Capitol Gains: Tax Credit Oprah

February 11, 2014

 Note: Capitol Gains is a bi-weekly feature on fiscal happenings in the Colorado legislature.

 By Ali Mickelson

This session, the Colorado Fiscal Institute is focused on smart revenue decisions that reduce income inequality and support overall economic prosperity. With that in mind, we are working to both promote bills that achieve this targeted goal as well as fight against bills that do not meet our principles of good tax policy. 

CFI has created a list of tax principles with which we evaluate all tax expenditures (credits, deductions, exemptions) that come before the legislative body. This year, with increasing revenue, legislators have been anxious to depart with funds through the tax code. Unfortunately, this can lead to rash decision-making and, what we at CFI lovingly call, “Tax Credit Oprah.”

Tax Credit Oprah is the notion that tax incentives are handed out the way Oprah gives away cars to her audience members. “You get a tax credit! You get a tax credit! Everybody gets a tax credit!”

Now, don’t get us wrong. We think it’d be great to get a free car from Oprah, but the difference between Winfrey’s generosity and state tax credits, exemptions and deductions is that Oprah is using her own money, not everybody else’s. And so if it’s everybody’s money  – funds that would otherwise be used for schools, higher education or other critical state services – that is instead being used to benefit individual taxpayers, shouldn’t there be some guidelines about when that’s OK?

We’ve developed our own set of principles for tax expenditures that we hope will assist policy makers in pursuing wise choices and help others understand why support or oppose certain proposals.

 CFI’s principles for evaluating tax credits, deductions and exemptions:

  1. Is the tax credit effective?  When evaluating a new tax credit, CFI considers whether the tax credit is proven to meet a targeted goal. CFI also considers the return on investment from the tax credit when compared to the benefit and cost of investing in other state priorities. 
  2. Is the tax credit economically efficient?  CFI evaluates all tax credits from an economic standpoint. A good tax credit will produce the intended outcome without significant additional cost or disruption to public spending or the economy. CFI also considers the behavior the credit is intended to incentivize and if this behavior would occur without the credit. 
  3. Is the tax credit equitable?  Equity in evaluating tax credits focuses on who benefits from the favored tax treatment proposed by the credit or exemption and whether the beneficiaries, both direct and indirect, need the favorable treatment. All tax credits create winners and losers in the tax system, and CFI evaluates the impact of the credit on who pays taxes in light of who currently shoulders the largest tax responsibility. CFI evaluates the equitable distribution of the tax benefit based on ability to pay and other principles of equity. 
  4. Will the tax credit be regularly reviewed and evaluated?  Tax credits, just like any general fund appropriation, need regular review to evaluate whether they are working and to let taxpayers know how their money is being used. In order to determine if a tax credit is achieving its targeted goal and is the best use of taxpayer dollars, tax credits must be reviewed and evaluated regularly based on a clear set of objectives. CFI always considers the measures of transparency and accountability that are included in any new tax credit or economic incentive. 
  5. Will the tax credit decrease income inequality?  Growing income inequality is one of the top roadblocks to economic recovery because it limits the economic power of low- and middle-income families. CFI considers the impact of the credit or exemption on income inequality when evaluating any new tax credit. 

Watch for CFI this session, battling against Tax Credit Oprah, and for a copy of our tax principles including a list of bills that we oppose, click here:  CFI Tax Principles 2014 FINAL

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