Colorado Proposition 116: Will Voters Reduce the State Income Tax Rate?

This Election Day, Colorado voters will weigh in on Proposition 116, the Decrease 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. Rate from 4.63% to 4.55% Initiative. It would permanently reduce the state’s flat income tax rate from 4.63 to 4.55 percent and be retroactive to January 1, 2020, meaning taxpayers would benefit from the relief starting this year.

It is worth noting that while the state’s statutory individual and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate is 4.63 percent, in fiscal year 2019, actual tax collections exceeded the revenue cap by $428 million, triggering a Taxpayer’s Bill of Rights (TABOR) refund in the form of a reduced income tax rate of 4.5 percent for tax year 2019.

While reducing the income tax rate to 4.55 percent for tax year 2020 and beyond would put the rate slightly higher than the rate in effect last year, it would provide an estimated $203 million in relief in FY 2021 and $154 million in relief in FY 2022 compared to what would otherwise be collected under current law. This change would provide relief to individuals, families, and businesses across the state at a time when so many are facing economic challenges due to the COVID-19 pandemic.

An income tax rate reduction would also improve Colorado’s competitive standing compared to neighboring states, bringing Colorado’s individual income tax rate closer to Arizona’s low top marginal rate of 4.5 percent.

The measure was brought to the ballot by conservative groups, but Governor Jared Polis (D) has also sounded supportive notes. Polis advocated for a rate cut early in the year (prior to the pandemic), consistent with a campaign pledge, and in an interview in August, he reiterated those views: “We’ve long sought an income tax decrease. We obviously preferred that it was revenue neutral. But particularly in this challenging time, I think Coloradans certainly need tax relief.”

Although state forecasters expect an 11.6 percent decline in general fund revenue collections in FY 2021 compared to FY 2020, revenue collections have been strong in Colorado for some time, with the state expected to close the fiscal year with a nearly $2 billion reserve. State economists also anticipate that the General Assembly will have $2.9 billion more to spend or save in the FY 2022 General Fund than what is budgeted for FY 2021.

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