February 29, 2008

Colorado Takes Business Tax Reform in a Refreshing Direction

There’s usually good reason to view proposed tax breaks for business with a bit of skepticism. Countless tax preferences granted to businesses lack any economic or policy justification, often instead being the result of the hard work of business lobbies or simply the nagging paranoia many legislators have of their state evolving into an “unfavorable” environment for business.

A recent business tax cut approved by Colorado’s House Finance Committee, however, enthusiastically breaks this mold. The proposal under consideration eliminates the business personal property tax for businesses with less than $7,000 in personal property (i.e. those least able to pay) such as furniture, computers, and software. The business personal property tax has been the subject of serious criticism and reform efforts across the country for quite some time, most recently in Arizona, Florida, Idaho, Maine, and Utah.

One of the primary complaints of those involved in these movements has been that the business personal property tax is too complicated. Calculating one’s tax involves taking account of every item used in the operation of the business, and then determining the item’s current value from fairly complicated depreciation tables. For larger businesses that have sufficient staff to undertake this process, the burden may be only a minor inconvenience. For small businesses, however, the costs associated with figuring out what one owes can easily exceed the actual tax bill. The government faces a similar hassle in reviewing the lengthy tax returns submitted by small businesses, often with gains in revenue of no more than $50 or $100 per return for businesses of the size that will be benefited by this proposal.

Colorado has taken a well-targeted approach to reducing the problems faced by small business (as well as government itself) as a result of this tax. By exempting businesses possessing less than $7,000 worth of property from paying, the state will have reduced the number of businesses subject to the tax by about 30,000. Not only will this save the government a lot of hassle, but by targeting the tax relief to businesses with the smallest amount property, only those that were paying the smallest amounts anyway will be affected. This is the reason that the price tag of the reform is quite low, at $2.6 million annually statewide with $600,000 of that picked up by the state. The cost is also kept low by the fact that the $7,000 exemption does not apply to businesses with more than $7,000 of property – large, likely more profitable, companies will see no windfall benefits as a result of this legislation as they must continue to pay taxes on even the first $7,000 of property they possess. And finally, as government tax agencies see their workloads decline significantly they will have more resources available to scrutinize the returns of those larger businesses that actually pay significant amounts in property taxes.

But the issue here is not a concern for most states. About ten states currently do not tax any business personal property, while most others have exemptions much higher than Colorado’s current $2,500. Nonetheless, if this proposal becomes law the state will deserve much credit for deciding to approach a business tax cut in a much more responsible manner than is often the case.


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