UP AND DOWN 17TH STREET: Ritter tax proposal looks like win-win

Published October 3, 2007 at midnight

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When Gov. Bill Ritter announced his economic-development agenda last week, much of the focus was on a rollback of the business personal property tax. Not counting, of course, the typical partisan name-calling.

Less noticed, harder to understand but perhaps more important is the proposed "single factor" corporate income tax.

Don't hit that snooze button. The change Ritter proposes makes so much sense economically and politically, it's a wonder it wasn't done years ago.

At tax time, people who work in one state and live in another have to calculate how to divide their income between two returns. Businesses operating nationwide have a far bigger problem figuring out what chunk of income goes on the home-state return.

Colorado offers, as many states do, a "three factor" formula to calculate the liability of a business. What percentage of your payroll is in Colorado vs. nationally? What percentage of your property is here? And what percentage of sales?

Here's an example from Tom Clark, of the Metro Denver Economic Development Corp. A company with a payroll of $10 million has $4 million, or 40 percent, in Colorado. It owns $100 million of property nationwide, with $30 million, or 30 percent, here. Its sales are $300 million, with $60 million, or 20 percent, here. The average of those percentages - 30 percent - is the share of income that's taxable here.

Unlike other states, Colorado offers another choice. A company can use an alternate formula that leaves payroll out of the calculation. Then, it would average just the property and sales percentages.

It's not as confusing as it sounds, but it's confusing enough. And it creates a lot of work as a company decides which of the two formulas offers greater savings.

More importantly, both formulas can create a disincentive to invest in Colorado. If the proportion of property owned here increases, the company would have to declare a greater share of its income taxable. That can cost the company, depending on other states' tax rates.

Ritter's proposal is a "single factor" formula that dumps both formulas and calculates income based only on a company's sales. In doing so, it eliminates the complexity and the disincentives.

As Clark says, the beneficiaries are companies with a lot of real estate or equipment and high payrolls in Colorado. The losers: companies with large sales here but with few workers or little real estate. The state has yet to make a prediction about the effect on tax revenue, but it could be close to neutral.

A simpler tax policy that rewards companies that invest and employ in Colorado. What could make more sense?

David Milstead and James Paton take turns writing Up and Down 17th Street. Contact Milstead at 303-954-2648 or milstead@RockyMountainNews.com.

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