DENVER — For the second time in recent years, Colorado voters will be asked in November whether they want to lower the state income tax. This is a tax on the wages an employee earns in the state.
For decades, the state’s income tax was graduated, meaning those who earned more paid more. That all changed in 1987, however, when the state switched to a flat 5% income tax for everyone regardless of how much they made.
That tax was then dropped in 1999 to a flat 4.75% tax for everyone. The next year, in 2000, it decreased once again to 4.63%, where it remained for two decades before voters largely approved another income tax cut in 2020 to 4.55%
Now, a question on the November ballot is once again asking voters to weigh in on a tax decrease.
What Proposition 121 Does
Proposition 121 asks whether the state income tax should be reduced to 4.4% for both businesses and corporations from now on.
The change would result in a 2.4%, or estimated $638 million, revenue decrease in fiscal year 2022-23 and an estimated $412.6 million drop in fiscal year 2023-24, which would mean less money going into the General Fund for the state budget that funds projects statewide like education, road and highway projects, water and conservation projects, and more.
The Case for Lowering the Income Tax
Between talks of a possible recession looming and high inflation, supporters of Proposition 121 say this is the right ballot measure at the right time.
“We have enough to take care of government. What we need to do is put more money back into the pockets of people,” said Michael Fields, a senior advisor with Advanced Colorado Action, a conservative political group.
It’s true that the state’s budget this year is bigger than ever. A strong economy, robust tax revenue and a massive influx of funding from the federal government has resulted in a $36.4 billion budget this year.
With that, state lawmakers were able to put a big influx of funding toward education to buy down the negative factor in a big way, as well as toward other priorities like construction, air quality programs and more. They were also able to dedicate money to the rainy-day fund to help the state prepare for an economic downturn.
With Proposition 121, most workers would see about $63 per year in savings. However, Fields says for families that are struggling, every little bit helps.
“Sixty dollars is a lot, you know, when groceries are up when inflation is 8.2%. And so we think this is the time to start chipping away at it responsibly. We're not trying to end the income tax tomorrow,” he said.
Beyond that, Fields says lowering the income tax will make Colorado a more competitive state in attracting businesses, which would, in turn, bring in more revenue.
“We can afford it and it helps our state be more competitive,” Fields said.
The Case Against Lowering the Income Tax
While the idea of lowering the income tax might sound good to voters on its face, critics of the idea worry about the vast consequences a move like this will have on the state and its budget.
For one thing, Scott Wasserman, the president of the Bell Policy Center, points out, while most families will see nominal savings, it’s the wealthy who will benefit the most.
“People who are very wealthy stand to gain thousands of dollars from this income tax cut, whereas the average Coloradan will get maybe $65 back,” Wasserman said.
According to a nonpartisan analysis, Coloradans with incomes of $1 million or more only make up 1% of the state’s taxpayers. But they will receive nearly half of the total tax savings from this measure. On average, they are expected to save $7,000 per year.
Colorado already has one of the lowest income taxes in the country and Wasserman worries cutting it even more could affect critical services many families rely on. Colorado is currently 19th in the nation for states with the lowest tax burden.
While the state’s economy is good currently, that won’t always be the case in the future. The big influx of federal funding also won’t last forever.
“I think our fear is that if we continue to permanently lower the income tax, many local communities and the state are going to start to try to fill those gaps by leaning on some of the taxes that we see in other states that have some of the poorest people paying the biggest amounts,” Wasserman said.
In particularly difficult financial years, without the help of this additional revenue, the state could also be forced to cut or pare back some services. Colorado is already near the bottom of the country in terms of its investments in public services and schooling.
“We're asking Colorado voters to just really stop and ask themselves, 'Do you stand to lose more than you would gain?'” Wasserman said.
While tax cuts are almost always popular with voters in the state, he hopes this time they will think twice before voting yes.
Cause and Effect
Along with having one of the lowest income tax rates in the country, the state also has one of the simplest systems with a flat tax.
“One of the benefits is simplicity. You don't have to use any special calculations, it's very, very easy to know exactly what you're going to be paying in taxes. There's no tax brackets. The downside to that is everybody pays at the same rate,” said Robert Persichitte, an affiliate faculty member and the director of the Volunteer Income Tax Assistance Program at Metropolitan State University of Denver.
Even without Proposition 121, workers will see a slight decrease in their income tax next year because of the Taxpayer Bill of Rights (TABOR).
Starting in 2019, anytime the state collected too much tax revenue, along with a possible return, workers will also see an automatic drop in their income tax to 4.5%.
This year, Coloradans also received a $750 TABOR return check. In future years, though, if the measure passes, the TABOR returns people see may be lower or nonexistent.
“So, we're not having the system where you give us money, and then we give you money back,” Persichitte said.
Should Colorado Have an Income Tax at All?
On both sides of the political spectrum, there have been calls to do away with the state income tax altogether.
At a Steamboat Institute conference last year, Governor Jared Polis said, “If we can move away from taxing income, which is something that you don’t want to discourage because we want everyone to make income, we want companies to make income. That’s a great thing, to basing it on something like pollution, or carbon, or something we don’t want. You’ll have a more pro-growth tax structure.”
Heidi Ganahl, who is running to unseat Polis, also believes the income tax should be done away with.
“I would also love to take Colorado to a zero-income tax state. We have nine other states that are zero income tax. It won't happen overnight. But we can tighten our belt a bit,” Ganahl said in a June interview with Denver7.
Others like Wasserman have called for a more progressive tax structure in which the wealthier pay more.
Historically, voters have been supportive of tax reduction questions on the ballot. Every time taxes are cut, there is some give and take, though, with the state budget.
Once again this year, it will be up to voters to decide whether the benefits outweigh the downsides.
Full ballot guide
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