Tax deductions

Audit: Dozens of Colorado Tax Deductions, Exemptions Are Underutilized | Subscriber Content

Dozens of Colorado’s tax deduction and exemption programs are underutilized, with many serving no purpose whatsoever, according to a new state audit.

The Office of the State Auditor released its fifth annual Tax Expenditures Compilation Report on Friday, detailing individual assessments of 48 tax expenditures, including various tax credits, exemptions and deductions. The report concluded the office’s first comprehensive five-year review cycle, which it has been working on since 2018.

This year’s report showed the most negative results to date.

Of the 48 tax expenditures assessed, 18 proved not to meet the planned objectives. Fourteen others are partially meeting their targets, and one could not be determined, meaning that only 15 of the 48 programs are working as planned.

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This nearly doubles the number of unsuccessful state tax expenditures, as annual reports from 2018 to 2021 found that only 21 programs fell short of their targets. The year of each report only reflects the date on which the program evaluations were conducted. In each annual report, different tax years are used by program, depending on the data available, and the dates when the programs were enacted vary from 1883 to 2018.

Reports from 2018 to 2021 found that 93.5%, 80%, 86.5% and 66.7% of evaluated programs met their objectives or partially met their objectives, respectively. The 2022 report concluded that only 60.4% of programs were meeting or partially meeting their objectives.

“These assessment reports help legislators understand whether tax expenditures established in state law are achieving their purpose and what policy actions might be needed,” said audit manager Trey Standley. “A number of tax expenditures have been repealed or amended as a result of OSA’s work.”

This year, nearly all of the 18 unsuccessful tax expenditures were determined to be failing to meet their objectives simply due to lack of use, according to the audit.

One-third of unsuccessful programs had no users in the tax years assessed in the audit: rural broadband equipment reimbursement, catastrophic health insurance deduction, investment for child care services, excise tax exemption on aviation gasoline, commercial vehicles used in interstate commerce exemption and credit for the purchase of telephone numbers single value motor vehicle registration.

The Rural Broadband Equipment Rebate – allowing broadband service providers to claim a refund of sales tax paid for property located in unincorporated areas with populations of less than 30,000 – n has been awarded to anyone since its inception in 2014. The program has received 14 applications; however, they were all rejected due to lack of sufficient information to prove eligibility.

The credit for the purchase of single-value motor vehicle registration numbers was not used until after its inception in 2016, resulting in a revenue impact of $41 that year and none since . The income tax credit is available to people who purchase personalized license plates from the Colorado Disability Funding Committee, but according to the audit, the current committee was unaware of the credit and did not issued certificates to buyers that are required to claim credit.

The Child Care Investment Credit has been infrequently used in recent years and was not used at all in 2018, the tax year assessed by the audit. It aims to incentivize employers to operate a child care center for their employees with a 10% tax credit on the investment; however, the audit revealed that it was not significant enough to justify the extreme expense.

The catastrophic health insurance deduction, the aviation gasoline excise tax exemption, and the exemption for commercial vehicles used in interstate commerce were all deemed unnecessary by the audit, completely unused because they each duplicate another program or their qualifications are too limited.

The other 12 unsuccessful tax expenditures in the audit are:

• Income tax deduction for Olympic medalists: few eligible athletes used it, too few taxpayers to calculate the impact on income.

• Savings account income tax deduction for the purchase of a first property: seldom used and offers a small tax advantage, impact on income of $1,942 from four taxpayers.

• Medical Marijuana Sales Tax Exemption for Indigent Patients: Underutilized, $10,133 revenue impact for 83 taxpayers.

• Exemption of goods intended for use in spaceflight: minimal use, impact on income of $12,000 for an undetermined number of taxpayers.

• Deduction for contributions and pre-tax payments to Medical Savings Accounts: no longer necessary as similar federal deductions were established after its inception in 1994, impact on income of $16,000 combined with other similar deductions of less of 250 taxpayers.

• Deduction of employer’s contribution to medical savings for corporations, individuals, estates and trusts: no longer required as similar federal deductions were established after its creation in 1994, impact on income of $16,000 combined with other similar deductions of less than 250 taxpayers.

• Colorado Works Program Employer Credit: underutilized and eligibility requirements limit effectiveness as users likely exceed earnings limits once they start receiving wages, revenue impact of $35,374 from 32 taxpayers.

• Career Education Credit: Was used by a few taxpayers, none of whom submitted required documentation demonstrating eligibility, revenue impact of $41,860 from 51 taxpayers.

• Military service persons reacquiring the Colorado residency deduction: seldom used and inconsistent with the purpose established by the General Assembly, impacting revenues of $168,939 from 63 taxpayers.

• Exemption for low-emission vehicles: no longer in effect because federal emissions requirements have made qualifying low-emission commercial trucks the norm since 2014, revenue impact of $2.2 million from an indeterminate number of taxpayers.

• Long-Term Care Insurance Credit: Not large enough to encourage use and benefits declined because premium costs increased, revenue impact of $2.6 million for 12,500 taxpayers.

• Income tax credit for innovative trucks: used minimally as there are not many electric trucks available for purchase, impact on income and taxpayers undetermined.

Annual audit reports of Colorado’s tax expenditures are required by Senate Bill 16-203, passed in 2016 to begin in 2018. Under the bill, the State Auditor’s Office must report each year at the General Assembly on the use, effectiveness and efficiency of tax expenditures. and the impact on taxpayers. The Tax Policy Legislative Oversight Committee will now review this new report.

Now that the first five-year cycle is complete, the Office of the Auditor General will begin again with a new five-year review cycle, which will include new tax expenditures established since 2018.