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Law360 (June 15, 2020, 6:35 PM EDT) -- The Colorado Legislature on Monday approved a bill temporarily decoupling from certain federal pandemic tax-relief provisions as the state grapples with a pandemic-induced budget hole, after the bill's scope was scaled back to get the governor's support.
The Colorado Legislature passed a modified bill instead of a previous one that would have decoupled from federal tax break provisions beyond the 2020 tax year. (AP)
Colorado would decouple from several pass-through and corporation tax relief provisions in the federal Coronavirus Aid, Relief and Economic Security Act, or CARES Act, for the tax year 2020, according to a fiscal note for the bill. A previous version of the bill would have decoupled for all tax years ending on or after the act's passage.
Additionally, the bill would limit a qualified business income deduction for pass-through business owners provided by the 2017 Tax Cuts and Jobs Act
, according to the note. Under the bill, owners whose adjusted gross income exceeds $500,000 must add back the federal deduction to calculate state taxable income for income tax years commencing on or after Jan. 1, 2021, but before Jan. 1, 2023. A previous version of the bill would have limited the deduction to those with up to $75,000 in adjusted gross income.The bill would raise $113 million for fiscal year 2021 and $23 million for fiscal year 2022. A previous version of the bill would have raised an estimated $248 million in fiscal year 2021 and $408 million in fiscal year 2022.
The bill had been amended after discussions with Democratic Gov. Jared Polis and other stakeholders, Sen. Chris Hansen, D-Denver, a sponsor of the bill, told Law360. While the amount of revenue raised would be lower under the revised bill, Hansen told Law360 he was still pleased with the bill.
"You have to see 1420 in the context of the other bills that we've been working on simultaneously, and our overall goal was to make sure that we had money for K-12 funding and for the earned income tax credit," Hansen said. Between H.B. 1420 and other bills, including H.B. 1427, which would refer a rise in tobacco tax to voters, the Legislature had accomplished its goal, Hansen added.
The bill will go to Polis next. The governor supports the bill, Conor Cahill, Polis' spokesperson, told Law360.
The bill would require that for tax year 2020, 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. For pass-through business owners that claim an excess business loss deduction for tax year 2020, the amount exceeding the limitation in the TCJA that is allowed under the CARES Act must be added to taxable income, according to the bill.
Pass-through business owners and C corporations that claim a business interest income deduction for tax year 2020 would also have to add to their taxable income the amount exceeding the limitation in the TCJA that is allowed under the CARES Act, under the bill.
Previously, the bill's provisions regarding the CARES Act would have applied to all tax years ending on or after the federal law's March 27 enactment.
The bill would also increase the state's earned income tax credit from 10% of the federal earned income tax credit to 15%. Additionally, the bill would extend the state credit to taxpayers who are otherwise eligible for the federal credit but for the absence of a valid Social Security number, beginning in tax year 2021. This would extend the credit to taxpayers who are in the state without valid immigration authorization.
Sen. Jack Tate, R-Centennial, criticized the bill on Friday, although he praised the bill's sponsors for what he termed a "dramatic compromise."
"This bill does not get the job done," Tate said, "Why do I say that? Because it doesn't help economic growth, which should be our key concern right now at this juncture when dealing with a pandemic."
The bill was sponsored by Hansen, Sen. Dominick Moreno, D-Commerce City, Rep. Emily Sirota, D-Denver, and Rep. Matt Gray, D-Broomfield.
Tate did not respond to requests for additional comment.
--Additional reporting by Asha Glover. Editing by Vincent Sherry.
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