New Democrat Update

HELPING COLORADO’S ECONOMY RECOVER

Much has changed about the nature of today’s economy. Not surprisingly, a significant chunk of Colorado’s public expenditure and tax policies were designed for a different economic age, when the dominant key to growth was fostering business capital formation and how quickly companies could accumulate plant and equipment. Cutting taxes was seen as the best means to help make all of that happen.

While capital is still essential, the single most important factor driving economic growth now is innovation. Higher family incomes and increased employment opportunities depend on an entrepreneurial private sector that is developing new products, materials, and production methods; devising new ways of marketing and distributing goods and services; and creating better ways of organizing the workplace and managing a business.

Workforce quality - measured by the skills and education of people - ranks number two. In a knowledge, innovation-oriented economy, enabling workers to expand their skills is essential.

Another key ingredient in economic competitiveness is the health and capacity of our telecommunications and transportation systems. The ability to move information around cheaply and easily, as well as transport goods and services as efficiently as possible, is also high on the list.

To become a better and more effective partner with the private sector, the state must shift its focus to making Colorado firms and workers more productive. At the same time, policymakers must eliminate and oppose measures that seek only to divide a slowly growing pie, protect or reward special interests at the expense of overall progress, and slow down the process of change.

For example, some misguided public subsidies actually hurt the companies getting state “help” because they work against what it takes to succeed - innovation and competitiveness. Such “assistance” can allow beneficiaries to avoid taking the necessary steps to become more productive, by insulating them from the full force of competition and rewarding them for continuing to do what they have done in the past. Such subsides also distort the market, tilting more capital investment toward firms than their economic prospects justify, leaving fewer resources for other companies with more growth potential and job-generating ability.

The hodgepodge of Colorado’s numerous state sales tax exemptions is just one part of a tax code ripe for reform. For example, we should be asking why sales tax does not apply to the purchase of precious metal bullion and coins, agricultural compounds and bull semen, and farm auction close-out sales. Those exemptions cost us a total of over $6 million a year, while yielding very little, if any, public benefit.

Policymakers should also take a look at the impact of the state’s annual $40 million in tax expenditures for enterprise zones (EZ). The idea (as noted in the first paragraph) behind EZs is that lower state taxes will boost higher levels of investment, generating needed employment in economically distressed areas (which, because of political pressure over the years, has now grown to about 70 percent of the state).

For that reason, many business-minded state Democrats have supported EZs since they were first enacted in 1986. However, economic analyses since then have consistently shown that EZs have had very little, if any, effect on economic development, concluding that state taxes - and as result the incentives that reduce them - have been too small to significantly influence business investment decisions.

Past support or a misguided desire to “be consistent” should not be the criteria for continuing programs that do not work. There is already enough of that in the other party. Empirical evidence should be Democrats’ guide.

QUALITY OVER QUANTITY

Past attempts to eliminate ineffective spending and tax subsidies have often failed because the political intensity of those now benefitting almost always trumps the public good. To cut through the special-interest politics, the legislature should create a Colorado Commission on Spending and Tax Subsidies (CCSTS) to uncover these breaks, analyze their cost, and evaluate if their continuance still makes sense.

CCSTS would send its recommendations to the Governor, who would then decide if the package should be considered by the legislature. Both the Governor and legislature could support or oppose the package, but neither could amend it.

Such a model proved successful at the federal level when the conclusion of the Cold War ended the need for many military facilities. Congress wisely created the Defense Base Closure and Realignment Commission which spared elected officials from having to support a particular base closing (especially those in their own districts or states) by only voting for the whole list or nothing at all. It put an end to special pleading.

CCSTS’ mandate would be to recommend repeal of any spending or tax subsidies that promote unproductive activities, create unfair economic advantages, benefit only a narrow slice of the economy or have simply outlived their usefulness. If the legislature approves, it would invest those savings in initiatives that promote economic innovation, the quality of our workforce and the infrastructure. The result would be a public spending and tax structure that better promotes productivity, work and savings.

Of course, CCSTS would not blindly eliminate every state subsidy. Not all spending and tax breaks are equal. Those that serve a clear public purpose that could not be achieved without special spending or tax treatment would be left out of the package. Those that have broad purposes which expand the economy’s general productive potential and result in the generation of more innovative firms, would be retained.

For example, this legislative session, State Rep. John Kefalas (D-Fort Collins) is pushing a bipartisan proposal that has proven to increase the availability of capital to promising startup companies in other states. HB 1105 provides an innovation investment tax credit to “angel investors,” individuals who often fill the gap between financing provided by family and friends and venture capital. Similarly, State Rep. Joe Miklosi (D-Denver) has advocated an initiative (HB 1127) to boost investment in job-generating small businesses.

Another good idea would be to provide tax credits for company expenditures on research at universities or federal labs. Because the results of such research are shared with other competing companies, the profit motive is reduced and worthwhile ideas often go unfunded. A little push from the state might get more good projects over the finish line.

Colorado could also provide incentive funding to those state-supported colleges and universities that allow the commercialization of faculty research to be considered in the granting of tenure. To promote cooperation with the private sector, professors could be encouraged to bypass tech transfer offices, let entrepreneurship count toward their service requirements, and permit successful patent applications to count as publications for tenure review purposes.

Maybe best of all, the process of modernizing Colorado’s spending and tax structure would raise the level of debate on the economy, resulting in even more effective policies over the long-term. It might put to rest the old conservative mantra that all the economy needs is lower taxes and a smaller state government.

Instead, it will show that increased innovation and productivity are the keys to higher incomes and more economic opportunity - and, at this point in time, that the quality of state spending and taxation is much more important than its quantity.