By Asha Glover

Law360 (June 11, 2020, 9:08 PM EDT) -- The Colorado House of Representatives advanced a measure Thursday that would raise an estimated $248 million by overriding a number of federal pandemic pass-through and corporation tax relief provisions, despite Republican pushback.

H.B. 1420 passed on a 39-26 vote. The bill would require additions to the taxable income of pass-through business and C corporations by decoupling from expanded income tax deductions allowed under the federal Coronavirus Aid, Relief and Economic Security Act . The bill will next be considered by the state Senate.

Rep. Shannon Bird, D-Westminster, said the bill is necessary to ensure that the public sector recovers from the novel coronavirus pandemic.

"You must know that for public education funding ... we just got back to 2010 or 2008 levels of per-pupil funding, so there's something wrong when only the private sector recovered [from the Great Recession], but the public sector still is not able to appropriately invest in our schools, in health care and in our roads," Bird said.

But Republican lawmakers argued that the bill is not-business friendly. Rep. Colin Larson, R-Littleton, told the House the bill will make Colorado uniquely uncompetitive and will discourage companies from relocating to the state. Companies that are not brick-and-mortar small retail businesses are most likely to relocate, he said.

Larson also said that the state has lost $3.3 billion in revenue because of the coronavirus and that it is bad policy to recoup revenue by further devastating the business community.

"We are all heartbroken about the cuts that had to be made to K-12," he said. "What I do not want is to come back here next year and have to deal with a hole that is much larger because we came through in the middle of the summer and rather than helping businesses that are struggling on the edge right now ... instead, we decided to come in and finish them off. "

The bill would also require pass-through business owners who claim a federal qualified business income deduction to add back the amount of the deduction to compute state taxable income if individual adjusted gross income exceeds $75,000, or $150,000 for couples. Lawmakers adopted an amendment to clarify that the provision would not apply to taxpayers who file a Schedule F on their federal income tax return.

Additionally, the bill would require 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. The bill would also require pass-through business owners and C corporations that claim a business interest income deduction to include in taxable income the amount that exceeds the 2017 federal Tax Cuts and Job Act's limitation.

The bill's provisions relating to the CARES Act would apply to tax years ending on or after the federal law's March 27 enactment.

The bill would also eliminate a state income tax modification for qualifying net capital gains. The provision, if passed, would go into effect at the end of the 2020 tax year. The measure would also repeal the state sales and use tax exemptions for industrial use of energy, including those used in certain industrial, transportation and communication services. Instead, qualified taxpayers would be eligible for a sales and use tax refund of up to $1,000 per filing period, according to the bill.

The $1,000 refund limit would not apply to the sale, storage, use or consumption of certain materials for agricultural purposes, electricity generation or street and railroad transportation services, or to diesel fuel purchased for off-road use. If passed, the provision would apply to filing periods on or after Aug. 1. An adopted amendment clarified that no part of the provision can be construed in the refund section to limit the availability of any other exemption under the state's sales and use tax statute.

The bill would also cap the amount of net operating losses a corporation can carry forward at $400,000. State lawmakers, in separate legislation, have also proposed partly decoupling from federal provisions on corporate NOL deductions by limiting the NOL carryforward period to 20 years. That measure, H.B. 1024, was passed by the Senate on Saturday. If signed by Democratic Gov. Jared Polis, the measure would take effect 90 days after the legislative session adjourns.

According to a fiscal note, H.B. 1420 would require an appropriation of $4.8 million for fiscal year 2021-2022 and would raise $248 million for the state's general fund during the same time period.

The measure was advanced by the House Finance Committee on Tuesday, and the House Appropriations Committee advanced the measure Wednesday. During the Finance Committee hearing, Rep. Emily Sirota, D-Denver, the bill's sponsor, said that the bill would not increase tax rates and therefore tht voter approval is not required under the Colorado Taxpayer Bill of Rights, which requires any tax increase to be approved by popular vote.

Representatives of Polis did not immediately respond to requests for comment Wednesday.

--Editing by Vincent Sherry. 

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