax incentives to invest in the local economy and create new employment — is being challenged by a variety of experts.

CU News Corps analyzed this year’s legislative session and the key corporate tax-credit incentive bills that lawmakers proposed and passed. News Corps found that many of the programs put in place don’t always work as well as lawmakers intend.

While politicians and business lobbyists across the state reiterate the importance of the various incentive programs, an array of economists, business analysts and free-market advocates, as well as former state representatives, contest the belief that funneling taxpayer money into the pockets of corporations is an adequate tool for sustainable economic and employment growth.

Carol Hedges, executive director at the independent Denver-based think-tank Colorado Fiscal Institute, calls the government’s way of providing companies with investment incentives “Tax Credit Oprah.”

“If you go back to Oprah Winfrey, when she gives away cars, that’s sort of what the legislature is doing with tax credits,” Hedges said. “This year, it’s even worse because the revenue is expanding, so they feel like they have money to give away.”

The 2014 Colorado Economic Outlook, provided by the Governor’s Office of State Planning and Budgeting, found that the state’s economy has grown more stable in the past year. According to the report issued in March, general fund revenue is expected to grow 3.2 percent in the current fiscal year, and another 7.3 percent in fiscal year 2014-15. And the overall net amount of corporate tax revenue from July 1, 2012 to June 30, 2013, was $652 million, according to the Colorado Department of Revenue.

The department does not release information on the overall amount in tax credits companies claimed, however, citing tax privacy. But a nationwide New York Times analysis published in December 2012 estimates that Colorado spends at least $995 million on incentive programs each year. With a budgeted $28.5 billion of overall expenses in fiscal year 2013, that’s 3.5 cents of every dollar the state spends.

The new 2014-15 $23 billion budget Gov. John Hickenlooper signed into law April 30 further increased funds for economic development and business incentives.

“Companies are looking for funds to finance investments they would otherwise not be able to make,” said John Tayer, president and CEO of the Boulder Chamber of Commerce. “[Incentives are] also an indication of how serious the state is taking its business sector, and how much they want to see it thrive.”

Tayer is among those who supported a variety of bills in this spring’s legislative session that contemplated using tax credits to incentivize businesses to locate and create jobs in Colorado.

$750,000 cap not enough for Enterprise Zone critics

The Enterprise Zone program is one of Colorado’s largest economic development programs. Since it was created in 1986, it has tried to incentivize businesses to invest in economically “distressed” areas in the state (see interactive map). In return, the businesses earn a variety of tax credits.

In 2011, The Denver Post ran a series of investigative stories on the Enterprise Zone program. The paper found that Colorado companies claimed more than $75 million worth of tax credits through the program in 2010. At the same time, those companies created a net 564 jobs.

After several failed attempts, Colorado legislators in 2013 came up with an annual $750,000 cap on the amount of credits a single corporation can claim each tax year.

And this year, the first in which the new cap is applied, House Bill 14-1163 closed a loophole on the amount of credits that can be carried over into the following year.

The House clarified language in the 2013 bill, which intended credits earned on and after tax year 2014 exceeding $750,000 to be allowed as a “carryforward” into future years. In their clarification, legislators labeled this mechanism an “error” that “was not the intent and would render the $750,000 cap ineffective” and retracted it. Gov. John Hickenlooper signed the bill into law March 27.

The changes will save the state $20.9 million over the course of the next two fiscal years, according to calculations by the nonpartisan Colorado Legislative Council.

Despite the downsized scope of the program, for some, that doesn’t go far enough.

“I’d like to see a much lower cap, but creating any permanent cap is a tremendous accomplishment,” former state Sen. Joel Judd (D-Denver), one of the sponsors of the original bill in 1986 (when he was in the House) and now one of the most outspoken critics of tax incentive programs, wrote in an email. “[Since 1986], I don’t know of a single bit of economic activity that happened because of the Enterprise Zone program’s credits and exemptions.”

In 2007, a joint regular performance audit report by three key state economic development offices concluded, “Similar to previous audits, we have been unable to measure the relationship between enterprise zone status and changes in the economic conditions of designated zone areas.”

Judd said that report was the last time the legislature tried to audit the program’s performance. In 2010, he met considerable resistance from lawmakers and business lobbyists when he proposed a bill that asked to terminate the Enterprise Zone program altogether. Ultimately, Judd had to withdraw the bill.

“Some legislators and others believe in good faith that giving state money to private businesses will create more economic activity than paying that money to teachers or road workers or just reducing overall taxes by the same amount,” he said. “You can’t change beliefs in the absence of data.”

Jeff Kraft is the director of business funding and incentives at the Office of Economic Development and International Trade, which administers the Enterprise Zone program. He said a task force created last year helped prove the program’s effectiveness.

“One of the things we saw during the course of that task force was local economic development [officials], particularly in rural areas or some other economically distressed areas that the Enterprise Zone program serves, were very passionate in terms of defending the zone to promote economic development in their areas,” Kraft said. “So the actual people on the ground who are doing economic development felt that it makes a real difference and that it is one of the few programs the state runs that directly targets and serves rural communities.”

Jeffrey Zax, an economics professor at the University of Colorado Boulder, called enterprise zones “a terrible idea.”

“Who has ever said, ‘I can get along without my subsidy’?” Zax asked. “[Enterprise zones] don’t work, but the businesses in the enterprise zones say, ‘This is what makes my business run.’ Of course they do.”

And Carol Hedges from the CFI said, “It just kills me that the business lobby comes in and says, ‘[The program] works.’”

According to the latest Enterprise Zone Annual Report, 7,212 jobs have been created through Enterprise Zone program incentives in fiscal year 2013. At the same time, businesses claimed tax credits for $3.89 billion worth of investments, or more than $530,000 per job.

But Kraft warned these two metrics could not be used to calculate a dollar-per-job ratio, as not every invested dollar is meant to create a job right away.

“One way to [improve the overall economic conditions] is obviously by creating new jobs,” he said. “Another way is by investing in fixed capital, equipment that’s used in economic activities. We have a tax credit just for investing in capital equipment regardless of whether you are hiring or laying people off.”

These long-term fixed capital investments make up a huge part of the Enterprise Zone program’s annual bill, which amounted to a total $134.9 million in fiscal year 2013. In 2006, that number was at $53.9 million.

In the short term though, job creation can be measured at least partially efficient. But to claim a job creation tax credit, a company simply needs to prove a net increase of employment in the designated enterprise zone. Administrators don’t track whether the company laid off workers outside the zone in the same time frame to compensate for its investments.

Do you think the government should keep incentivizing corporations with tax credits?
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State Sen. Rollie Heath (D-Boulder) co-sponsored both the bill to cap the maximum amount of annual tax credits and the one asking for the task force and a review of the decades-old enterprise zone boundaries, which the OEDIT will conduct toward the end of this year.

Heath established his own manufacturing business in the Five Points Area in downtown Denver in 1990. He said the Enterprise Zone program was an incentive for him to locate his capital-intensive startup in the at-the-time low-income neighborhood.

“The original purpose of the bill was a small-business incentive for those [companies] who have choices,” Heath said. Instead, large corporations such as oil and gas companies took advantage of the fact that their resources were situated in enterprise zones and claimed some easy reductions on their tax filings.

Today, that’s no longer possible. Another bill Heath co-sponsored asked program administrators to consider a business’s motivation to locate in an enterprise zone much more carefully and implemented a pre-certification process for businesses seeking to invest there.

“The adjustments were necessary because the bill went way beyond what we originally wanted it to be,” Heath said.

Read Part II/ Read Part III/ Read Part IV

HB1163 at a glance JPG

 

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No Responses to “HOUSE OF SUBSIDIES: Part I”

  1. HOUSE OF SUBSIDIES: Part II | CU News Corps on May 12th, 2014 11:32 am

    […] Part I/Read Part III/Read Part […]

  2. HOUSE OF SUBSIDIES: Part III | CU News Corps on May 12th, 2014 11:33 am

    […] Part I/Read Part II/Read Part […]

  3. HOUSE OF SUBSIDIES: Part IV | CU News Corps on May 12th, 2014 11:33 am

    […] Part I/Read Part II/Read Part […]

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Explanatory multimedia reporting from CU Boulder journalism students
HOUSE OF SUBSIDIES: Part I