By Asha Glover

Law360 (June 10, 2020, 7:23 PM EDT) -- A Colorado House committee Wednesday advanced a measure that would raise an estimated $248 million in part by overriding a number of federal coronavirus tax relief provisions. 

H.B. 1420, which the House Appropriations Committee advanced by a 7-4 vote, would require additions to the taxable income of pass-through business and C corporations by decoupling from expanded income tax deductions allowed under the federal Coronavirus Aid, Relief and Economic Security Act . The bill will next be considered by the full state House of Representatives.

The bill would require pass-through businesses that claim an expanded federal net operating loss deduction to include in taxable income the portion of the deduction that is affected by the CARES Act's net operating loss provision. The bill would also require pass-through business owners and C corporations that claim a business interest income deduction to include in taxable income the amount that exceeds the federal Tax Cuts and Jobs Act's  limitation.

The bill's provisions relating to the CARES Act would apply to tax years ending on and after the federal law's March 27 enactment.  

Even if the measure clears the state Legislature, it could be vetoed by Democratic Gov. Jared Polis. The governor told reporters during a news conference Tuesday that his office and lawmakers had not yet reached an agreement on a fiscal reform package, specifically because it did not include the income tax rate cut that Polis campaigned on.

"We are happy to negotiate with all parties and include other parts of the package that can backfield some state revenue and … earned income tax credit, as well as an income tax cut," Polis said.

While the bill does not include Polis' income tax cut, it would increase the percentage of the earned income tax credit from 10% to 20% beginning in 2023.

The bill would also require pass-through business owners who claim a federal qualified business income deduction to add back the amount of the deduction to compute state taxable income if individual adjusted gross income exceeds $75,000, or $150,000 for couples.

Additionally, the bill would eliminate a state income tax modification for qualifying net capital gains. The provision, if passed, would go into effect at the end of the 2020 tax year.

The measure would also repeal the state sales and use tax exemptions for industrial use of energy, including those available for the sales, purchase, storage, use or consumption of electricity, coal, gas, fuel oil, steam, metallurgical coke or nuclear fuel that is used in certain industrial, transportation and communication services. Instead, qualified taxpayers would be eligible for a sales and use tax refund of up to $1,000 per filing period, according to the bill.

The $1,000 refund limit would not apply to the sale, storage, use or consumption of certain materials for agricultural purposes, electricity generation or street and railroad transportation services, or to diesel fuel purchased for off-road use.

If passed, the provision would apply to filing periods on and after Aug. 1. A sales and use tax exemption for newsprint and printer's ink available to newspaper publishers and commercial printers would not be affected, according to the bill.

The bill would also cap the amount of net operating losses a corporation can carry forward at $400,000. State lawmakers, in separate legislation, have also proposed partially decoupling from federal provisions on corporate NOL deductions by limiting the NOL carryforward period to 20 years. That measure, H.B. 1024, was passed by the Senate Saturday. If signed by Polis, the measure would take effect 90 days after the legislative session adjourns. 

According to a fiscal note, H.B. 1420 would require an appropriation of $4.8 million for fiscal year 2021-2022 and would raise $248 million for the state's general fund during the same time period.

The measure was advanced by the House Finance Committee by a 7-4 vote on Tuesday. During the committee hearing, lawmakers raised concerns about how and whether the bill complies with the Colorado Taxpayer Bill of Rights, or TABOR, which requires any tax increase to be approved by popular vote.

"This does not need to go to the voters," Rep. Emily Sirota, D-Denver, the bill's sponsor, told the committee Tuesday, saying the bill would not increase tax rates. "We are able to make these changes." 

The state's business community has begun pushing back against the bill. The Colorado Chamber of Commerce, in a statement Tuesday, said it opposed the measure because it would eliminate federal tax relief meant to help businesses get through the coronavirus pandemic. The chamber added that the bill would not impact only large corporations, as supporters of the bill have said.

"If this bill passes, it will be devastating for small businesses and the workers they employ across every industry — from manufacturers to retail to agriculture to construction and more," according to the statement.

Representatives for Polis did not immediately respond to requests for comment Wednesday.

--Editing by Neil Cohen.

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