Racial inequities in Colorado’s tax code highlighted as Proposition 116 fight looms

Growing reliance on sales taxes, fees places higher burdens on Coloradans of color

(Getty Images)

When Denver voters begin filling out their ballots next month, they’ll decide whether to approve two new 0.25% sales tax hikes to help the city tackle homelessness and climate change — and if both pass, they’ll become the fifth and sixth increases to Denver’s sales tax rate in the past two years, raising the total rate that consumers pay on purchases in the city to 8.81%.

The city’s growing reliance on sales and use taxes was a point of contention for some Denver City Council members as the two measures advanced to the ballot; the burden of sales taxes, they noted, falls especially heavily on poorer Coloradans, who spend a greater share of their earnings on consumer purchases than their wealthier neighbors do. But supporters of the sales tax measures and experts in state fiscal policy agree: Denver’s city government didn’t have many better options.

“The only tools they have available are sales tax and property tax — not really the best tools if you want to further address (homelessness),” said Tyler Jaeckel, director of policy and research for the left-leaning Bell Policy Center. “It’s not a choice that Denver is making lightly. It’s something that’s been forced upon them by our structures.”

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As local governments across Colorado prepare to deal with a series of looming budgetary disasters caused by the coronavirus pandemic, Jaeckel and other liberal fiscal reform advocates fear that the trend towards more regressive tax structures could soon get worse. A pair of statewide measures backed by conservative groups have qualified for the 2020 ballot, including Proposition 116, a proposal to lower the state’s income tax rate from 4.63% to 4.55% — a cut that would force Colorado to shave another $170 million annually off of its pandemic-ravaged budget.

In the face of such cuts, Jaeckel said, governments in Colorado will continue to do what they’ve done throughout much of the last 30 years, as state and local budgets became increasingly constrained and other restrictions imposed by the Colorado Taxpayer’s Bill of Rights, an anti-tax constitutional amendment approved by voters in 1992.

  Colorado has been placing a larger burden on low- and middle-income families over the last three decades.   -Tyler Jaeckel, of the Bell Policy Center

Sales taxes have become “the easy way out” for local policymakers looking to plug holes in their budgets, Denver City Councilman Kevin Flynn said during an Aug. 3 council meeting.

“What you see is much greater use of the sales tax at the local level to fund critical services,” said Jaeckel. “Colorado has been placing a larger burden on low- and middle-income families over the last three decades, and that has put us in a really difficult position, especially during COVID right now.”

In a new research paper published by the Bell Policy Center this week, Jaeckel and co-author Josh Mantell highlight how Colorado’s reliance on regressive revenue mechanisms like sales taxes and user fees reinforces racial wealth disparities. Amid an ongoing national conversation about police violence and systemic racism, Jaeckel and Mantell argue, the racial dimensions of state tax policy can’t be ignored.

“The regressivity of Colorado’s tax code builds upon and exacerbates long-standing racial inequality,” the report reads. “An overreliance on sales tax has a cumulative negative effect on Coloradans of color, as they are often less likely to own homes and spend more of their income on items affected by sales taxes.”

People of color are far more likely to face greater state and local tax burdens in Colorado, which liberal reform advocates blame on TABOR and other conservative anti-tax measures. (Courtesy of Bell Policy Center)

As Election Day nears, critics of Proposition 116 are ramping up their opposition campaign. In an Aug. 31 letter, a coalition of more than 50 groups — including the Bell Policy Center, the Colorado Education Association, the Colorado Coalition for the Homeless and the Colorado NAACP — urged Gov. Jared Polis to oppose the measure, which they said would “disproportionately harm Black, Indigenous, and people of color.”

Polis, who successfully fought many of the same liberal groups to preserve certain tax breaks for businesses during budget negotiations earlier this year, has long voiced support for cutting state income taxes. Though he told the Colorado Sun last month that he believes that “particularly in this challenging time … Coloradans certainly need tax relief,” he has not yet made a formal statement on Proposition 116.

“The Governor will discuss his observations on whether the various ballot initiatives are good, neutral, or bad for Colorado after the ballot is set,” Polis spokesperson Conor Cahill said in a statement.

‘People need tax relief’

No formal campaign yet exists in support of Proposition 116, but the measure is backed by a closely-linked coalition of conservative nonprofits including the Independence Institute, Unite for Colorado and Americans for Prosperity, which did not respond to requests for comment.

“More than ever, people need tax relief,” State Sen. Jerry Sonnenberg, a Republican from Sterling who filed the initiative with the Colorado secretary of state’s office earlier this year, told Fox 31 Denver in an interview this week. “People have been out of work, businesses have been shut down. This is what they need to be able to move forward.”

State Sen. Jerry Sonnenberg, a Republican from Sterling, filed Proposition 116 as a ballot initiative earlier this year. (Colorado General Assembly)

Critics, however, point out that because of Colorado’s flat income tax, most of the benefits of Proposition 116’s tax cut — about $90 million — would go to the top 3% of Colorado earners. Another $80 million would be split between the bottom 97%, with the average taxpayer receiving less than $40 in annual tax savings.

It’s lopsided tax policies like Proposition 116, opponents argue, that have led governments to balance their budgets on the backs of poorer residents and people of color. In Colorado, local governments raise 35% of their revenue through sales taxes — up from 20% in 1977 and more than double the current national average of 17%, according to the Bell Policy Center’s research.

“Everyone turns to the tax code and says, ‘It’s just benign, it doesn’t have any values to it,’” said Jaeckel. “And that couldn’t be farther from the truth. Both the historic roots of where certain tax tools come from, and then also the distributional effects of the use of certain tools, can have huge racial equity effects. And I think we see that play out in Colorado pretty heavily.”

The tax burden on low-income Coloradans and people of color is particularly acute in conservative-leaning counties that keep property taxes low, Jaeckel’s research found. In El Paso County, just 12% of government revenue comes from property taxes, with 65% coming from sales taxes and another 15% from fees, licenses and fines.

Overall, because of the widespread use of regressive revenue mechanisms, Coloradans who make less than $100,000 per year pay an average of almost 9% of their income in state and local taxes, while the highest earners pay just 6.5%, according to a Colorado Fiscal Institute analysis. Because of existing racial income disparities, Black and Latino Coloradans make up a far higher share of lower-income, more tax-burdened residents.

What’s worse, experts say, is that as the economic impacts of the pandemic grow more severe, Colorado communities could find themselves caught in a vicious cycle, since sales tax revenues are especially sensitive to downturns in consumer activity.

“Especially if we are going to make cuts to our income tax at the state level, we could start to see these (effects) get even worse,” Jaeckel said. “When localities overly use things like a sales tax, they become very vulnerable to recessions, like where we are today. It’s not only healthy tax policy to have a greater array of tools … it also allows us to overcome ebbs and flows of the market, and really provide those critical services to all Coloradans.”

Editor’s note: This story has been updated to accurately state Colorado’s current income tax rate and the new rate were Proposition 116 to pass.