A view of the Colorado Capitol on Sept. 30, 2022. (Quentin Young/Colorado Newsline)
For the second time in two years — and likely not for the last time — Colorado voters will decide in November whether to approve a cut in the state’s income tax rate.
Proposition 121, a ballot measure backed by the right-wing Independence Institute, would reduce Colorado’s statutory income tax rate from 4.55% to 4.4%, reducing state tax collections by more than $400 million annually.
If the initiative passes, a tax filer who earns $60,000 a year would owe about $63 less in taxes in 2023, according to a state fiscal analysis. Nearly half of the benefits of the rate reduction — an estimated $188 million — would go to Coloradans earning more than $1 million a year, who would see an average tax cut of $6,647.
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The measure comes just two years after a majority of Colorado voters approved Proposition 116, which cut the rate to 4.55% from 4.63%. Both measures were sponsored by Jon Caldara, president of the Denver-based Independence Institute, and Republican state Sen. Jerry Sonnenberg of Sterling.
The continued incremental cuts are part of what the Independence Institute admits is an effort to gradually abolish the state’s income tax altogether.
Path to Zero, an issue committee in support of Proposition 121, was registered with the Colorado secretary of state’s office on Aug. 5. Its sole donor, in the form of $2,910 in in-kind contributions, is the Independence Institute.
“Proposition 121 would allow Coloradans to keep more of their hard-earned money, helping them cope with record inflation,” the group says on its website. “Lowering taxes is also one of the main ways Colorado can attract businesses, entrepreneurs, and job creators to the state, adding resiliency to the state’s economy.”
Another pro-121 issue committee, Colorado Character, reported more than $543,000 in expenditures on a signature-gathering effort in support of the measure last year. Backers submitted the required 124,632 valid signatures to the secretary of state’s office last October.
Nearly all of Colorado Character’s funding came from two “dark money” nonprofits, Defend Colorado and Colorado Rising Action, which are not required to disclose their donors.
An issue committee in opposition to Proposition 121, Keeping Colorado Great, was registered Sept. 8 but has not reported any fundraising activity.
Possible budget cuts
Nine states in the U.S., including Texas and Florida, have no personal income tax. A 2018 analysis from the nonpartisan Institute on Taxation and Economic Policy found that states without income taxes, which mostly rely on sales and excise taxes to offset the lost revenue, are among the most “regressive” tax systems in the country, with a higher share of their tax burdens falling on low- and middle-income residents.
Exactly how Proposition 121 would affect the state budget in the coming years is uncertain. Because Colorado tax revenues in 2022 and 2023 are already projected to exceed the limits set by the Taxpayer’s Bill of Rights, a 1992 constitutional amendment that restricts the growth of the state budget, it’s possible that a reduction of the income tax rate in those years wouldn’t cut into the state’s general fund.
That picture is complicated, however, by another measure on the 2022 ballot, as well as growing fears of a recession and a subsequent decline in tax revenue. If voters in November pass both Proposition 121 and Proposition 123 — an initiative that would earmark $300 million annually for affordable housing programs by reducing the TABOR refund limit — lawmakers could be forced into budget cuts as soon as next year, according to a forecast from the Office of State Planning and Budgeting last month.
Reacting to that report, Scott Wasserman, president of the progressive Bell Policy Center, called Proposition 121 “a permanent cash grab that takes money off the community table, very likely forcing cuts to state services all communities count on.”
Colorado Gov. Jared Polis, a Democrat, suggested in 2021 that Colorado’s income tax should be reduced to zero, with an equal amount of revenue instead generated by taxes on “things you actually want to penalize in society,” such as pollution or tobacco use. His opponent in the 2022 governor’s race, University of Colorado Regent-at-Large Heidi Ganahl, has made a pledge to eliminate income taxes a cornerstone of her campaign, despite providing few details on how — or if — she would make up for the $11 billion shortfall her plan would create in the state’s yearly budget.
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