Though the 2026 election remains nearly 13 months away, debate is heating up around a proposed initiative that would replace Colorado’s flat 4.4% income tax with a graduated system that imposes higher tax rates on businesses and individuals with higher incomes.
A coalition led by the Bell Policy Center is pushing the proposal, which is estimated to lower taxes for any person or company making less than $500,000 a year and raise them for those making more. The proposal is expected to bring in between $2.4 billion and $3.25 billion in its first year, and at least one version of the initiative proscribes that new money would go to public education, health care, child care and non-policing programs meant to improve public safety.
The effort ran into a setback Wednesday before the state Title-Setting Board, which ruled unanimously that it deals with more than one subject, which is illegal under Colorado law. But rather than stop the initiative, the decision will require its backers, which also include groups like the Colorado Children’s Campaign and Colorado Consumer Health Initiative, to rewrite the proposal, potentially breaking it into multiple measures.
Supporters tout benefits of tax change
Bell Policy Center leaders, who announced plans last month, said the initiative would grant tax relief to most Coloradans while at the same time restoring funding to state services at a time when the state has had to cut back its budget in part because of federal tax cuts. And they paint the effort as one that would create tax equity after those same federal cuts benefitted wealthier individuals the most.
“Colorado is at a turning point,” Bell Policy Center President/CEO Chris deGruy Kennedy said upon rollout of the idea by the Protect Colorado’s Future coalition. “For more than three decades, an upside-down tax code has hurt Colorado’s schools, health care, childcare and the environment. We’ve made the wealthy even wealthier while everyone else struggles to keep up.”
But emerging opponents from the fiscally conservative Advance Colorado group to civic-minded individuals are warning that the change to Colorado’s tax system is a thinly veiled effort to raise taxes significantly at a time when the economy appears to be slowing. They halted the original iteration of the ballot initiatives, saying it tried to stuff into one question the diverse issues of creating a graduated income tax, exempting new revenues from the Taxpayer’s Bill of Rights Cap and eliminating the state prohibition on adding surcharges to income taxes.
“The point of this measure is not to create a graduated income tax. You can do that and make it revenue-neutral,” Advance Colorado President Michael Fields said at the Oct. 1 title board hearing. “The point of this is to create a graduated income tax and raise taxes.”
How the new tax system would work
The plan’s method of calculating taxes is complex, with businesses and individuals paying different rates on different portions of income, such as the first $100,000, the amount between $100,000 and $500,000, the amount between $500,000 and $750,000, etc. But the Bell estimated it will create an effective tax rate between 4.2% and 4.4% for those earning $500,000 or less and effective rates from 4.9% to 9.2% for those making more, with the highest rate reserved for businesses and individuals generating $10 million or more.
A chart that would run with the inititiave on the ballot shows that individuals and businesses making between $200,000 and $500,000 annually would save the most from the changes — an average of $200 per year. Those making between $1 million and $2 million, on the other hand, would pay an average $7,117 more annually, and payers earning from $2 million to $5 million would owe $20,802 million more annually.
Sarah Mercer and David Meschke, Brownstein Hyatt Farber Schreck attorneys representing a man named Michael Hancock (who is not the former Denver mayor of the same name), said the proposed ballot title and chart suggest the tax hike will target rich individuals. But it could be particularly devastating to pass-through entities like limited liability companies and sole proprietorships whose owners are taxed individually on the revenue generated by their companies rather than on their incomes.
How the changes would impact business
Legislators in August voted to decouple a 20% federal deduction for those entities from federal law, meaning they will be forced to add the deducted taxes back to their state wages that are used as a tax base — a change that will cost them about $100 million. With this plan, owners and investors of those businesses likely will see their tax rates rise not because they are steeped in take-home pay but because they’re taxed on overall revenue.
“The idea of taxing millionaires is pretty popular … But there is a change in income-tax structures that is going to affect both individuals and corporations,” Mercer told the title board on Wednesday. “The way that the table is drafted really fails to inform voters that small- to mid-size businesses that are organized in another way will be impacted.”
Larger corporations making significant income are likely to fall into the higher tax rates as well. Coalition supporters have said that those businesses, which benefitted from the federal tax breaks in the “One Big Beautiful Bill” this summer that ended up reducing state revenue as well need to pay more into the safety-net and public-infrastructure system from which they benefit.
Too many issues in one ballot question
In addition to creating the new graduated income-tax system, the proposal would “de-Bruce” any of the new revenues brought in by the change, allowing the state to spend them freely without them counting against its TABOR cap that limits revenue growth. And the proposal also seeks to eliminate a prohibition in TABOR against applying surcharges to incomes, which could allow legislators to add such charges in the future without a vote of the public.
Each of the three title-board members on Wednesday pointed to multiple subjects that they felt the proposal had in addition to the income-tax system overhaul, including the extra de-Brucing clause and the revocation of the surcharge prohibition. Initiative supporters have until April to get the board to approve a revamped proposal that has a single subject, though it’s likely they’ll be back with an alternate proposal much sooner.
Even without specifics, however, Coloradans can debate the merits of the proposal.
Debate to continue
Kathy White, executive director of the Colorado Fiscal Institute, called the proposal a no-nonsense change that unties several of the limitations TABOR has placed on the state, including its mandate for a flat tax and its limitations on spending new revenue.
“A graduated income tax is just common sense: 98% of us get a tax cut, and the folks doing really well chip in a fair share to keep our schools strong, our healthcare system solid and our communities thriving,” White said in a news release last month. “That’s how we build a Colorado where everyone gets ahead, not just the lucky few.”
But conservative activist Natalie Menten said the proposal gives the false illusion that it will tax the rich and save the poor when small business owners will get hit disproportionately and some versions of the initiative only direct increased funding to the general fund. And Suzanne Teheri, an attorney representing Advance Colorado, said it’s now worded in a way to earn support by cutting taxes slightly for most voters, even as it has far more expansive and numerous aims.
“The lowering of one rate and the raising of another rate is your classic logrolling,” Teheri told the title board on Wednesday. “There will be people who might think we should raise taxes on millionaires but not that we should be raising taxes on small businesses, because a million dollars in revenue is not a high threshold for them.”