Colorado’s experiment with marijuana legalization is yielding an unexpected high, with state revenues substantially outpacing projections. Under the influence of these and other unanticipated revenues, the state is moving forward with a provision of the Taxpayer’s Bill of Rights (TABOR) that has languished unused for years: taxpayer refunds.
Colorado’s Taxpayer’s Bill of Rights, enshrined in Article X of the state constitution, requires voter approval for taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increases and institutes taxpayer refunds when state revenues under existing tax rates exceed the rate of inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. and population growth. From TABOR’s adoption in 1992 through 2001, over $2 billion has been returned to taxpayers, but there haven’t been any refunds since, the consequence of recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. and a voter referendum suspending the revenue limit from 2006-2010, designed to allow state revenues to recover in the wake of the economic downturn of the early 2000s. This voter measure, designated Referendum C, allowed the state to spend $11.6 billion that would have otherwise been subject to refund during what has been termed the “five-year timeout period.”
Prior to the adoption of Referendum C, the state’s Tabor Limit was defined as
(Previous Fiscal Year Spending) x (1 + Inflation + Population Growth) + (Voter-Approved Revenue Changes)
Referendum C, however, allows the state to retain and spend all excess revenue up to a cap, defined as the highest total state revenue for a fiscal year from the timeout period onward, which eliminates the ratchet effect and allows state revenues to grow quickly as an economy emerges from recession.
Between the economic downturn and Referendum C, refunds were off the table for quite some time. Now, due in considerable part to marijuana tax revenues handily beating the state’s highly speculative projections, Colorado is on the brink of issuing TABOR refunds for the first time in fifteen years.
Colorado’s TABOR includes three refund mechanisms: (1) a six-tier sales tax refund, (2) an Earned Income Tax Credit, and (3) a temporary income tax rate reduction. The basic parameters of each are as follows.
Six-Tier Sales Tax Refund
The term “sales tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. ” is somewhat misleading, as the surplus revenue need not have been collected through sales taxes; instead, it is distributed by formula through the income tax among six income tiers in line with adjusted 1999 distribution data. If the surplus is insufficient to provide $15 or more to each taxpayer, then an equal refund is provided to all taxpayers regardless of income. With larger surpluses, the distribution is made by income tier. The following table shows distribution formulas for single filers:
|
Income Range |
Distribution |
|
$0 – $36,500 |
(Excess Revenue) / (Qualified Individuals) * 25% |
|
$36,501 – $78,500 |
(Excess Revenue) / (Qualified Individuals) * 23% |
|
$78,501 – $114,100 |
(Excess Revenue) / (Qualified Individuals) * 19% |
|
$114,001 – $148,200 |
(Excess Revenue) / (Qualified Individuals) * 12% |
|
$148,201 – $181,100 |
(Excess Revenue) / (Qualified Individuals) * 6% |
|
$181,000 and up |
(Excess Revenue) / (Qualified Individuals) * 15% |
For the FY 2014 tax year, excess revenue was $69.7 million, all of which is to be distributed through the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. refund mechanism. For single filers in the lowest tier, this will yield a refund of $15 in the current tax year; those in the highest tier will receive a $47 refund.
The sales tax refund is the first refund mechanism and, depending on the excess revenue available, sometimes the last. Only if higher thresholds are met do the other mechanisms kick in, though if they do, this necessarily limits the amount subject to refund through the sales tax refund mechanism.
EITC Implementation
First enacted in 1999, the state’s Earned Income Tax Credit (EITC)—set at ten percent of the federal credit—is only activated in years when the state runs a sufficient revenue surplus to pay for the credit. Due to the recession and the five-year TABOR “timeout,” the EITC was last paid in 2001. However, legislation enacted in 2013 prospectively eliminates the revenue contingency, making the EITC permanent the next time it is triggered.
The cost of providing the Earned Income Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. in tax year 2016 is an estimated $91.1 million. The state currently projects revenue at $116.8 million above the TABOR limit at the end of the current fiscal year, which is adequate to trigger the EITC and remit the residue ($25.7 million) through the six-tier sales tax refund mechanism. Henceforth the EITC would no longer be contingent upon the existence of a surplus, becoming part of the state’s base spending.
Income Tax Rate Reduction
Finally, if after triggering the EITC, sufficient excess revenue remains to cover the projected amount of an income tax rate reduction, a temporary reduction of the individual and corporate income tax from 4.63 percent to 4.5 percent would go into effect the subsequent year. Since the EITC now becomes permanent the year after it is first triggered, this will soon be the second mechanism, available after the six-tier sales tax refund.
Current projections show an anticipated $434.9 million surplus in FY 2016. Since the EITC should already have been made permanent by the end of that fiscal year, this would be enough to cover the cost of the income tax rate reduction ($226.6 million) while still leaving $208.3 million to return to taxpayers through the sales tax rebate mechanism.
Note that these figures come from a fiscal note and a Legislative Council Staff issue brief released in April. Figures released in the March economic outlook were lower, meaning that the sales tax refunds would be less, though their projected figures were still sufficient to trigger the EITC and income tax rate reduction on the same schedule.
In fact, though, there is a great deal of uncertainty for future years. Late in the 2015 legislative session, a proposal (endorsed by Governor Hickenlooper) was floated to reclassify hospital fees to exempt that revenue from TABOR, and that or similar proposals are entirely possible in subsequent years. Legislators can also go to the voters to seek authority to retain the excess revenue. And because at least part of the additional revenue is due to marijuana taxes—earmarked for education—beating expectations last year, some have expressed frustration about the perceived interference of TABOR limitations.
Legislators will undoubtedly grapple with these issues in the next session. For now, however, taxpayers can expect to benefit from at least the first stages of TABOR refunds.
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