Income

Proposition 121: Colorado State Income Tax Cut – What You Need to Know

This election measure would reduce the state income tax rate. The permanent rate would be reduced from 4.55% of income to 4.40% of income.

In other words, if you are currently earning $100,000 in taxable income, your bill would drop from $4,550 to $4,400, a reduction of about 3%.

Here is the language you will see on your ballot:

Will there be an amendment to the Colorado Revised Statutes reducing the state income tax rate from 4.55% to 4.40%?

How would that work?

Colorado has a flat income tax rate, which means that no matter how much or how little a person earns, all state residents are taxed at the same rate. The permanent tax rate is currently set at 4.55%. If Proposition 121 passes, income taxes would be reduced for Colorado individuals and corporations.

The average taxpayer, with an income of about $79,000, would save about $119. But the savings would be much greater for the wealthiest people in the state.

For example, someone who earns a million dollars would save $1,500 in taxes. In total, about half of the savings will go to people earning more than $1 million a year, who make up less than 1% of the taxpaying population, according to state analysts.

But proponents also argue that lower tax rates can have positive side effects, such as boosting the overall economy.

Over the next fiscal year, the measure would reduce state income tax collections by about $413 million, on more than $13 billion in personal and corporate income taxes collected each year. .

Colorado’s income tax rate has gradually declined since the late 1980s, when it was set at 5%. More recently, voters approved a slightly lower cut in 2020. State income tax was also temporarily lowered due to TABOR limits on government revenue.

The change would not necessarily save taxpayers money in the short term. Voters are expected to benefit from a reduction on taxes for several years to come via TABOR refunds. But a lower tax rate would reduce tax liabilities permanently, ensuring lower taxes even in years when refunds are not paid.

The effects of the reduction could become more apparent in the coming years, if the economy is weaker and the state does not exceed its revenue limits. In those years, a tax cut would mean the government ultimately collects less money.

For a bit of history: Colorado has a flat tax rate, which means everyone pays the same percentage of their income. Prior to 1987, the state had graduated rates, which meant that wealthier people paid higher tax rates.


Estimated impact of Proposition 121 on individual income taxpayers, by income bracket, for the 2023-’24 state fiscal year

Income bracket Estimated number of taxpayers Cumulative change in taxes due Variation in taxes due for the average taxpayer
$14,999 or less 1,198,693 -4.3 million dollars -$7
$15,000 to $29,999 477 377 -$11.2 million -$23
$30,000 to $39,999 247,465 -9.1 million dollars -$37
$40,000 to $49,999 197,402 -9.4 million dollars -$47
$50,000 to $69,999 285 180 -$17.9 million -$63
$70,000 to $79,999 267 148 -$23.7 million -$89
$100,000 to $149,999 227,416 -$29.3 million -$129
$150,000 to $199,999 106,782 -$19.5 million -$182
$200,000 to $249,999 56,750 $13.4 million -$236
$250,000 to $499,999 89 206 $32.1 million -$360
$500,000 to $999,999 33,309 -$24.1 million -$725
$1,000,000 or more 29 109 -$188.3 million -$6,647
Total 3,215,835 -$382.3 million -$119

Who is for?

Campaign organizers include Jon Caldara, president of the Libertarian Independence Institute, and Republican Senator Jerry Sonnenberg.

“We have to keep business here. We don’t want to look to California, where our most productive people and businesses are fleeing to low-tax states,” Caldara said in an interview last year.

Supporters have banded together under the Path 2 Zero campaign, which aims to eliminate state income tax altogether. They argue that an income tax penalizes productivity.

“People generate income by investing, working and being productive. … (Higher income taxes) produce less of the very activity needed to grow our economy, create jobs, and improve the lives of all,” claims the Path 2 Zero website. .

Proponents also argue that since the state is running surpluses, now is a good time to cut the rate. Democratic and Republican gubernatorial candidates agree, in principle, with the reduction in the income tax rate.

“I think penalizing income is not good. I talked, can we replace it with a pollution tax or more of a carbon tax mechanism to reduce income tax to zero,” said Democratic Gov. Jared Polis, though he stressed that any cuts would have to be replaced by new revenue from elsewhere.

Republican candidate Heidi Ganahl said she would try to reduce income tax to zero if elected.

“Jared Polis and I actually agree … that zero income tax would be a great incentive for Colorado residents and for businesses and businesses to move here and settle here,” he said. she declared.

But unlike Polis, Ganahl said she doesn’t want to add any other new fees or taxes to make up for lost revenue. Instead, she suggested the state could cut spending by cleaning up fraud and waste.

Who is against?

Progressives and many Democrats have opposed more cuts, saying the state needs the money to address the challenges it already faces in transportation, schools, and more.

“When we hit the first recession, we’ll be taking in less money,” said Scott Wasserman, president of the progressive Bell Policy Center, in an earlier interview. “It will impact K-12 education, health and social services, corrections, higher education, public safety, and more.”

He and others argued that an income tax cut would disproportionately benefit the wealthy, who could receive many times more benefits than the poor. And opponents argue the economy is too precarious right now to risk a tax cut.

“In the event of a recession, the measure will likely reduce the amount of money available for the state budget, making it harder for the state to respond to economic challenges and provide essential services to those most affected. Now is not the time to weaken the state safety net,” read the opposition arguments published in the state’s Blue Book vote analysis.


Additional coverage

Another income tax cut for Colorado in 2022? Maybe – and it could cost the state budget $400 million