Bill would curb tax breaks for insurers, software and enterprise-zone investment

Colorado legislators are considering a rewrite of the state's tax code that would curtail incentives now offered to certain industries, including telecommunications and oil and gas, that invest in enterprise zones, as well as insurance companies and software purchasers.

House Bill 1296, which is awaiting a vote before its first committee, is estimated to reduce tax breaks by $81.2 million at full buildout in the tax year that begins in July 2027. But it's not a budget-balancing tool, as it would offset those revenue gains by creating a new tax credit for low-income seniors and extending an expiring tax credit for people who donate to child-care facilities.

Sponsoring Democratic Reps. Lorena Garcia of Adams County and Yara Zokaie of Fort Collins told members of the House Finance Committee on Monday that they want to eliminate tax incentives that are not driving desired policy outcomes. Doing so will save the state tens of millions of dollars that they argued is not being spent wisely now, and it can help it to put public dollars to higher priorities, they said.

'Incredibly targeted changes' or 'sweeping rollback'?

"This bill is incredibly targeted changes that still preserve and protect programs that are effective," Zokaie said before the committee delayed a vote on HB 1296 so that the sponsors could continue working on amendments to try to garner more support.

Business leaders argue the changes will yank the rug out from under several industries and cause financial backers to put money into other states, costing Colorado jobs, capital investment and even telecom infrastructure as the state is trying to build out coverage. And several legal experts questioned whether a proposed expansion of sales tax on software products in the bill is creating a whole new tax and violating the Taxpayer's Bill of Rights.

"This isn't a minor policy tweak — it's a sweeping rollback of one of the few effective tools rural Colorado has to attract and retain capital investment," Grand Junction Area Chamber of Commerce President/CEO Candace Carnahan said of the enterprise-zone changes. "The very industries this bill excludes are the ones that are still willing to put money into our communities, create jobs and invest in infrastructure. By targeting them, HB 25-1296 threatens to cut off economic opportunity at its source."

What tax bill would do

The major changes the bill proposes include:

Boosting from 2.5% to 7% the portion of an insurance company's workforce that must be located in Colorado for it to qualify for a regional home office insurance premium rate reduction, just three years after the legislature first raised that percentage from 2%. That incentive cuts their tax rate from 2% of premiums to 1%.Ending the sales and use tax exemption on any software that is not custom-made, including cloud-computing tools, software downloaded from the internet and software that is manually installed on a consumer's computer by a vendor's representative.Limiting the 3% tax credits on investments made within enterprise zones — designated zones in areas of lower economic activity — to a lifetime total of $2 million. The bill also would ban companies in the extraction of gas or hard-rock minerals, aviation, the retail sale of fuel products or the construction of wireless telecommunications facilities from taking the tax credit.Eliminating the business personal property tax income tax credit that companies can claim on the first $18,000 worth of property on which they pay taxes. A state audit found the cumbersome tax credit is underutilized, and an interim committee proposed raising the maximum value of property a company can own and be exempted from the tax in exchange for nixing the credit, but that exemption increase has not happened.

Exclusion of certain industries from certain tax breaks

While groups like the Grand Junction Chamber have assailed proposed enterprise-zone changes — the excluded industries make up 65% of all enterprise-zone tax credits on the Western Slope — Zokaie said the current law does little to incentivize investment. Industries, such as oil and gas, mining and telecommunications, are dependent on location and are not swayed by these tax credits, she argued, adding that she will look to remove aviation from the excluded industries in an amendment.

Garcia, meanwhile, argued that the home-office premium reduction is not helping to grow the insurance industry, pointing to a report from the Office of the State Auditor that was finished just last month. Between 2022 and 2024, 15 of the 18 insurance groups that qualified for the reduction reported a decrease in Colorado jobs, cutting a collective 4,300 jobs, while receiving a $17.5 million increase in credits as premiums rose, the report found.

"Tax credits are not just rewards. They are meant to incentivize certain behavior," Zokaie said. "And when we don't see that happening, we need to make changes."

A fiscal note from the nonpartisan Legislative Council estimated that nearly two-thirds of insurers that now quality for the reduction would not qualify any longer under the 7% workforce requirement — a statistic that worries insurers. Joe Thesing, Western U.S. government affairs director for insurer USAA, said it would serve as a disincentive to his company adding to its 2,113 employees in Colorado and it will cause premium hikes to offset the loss of the tax break.

Insurance and software tax changes

"This tax credit is working," said Johnna Reeder Kleymeyer, President/CEO of the Colorado Springs Chamber and Economic Development Corp., noting a 2023 study that predicted the finance and insurance sector in the Pikes Peak region will grow 23% in 10 years. "Raising this threshold from 2.5% to 7% … may sound modest, but in practice it risks pushing out companies who are already making a meaningful investment in our state."

The contraction of the software tax exemption, meanwhile, would bring Colorado policy in line with many other states, said Caroline Nutter, legislative coordinator for the Colorado Fiscal Institute. The move is allowable without a vote of state residents because of its de minimis impact on state revenues, and the tax exemption would remain in effect for custom-made software, supporters noted too.

Mark Medina, a partner at the Silverstein & Pomerantz law firm testifying for the Colorado Chamber of Commerce, scoffed at the assertion of the change having a de minimis impact, however. While the Legislative Council estimated it would increase state revenues $18.7 million in the next budget year, an April 2022 auditor's report estimated the impact at $83 million and Gov. Jared Polis himself said in his budget plan for next year that the change could boost state revenues by $100 million, he said.

Warning of likely lawsuit

"This bill will result in expensive and time-consuming legislation the state doesn't have the money to fight," said Michael Plachy, an attorney at Lewis Roca Rothgerber Christie LLP and member of the Colorado Competitive Council, about expected legal challenges.

HB 1296 also would extend a tax credit for donors to childcare facilities or schools, programs that train childcare providers and grant or loan programs for parents requiring financial assistance for childcare programs. That tax credit is set to expire in 2028 — meaning that a bill is not necessary this year to preserve it — and would be extended through 2030 under this proposal.

Committee leaders have not set a date yet for a vote, as Garcia and Zokaie continue to speak with opponents and work on amendments to the bill.

The Sum & Substance is a news site of the Colorado Chamber of Commerce. To read more, please visit tsscolorado.com.