While a few states continue to wrangle over vote counts and post-election litigation, the November 3 results were clear in Colorado, where there were no big surprises in who won the vote. There were successful ballot measures that spell changes for businesses in the years ahead.
A state family and medical leave law approved by voters will provide a safety net for most employees and will be jointly funded by both employees and businesses. Voters imposed new taxes on tobacco but offset that measure by cutting the state income tax rate. We expect continuity to be the theme in the Legislature in the coming year, where there was no change in Democratic control.
Pandemic will be front and center for the Legislature
As far as the state’s business climate is concerned, we didn’t see anything in the state election results that would prompt departures in policy. Following the blue wave in 2018 that gave Democrats control of the governor’s mansion and the Legislature, the government remains firmly in Democratic hands, with the Democrats achieving a net gain of one seat and a 20-15 majority in the Senate, and the House enters 2021 with the same 41-24 Democratic majority as 2019-2020. There will be a new Speaker, majority leader and minority leader in the House, but the top Senate leadership is unchanged.
A 19th century judge famously wrote in a decision that “No man’s life, liberty or property are safe while the Legislature is in session.” That probably is especially true when one party controls all the levers of government, but there are several moderating factors that will keep the Democratic majority from overreaching in the coming year.
Both parties are mindful that legislative districts will be redrawn in 2021 with a mandated goal of making them more competitive. Those types of districts tend to favor moderates who can appeal to swing voters, and many legislators will be wary of leaning too far left or right when they run in 2022. One example of this is the new family and medical leave law. The Democratic Legislature struggled to get enough votes to pass this expensive program through legislation, and advocates chose instead to place it in front of voters by the initiative process and allow them to make the decision.
As in 2020, the Legislature will be focused on COVID-19, and both parties will look for ways to make it easier for businesses to operate during the pandemic and get people back to work while keeping the virus in check.
Proposition 118: New family and medical leave insurance benefit
More than 57 percent of voters endorsed Proposition 118, which will create one of the most progressive state family and medical leave programs in the nation, and one that offers far more generous coverage than federal laws. Eight other states have their own family leave laws, but Colorado’s would be among the most comprehensive. This program implements a new fee system that will affect most businesses. The payroll deductions don’t kick in until January 2023 and the program starts in January 2024. Proposition 118 was opposed by the Denver Metro Chamber of Commerce and the Colorado chapter of the National Federation of Independent Business.
Here are some of the main provisions:
- One part of the program that likely will end up in court is defining who qualifies as an employee’s family member. The law defines “family member” broadly to include anyone with whom the employee has a significant personal bond that is like a family relationship.
- The law exempts businesses with fewer than 10 employees from paying the employer portion of the premiums. The self-employed and local governments may choose whether to participate. Employees of local governments that decline to participate may opt in by paying the employee portion of the premiums individually.
- Businesses with a comparable private plan are exempted, but it’s not yet clear what standards they will have to meet.
- The program is supported by a 0.9 percent premium of an employee’s wages, half to be paid by the employer and half by the employee, although employers may voluntarily pay a higher percentage of the premium. The law allows the Colorado Department of Labor and Employment to raise the premium to 1.2 percent of wages in 2025.
- The program provides up to 12 weeks leave at maximum benefit of up to $1,100 per week initially and requires an employer to preserve the employee’s job and health insurance.
The program will require substantial rulemaking to implement and we’ll see the initial regulations in 2022. There is not much for employers to do in the meantime except to wait and see how it plays out.
Voters favor taxing tobacco, but look askance at other taxes
Two other tax-related measures offset each other in terms of net revenue for the state.
One was Proposition 116, which lowered the individual state income tax rate from 4.63 percent to 4.55 percent. While everyone always welcomes any reduction in taxes, the real effect of this tax decrease is negligible – $37 for the average Colorado taxpayer and $800 for someone with income of $1 million. The state treasury will lose between $150 million and $200 million annually. Due to revenue limits imposed by the Taxpayer’s Bill of Rights (TABOR), the state already had placed a temporary 4.5 percent cap on Colorado’s flat income tax rate, which further diminishes the immediate impact of Proposition 116.
The loss of revenue was offset by voters’ overwhelming approval of Proposition EE, which imposes a significant tax increase on tobacco, including, for the first time, vaping products. Taxes on a pack of cigarettes will rise from the current 84 cents to $1.94 in January 2021 and then $2.64 in July 2027. Smokers also will pay a minimum of $7 per pack beginning in January 2021 in an effort to discourage tobacco consumption. Funds raised from the tax increase will be earmarked for education and affordable housing for the first three years and then dedicated in 2023 to universal pre-K. The higher tobacco tax is expected to raise about $177 million in its first fiscal year.
One ballot measure that did not generate much attention was Proposition 117, which says any new state enterprise that generates more than $100 million of revenue over five years will require voter approval. State enterprises are state-run businesses that depend on fees rather than taxes. Examples include government-owned utilities, toll roads and the state lottery. Under TABOR, enterprise revenue does not count toward the revenue cap that limits state spending and the imposition of fees from these enterprises does not require voter approval. Proponents see Proposition 117 as closing those loopholes that they say allowed new taxes to masquerade as fees while opponents say it will tie the hands of legislators as they try to fund new roads, education and other initiatives. Both sides agree that it could force legislators to take a different approach when looking to create new revenue-intensive programs.
Perhaps most significantly, voters also approved a change in the way the state calculates property taxes. Amendment B repealed a 1982 constitutional amendment known as the Gallagher Amendment, and the change is seen as favorable to business property owners as well as government services such as schools, fire departments and police that are funded primarily through property taxes.
Under Gallagher, residential property owners could pay no more than 45 percent of total property taxes. In some tax districts, this resulted in businesses paying a disproportionate share of taxes. Gallagher also required commercial property owners to pay 29 percent of the assessed value of their property. Opponents of Gallagher say the limit on homeowners’ share of taxes left some local governments and special tax districts short of revenue.
Amendment B is complicated, but essentially it lifts the restrictions on homeowners’ share of the tax burden, as well as the 29 percent rate on businesses, and allows lawmakers to adjust them. The bottom line is that the rollback of Gallagher unties the hands of legislators and allows them more flexibility in making tax policy.
We caution that businesses should be on the lookout next year for inflated property tax valuations. Unlike residential valuations, commercial valuations are based on a business’ profit and loss. With office buildings, malls, stores and restaurants all struggling to survive in the pandemic, many commercial properties will fall far below their valuations from a year ago. We’ve seen estimates that valuations could be 30 percent lower across the board.
Owners of oil and gas properties also should look for inflated valuations since the decline in oil prices has deflated the current value of those holdings. This will hit the state treasury hard, but businesses should be sure they are not paying more than their share of taxes.
Uncertainty still hangs over Washington
As we write this, recounts are in progress in several states where the results in the presidential tabulation were close. It would be extraordinary for the recounts to change the results, but control of the Senate does remain in limbo and that will have policy implications. As we’ve seen in Colorado since 2018 when Democrats took control of the government, one-party control makes it easier to implement legislative agendas. All eyes are on Georgia where a January 5 runoff election will decide two Senate races and whether we will continue to have the checks and balances – or the obstacles, depending on your point of view – of a divided government in Washington.
As we move into a new year and a new legislative session, Ireland Stapleton attorneys stand at the ready to help you and your business understand and implement these new laws and regulations.
The information provided herein is intended as general information and is not to be construed as legal advice. If legal advice is needed, you should consult an attorney.