Colorado leaders last changed the state’s income-tax system in 1987, moving from a graduated to a flat-tax structure in which every resident and business pay the same rate — a rate that now stands at 4.4%.
Over the years that followed, two things happened. Colorado’s per-capita income rose faster than comparable states, helping its economy become a national example, according to a recent paper from the Cato Institute. And with voter-approved tax-revenue limitations in place, the Legislature in recent years began to face billion-dollar shortfalls, spurring calls from activists that the state needs to change how it brings in money for public services.
Those waves of prosperity and cries for greater funding of public services are crashing into each other on the November ballot, where two opposing ballot measures are asking voters to decide the future of Colorado’s income-tax system. Amendment 87 seeks to jettison the flat-tax structure for a six-tiered graduated income-tax system in which businesses and individuals earning more than $500,000 annually pay higher rates, up to 8.4%. And Proposition 136 asks the same voters to cement in state law that no resident or company should ever pay an income-tax rate higher than the current 4.4%.
Amendment 87, sponsored by a the Protect Colorado’s Future coalition, also would boost state income-tax revenues by more than $2 billion a year, putting the new money broadly to K-12 education, health care and childcare. It would, as backers like Bell Policy Center President/CEO Chris deGruy Kennedy noted, raise taxes on just the highest 3% of individual earners and 5% of business earners in the state — companies and people who benefitted the most from recent federal tax cuts.
How would income-tax changes impact business?
Chris deGruy Kennedy discusses the income-tax ballot measures on the “Colorado Chamber Office Hours” podcast.
But in doing so, opponents of Amendment 87 like Advance Colorado Institute Executive Vice President Kristi Burton Brown assert, the tax change will push away employers who, frustrated by increasing regulations, already have begun reducing investments in the state. And that will hurt the lower- to middle-income Coloradans who graduated-tax-system advocates claim they are wanting to help, causing some to lose jobs and leaving the state with less money and more needed public assistance than it anticipates.
At stake with the dueling questions, proponents of both measures say, is nothing short of the economic future of the state. Without a fairer and greater-revenue-producing income-tax system, Amendment 87 proponents warn, government will not be able to offer the services that residents struggling through an affordability crisis need. With elimination of its flat-tax system, business leaders and Proposition 136 advocates predict, the once-business-friendly state that has sagged as companies have expanded and relocated elsewhere will fall into a death spiral where it will struggle to attract and retain jobs.
“No one is here to punish success. No one is here to say that just because you are making $600,000 a year, you aren’t worthy of it,” deGruy Kennedy told the “Colorado Chamber Office Hours” podcast. “It is simply a question of: Can you afford to pay a few thousand dollars more in taxes, or can people that are struggling to afford the cost of housing and healthcare and childcare a $50,000-a-year salary afford to pay more money?”
How Amendment 87 works
Kristi Burton Brown discusses the income-tax ballot measures on the “Colorado Chamber Office Hours” podcast.
Burton Brown said this tunnel-vision focus on the tax breaks that would go to individuals making less than $100,000 annually and the tax hikes going to higher earners misses the far bigger impact that such a seismic policy change could have on the economy.
“That’s one of the biggest problems with the arguments that people are making for Amendment 87. They say, ‘Oh, it’s going to give a small tax break to some working families,’” she told the same podcast. “It also might take their job out of the state. And that’s going to hurt them a whole lot more.”
The amendment, pushed by education advocates and fiscally progressive groups, would establish a marginal tax system where businesses and individuals pay different rates on different levels of income, meaning earners that don’t cross certain thresholds get a tax break. The first $25,000 of income would be taxed at 3.7% and the next band of income up to $100,000 at 4.2% before income between $100,000 and $500,000 would maintain its 4.4% rate. But the rate rises to 7.4% after $500,000, 7.9% after $750,000 and 8.4% for anything above $1 million.
The biggest annual average tax break — an estimated $325 — would go to those businesses and individuals making between $200,000 and $500,000 annually, with smaller cuts for those making less than $100,000 (about $210) and less than $25,000 (about $9). The biggest changes would hit companies and residents making more than $2 million, expected to pay an average of $13,914 more annually, as well as those making between $1 million and $2 million — a $4,764 increased annual tax bill.
Billions of dollars more for state government
Nonpartisan Legislative Council analysts predict that in its first full year, the new tax system should raise between $2 billion and $2.7 billion, with the number going up as incomes increase in the future. The Legislature would have broad discretion to put the new money to schools, public health care and early childhood education, though deGruy Kennedy has suggested that an interim committee should study options while the money earns interest in a reserve rather than just spend it all as soon as it arrives.
The issue of whether the state government requires $2 billion more a year to meet the needs of its residents is just one of the debates central to the two income-tax initiatives. And it’s part of the larger debate over whether the state’s recent budget shortfalls are the result of federal tax cuts that reduced state tax revenue or have been caused by years of overspending by majority Democratic legislators.
As just one part of it, deGruy Kennedy notes that the boost in funding could go a long way to covering the rising cost of Medicaid services to lower-income Coloradans. The fastest-rising expenses are for older Coloradans, particularly those with long-term-care needs and for state residents with disabilities — costs that have grown much more quickly over the past 20 years than inflation. Without more revenue, the state government won’t be able to meet the needs of its aging population, he argued.
But Burton Brown points to the same program and notes that Medicaid has been saddled by audit findings of overpayments for some services and meteoric rises in the costs of others that Gov. Jared Polis has taken steps to control. Democrats’ decision to take one-time money from the federal government during the pandemic and put it toward recurring programs for which they don’t have enough money now exacerbated the budget shortfall, she and others have said. And officials shouldn’t be turning to Colorado residents to solve this problem, she said.
Another blow to Colorado’s competitiveness?
“This is something that Colorado voters often say ‘no’ to when they’re asked,” she said, noting failures in past years of several efforts to redirect Taxpayer’s Bill of Rights refunds to government services. “Working families get upset because we have to sit down at our kitchen tables and budget … We have to prioritize what we spend money on. We can’t just say ‘Oh, give us everything we want.’”
The effort to boost income-tax rates for the highest-earning Coloradans comes as business leaders are becoming more cautious about bringing new jobs to Colorado, citing the high cost of living and doing business, as well as a rise in regulations. The state slipped this year from 11th to 25th in CNBC’s Top States for Business rankings and fell too in U.S. News & World Report’s Best States list. The Colorado Chamber of Commerce — which, like several other business groups, opposes Amendment 87 and supports Proposition 136 — documented 98 companies choosing to relocate or expand elsewhere since 2019, costing the state more than 13,000 jobs.
To those groups and to Proposition 136 backers, it is clear that a further increase in the cost of doing business here as compared to other states will cool investment in Colorado even further. But deGruy Kennedy and Amendment 87 backers disagree that such a move will cause money flight, and both sides cite studies and figures to back their cases.
Studies offer dueling conclusions
A Cato Institute briefing paper issued on Sept. 15, “The Flat Tax Advantage,” looked at the eight states that went from a graduated income-tax system to a flat-tax system since 1987 and found that those adopting flat taxes experience a roughly 1% growth in per-capita income than comparable states with graduated-tax systems by the fourth year of adoption. Colorado’s per-capita income was 5.3% higher than peer states within a decade of its conversion — a boost that translates to $4,600 per person in today’s numbers.
Mobile taxpayers — those with more wealth who can relocate their homes and their businesses more easily — respond to rising tax rates, the paper found. After California raised its top tax rate in 2012, the revenue boost that state leaders had expected was 61% lower than anticipated within two years, according to an American Economic Journal study — a gap the paper attributed to departures of high earners and to the reporting of lower taxable income by those who stayed.
The Fiscal Policy Institute noted in an August paper, however, that states with graduated tax systems also have the highest concentration of millionaires in the United States, offering evidence that higher income-tax rates do not spur wealth flight. The concentration of high-wealth individuals in states with “millionaire taxes” that boost such rates even higher when crossing that threshold hit 2.3 times the national average in 2023, the paper noted.
An August 2023 paper from the Center on Budget and Policy Priorities found that despite predictions of wealth flight, six of the 18 highest-tax states had more households earning $200,000 or more move in than move out between 2011 and 2021. California, the state with the second-highest top income tax rate in the country, had the second-lowest out-migration rate of households in that income bracket of any state since 2011.
Do income-tax hikes drive out employers?
Both sides, in fact, can point to the same state — Massachusetts — to make their points.
Burton Brown noted that after Massachusetts passed its millionaire tax in 2022, 150,000 people left the state, including high-wealth individuals who took jobs with them. It’s a trend Colorado needs to observe and be cautious about, she said.
“When jobs and job creators leave the state with big tax hikes on them, that’s going to hurt everyone in the state, including those who can least afford it,” she said. “If the progressive tax hike passes, businesses are definitely leaving the state. They’ve told us. They’re telling other people.”
But while some high-wealth individuals left Massachusetts after 2022, the overall population of millionaires there grew and the tax revenues from that income bracket came in significantly higher than state officials predicted, deGruy Kennedy noted. Colorado’s increased revenue will go toward things that business leaders have listed repeatedly as priorities, from subsidies that can keep down health-insurance premiums to childcare funding that can help to end Colorado’s early-childhood-education deserts.
Are other tax breaks in jeopardy?
“We knew that we had to generate revenue from those who have benefitted the very most from our growing economy,” he said. “These dollars will address problems making it hard to do business in Colorado right now.”
One other issue that has surfaced in the campaign — one raised by Polis himself during a Sept. 16 interview on the “Crux Politica” podcast — is whether Amendment 87 will eliminate existing tax breaks for veterans and low-income Coloradans.
The wording of the initiative requires all taxable income to be taxed at the rates that are listed, meaning special existing tax breaks based on income levels will go away, Burton Brown argued. DeGruy Kennedy called that assertion a “lie” and said the small changes in wording Amendment 87 makes to the section of the constitution now requiring a single income-tax rate do not prohibit tax breaks.
What if both income-tax measures pass?
Colorado is one of 15 states with flat income-tax systems — a number that’s roughly doubled since it switched to one universal income-tax rate 39 years ago. Twenty-eight states have a graduated income-tax system, including what deGruy Kennedy called 11 “deep red” states.
It’s possible that voters could pass both Amendment 87 and Proposition 136. If that happens, the clause in Amendment 87 eliminating the constitutional requirement for a single income-tax rate would likely pass into law. But the determination of what future tax rates will be would be based on which of the two measures receives more votes.
Coloradans have a big choice to make — a choice that will impact employer growth decisions, income taxes paid by state residents and funding levels for state services. And while voters will also determine on Nov. 3 who will be governor for the next four years and whether Democrats will have supermajorities in the state House and Senate for the next two years, the choices they make on Amendment 87 and Proposition 136 may have the longest-lasting impact on the state.