Update: On November 8th, voters approved Colorado Proposition FF and Proposition 121.
When Coloradans go to the polls this November, they will be given the opportunity to permanently lower their income 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. es—or to increase those tax burdens. Colorado Proposition 121 would reduce the state’s flat statutory income tax rate from 4.55 percent to 4.4 percent, effective retroactively for tax year 2022. Colorado Proposition FF, on the other hand, would create a tax cliff and introduce a marriage penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples. in an effort to limit deductions for high earners.
Colorado’s income tax rate of 4.55 percent is already competitive for the region—lower than most of its neighbors—but still falls short of Arizona’s low 2.98 percent rate (declining to 2.5 percent next year) and income-tax-free Wyoming. An income tax rate of 4.4 percent would improve Colorado’s competitive standing and bring the state closer to its lower-tax neighbors.
This is not the first income tax rate reduction Coloradans have seen in the last few years. In 2020, the state’s statutory income tax rate was 4.63 percent, but a Taxpayer Bill of Rights (TABOR)-triggered reduction temporarily brought that rate down to 4.5 percent for tax years 2020 and 2021. Voters then approved Proposition 116 in November of 2020, which reduced the statutory rate from 4.63 percent to 4.55 percent. As such, when the TABOR-related reduction timed out in 2022, the statutory rate returned to the new, lower rate.
TABOR, a state constitutional amendment approved by voters in 1992 (but amended by an increased “Referendum C” cap in 2005), places an annual limit on state revenue growth, capping it at the prior year level after adjusting for 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. , population growth, and any voter-approved revenue changes. Any collections above that limit, by default, are returned to taxpayers unless a majority of voters authorize the state to retain the surplus.
Under Colorado Proposition 121, taxpayers would be able to see lower income taxes even without relying on TABOR-related tax relief. This is far more economically beneficial than after-the-fact tax rebates or retroactively or temporarily reduced rates, as it enables investment and other decisions to be made in anticipation of a lower tax burden.
Colorado is well-positioned to make this change. Like many states, the Centennial State is seeing significant surpluses in the post-pandemic economy. In fact, the proposition’s fiscal analysis states that revenues are expected to trigger TABOR reductions down to 4.5 percent from 2022 through 2024, meaning state finances are predicted to continue their current robust trajectory. Advertising these lower rates, rather than relying on TABOR to implement them after the fact, is sound policy.
At the same time that state coffers are overflowing, a statutory rate reduction would provide tax relief for individuals, families, and businesses across the state that may be struggling to make ends meet amidst high inflation. Using strong collections to make the state more competitive would help Colorado in the long run, strengthening its economy ahead of any potential future downturns.
Also on the ballot is Colorado Proposition FF, a strangely structured amendment that attempts to fund a universal school meals program (i.e., providing school breakfasts and lunches to all students, not just those from low-income families) by limiting both standard and itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. s for high earners.
Under legislation already enacted this year, Coloradans with taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. of $400,000 or more must add back itemized or standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. s over $30,000 for single filers or $60,000 for joint filers. Before taxes can even be paid under those new rules, Colorado Proposition FF would tighten the caps, making them $12,000 for single filers and $16,000 for joint filers, while lowering the threshold to $300,000.
Notably, these caps are less than the current standard deduction, which follows federal treatment at $12,950 for single filers and $25,900 for joint filers and is adjusted for inflation. The proposal becomes not only a cap on itemized deductions but a reduction in the standard deduction. It creates a substantial tax cliff where earlier legislation had already put the camel’s nose beneath the tent. At $299,999, your itemized deductions are uncapped. Earn one dollar more and your deductions are capped at less than the standard deduction.
Neither the $300,000 threshold nor the deduction caps are indexed for inflation, so both will lose value in real terms with each passing year. And there’s a double marriage penalty since the $300,000 threshold is the same for both single and joint filers and the cap only increases by one-third (from $12,000 to $16,000) for joint filers.
Colorado voters have the opportunity to improve their state’s competitiveness by lowering the statutory income tax rate to 4.4 percent in Colorado Proposition 121, but they could also make their tax code more complex and create some unintended incentives through Colorado Proposition FF. Whatever Colorado voters decide, they’ll be making their decision within a broader environment of reform and relief: 21 states have enacted or implemented income tax rate reductions since the start of last year, and in an increasingly mobile economy, tax competition matters more than ever before.