In the Colorado tax code, it pays to be rich and it’s expensive to be poor.
For decades now, that’s been the stark takeaway buried inside the 286-page report on Colorado’s tax system the state Department of Revenue releases every two years: The less you make, the more you spend on taxes, as a percentage of your income.
But despite growing public frustration over income inequality and the state’s rising cost of living, the tax disparities apparent in Colorado’s law have drawn little political attention.
That is, until now. After years of defeats at the ballot box, progressive advocates believe they’ve landed on a tax plan that can resonate with Colorado voters: making the rich pick up more of the bill.
The Colorado Fiscal Institute in December introduced 35 possible ballot proposals that would advance the idea and ask voters to re-establish a graduated income tax in the state for the first time in more than 30 years. Structured like the federal income tax, graduated or progressive state tax brackets would levy higher tax rates based on how much money residents make.
As written, the proposals could raise billions of dollars for things like higher education, transportation and teacher pay — a familiar wish list at the state Capitol. But they would also do something else that some progressives are starting to view as just as important as generating money for public services: chip away at the growing gap between the wealthy and everyone else.
“Let’s not forget why we’re trying to raise revenue in the first place,” said Scott Wasserman, president of the Bell Policy Center, a progressive think tank. “We’re trying to raise more revenue so we can ease the cost pressures on an ever-shrinking middle class.
“If our challenge is inequality and our challenge is a shrinking middle class that’s wrestling with costs that used to be lower because of greater public investment, why not have a policy that’s related to that?” he asked.
Advocates haven’t ironed out the details of what would appear on the 2020 ballot, but eliminating the state constitution’s prohibition on graduated tax rates is expected to be a top priority.
Complicating matters for the left is Democratic Gov. Jared Polis’ ongoing support for across-the-board income tax cuts, which many progressives view as a non-starter. Polis and state lawmakers are working separately on legislative tax changes that could be accomplished without voter approval. But it remains to be seen whether they will find common ground in the upcoming session.
If they don’t, and Polis doesn’t endorse a ballot measure in November, it could be difficult to overcome Colorado’s longstanding resistance to taxes.
“I think the more that they’ve lost, the more it’s like, ‘What don’t they understand about fixing the roads or increasing dollars to classrooms without raising taxes?’ ” said Michael Fields, the executive director of Colorado Rising State Action, a conservative political group. “They’re getting hurt more each time that they’re trying it.”
As inequality rises, most support taxes on rich
The push comes at a time of skyrocketing income inequality nationwide, drawing scrutiny not just from the political left that supports Bernie Sanders and Elizabeth Warren, but also from economists across the political spectrum and the Federal Reserve.
By one analysis, the wealthiest 1% of Americans captured a staggering 42% of all the income growth in the country between 2009 and 2015, and 59% of the income growth between 1973 and 2007. For context, from 1945 to 1973, the richest 1% accounted for just 5% of the nation’s income growth, according to the analysis by the left-leaning Economic Policy Institute.
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Against this backdrop, taxing the rich has become a popular idea that crosses party lines. In Gallup polls, upwards of 60% of Americans consistently say higher-income people pay too little in taxes, and a 2019 Fox News poll found that 65% support raising taxes on millionaires. Democratic presidential candidates have seized on the issue, floating sweeping rewrites of federal tax policy that include plans to tax wealth, Wall Street transactions and large corporations.
In Colorado, the wealthiest 1% claimed 22% of the state’s income growth from 2009 to 2015, according to the EPI report. But the newfound focus on income inequality marks a shift for the Colorado political left, which has spent much of the past decade focused on raising revenue for public services — even when the costs would fall disproportionately on the poor and middle class.
Over the years, Colorado Democrats have backed plans to raise sales taxes, fees and sin taxes, all of which have a tendency to squeeze middle- and lower-income wallets more so than the wealthy. Even with voters rejecting most statewide tax hikes, Colorado’s tax code has become more regressive in recent years, meaning people who earn less pay higher shares of their income to the government.
This can at least partly be attributed to the Taxpayer’s Bill of Rights, the constitutional amendment that limits state spending and requires voter consent for new taxes. The status quo during the TABOR era has effectively pitted two Democratic goals against one another. To fund additional public services, state government needs more revenue. But one of the few ways lawmakers can raise revenue in Colorado without voter approval is through fees, which tend to be regressive.
Since the measure was adopted in 1992, fees have exploded, while state income taxes have fallen. And as state funding was squeezed, many local governments turned to sales taxes of their own to pay for neglected public services like transportation.
Unequal tax rates in Colorado remain entrenched
In 2015, the last year state income tax data was available, the poorest Coloradans spent 19% of their income on state and local taxes and fees, while the wealthiest paid 7%. That same year, those making under $15,000 paid 2.7 times the effective tax rate of those making more than $100,000, up from 2.5 times in 2014.
The biggest gap between the rich and the poor is at the local level, largely due to the impact of sales taxes. But the inequality in state taxes reveals something more troubling — the extent to which tax breaks for the wealthy play a role.
Overall, Colorado’s state taxes lean regressive, but the disproportionate burden on the poor is neutralized somewhat by the state income tax. Colorado has a flat income tax of 4.63%, meaning everyone should theoretically pay the same rate regardless of their income. But low-to-moderate income people qualify for certain tax breaks like the Earned Income Tax Credit that higher income people don’t, reducing their effective tax rate.
(The income tax rate for 2019 is temporarily lowered to 4.5% because of tax revenue that exceeded the TABOR caps.)
However, it’s notable what happens at the highest income levels: Those making more than $200,000 actually pay lower effective income tax rates, on average, than households that make between $100,000 and $200,000. The reason: higher-income people qualify for more tax breaks than much of the middle class, such as the deduction for pass-through business income and a number of credits for qualifying investments.
Wasserman believes there’s an obvious solution to address tax fairness and income inequality and boost funding to public services in one fell swoop: Tax the wealthy at higher rates, as most other states and the federal government do. And, he believes this tactic could have more success than last year’s failed attempt to eliminate taxpayer refunds owed under TABOR.
“We’re not trying to raise taxes for the folks for whom a $60 TABOR rebate is a significant amount of money,” Wasserman said. “We’re talking about the upper 10% of Coloradans and asking for a modest increase in the share they pay.”
Colorado had a graduated income tax from 1937 until 1987, with a top rate as high as 10% at one point. But the legislature switched to a flat tax in the 1980s, and then in 1992, the adoption of TABOR prohibited lawmakers from switching back.
Individual Income Tax Rates since Enactment
The Colorado Fiscal Institute has proposed three new tax brackets that would raise taxes incrementally on joint filers making more than $250,000 or individuals making more than $187,500. It includes a top tax rate of 9.85% on taxable income above $1 million.
Wasserman said he’s also open to cutting taxes on lower incomes as part of the new brackets, but none of the 35 initial proposals would do so.
In public polling, how you define wealthy matters — a lot — when determining whether such an idea would win public support. While 65% of respondents in the Fox News poll support raising taxes on millionaires, support drops to 44% for those making more than $250,000.
Critics believe installing graduated income tax brackets in Colorado would lead to tax hikes for working families, in addition to the very rich. “What most people consider middle class families are going to see their taxes go up,” said Fields, the conservative advocate.
A “fair and just” tax code is the goal for advocates
In its proposals, the Colorado Fiscal Institute states that a “fair and just” tax code would have all taxpayers paying “similar percentages of their income in total taxes.”
But what’s fair depends greatly on your point of view. While the rich pay lower effective tax rates — that is, the total percentage of their income that is paid to the government — they still pay significantly more taxes on average if you just look at raw dollars spent.
In 2015, only 6.8% of households made more than $200,000, but contributed 33% of total state and local taxes, according to the state tax report.
“I don’t think that the current system is unfair at all,” Fields says. Instead, he credits the state’s flat tax with attracting wealthy residents and good-paying jobs that have helped Colorado’s economy thrive.
“If you think that tax rates do impact behavior, then you have to think if you raise taxes you’re going to impact that (economic) activity,” Fields said. “We want to keep the people who are well off in our state.”
A look around the region shows a wide range of approaches when it comes to taxes. Six of 11 nearby states have graduated income taxes, with the highest rates ranging from 4.54% in Arizona to 12.3% in California, according to the Federation of Tax Administrators. Only Utah has a flat tax, at 4.95%, which is slightly higher than Colorado. Nevada, Washington and Wyoming have no state income tax.
But comparing tax rates alone can be misleading. Colorado, for instance, is tied with New Mexico for the most generous standard deductions, meaning people here pay taxes on a smaller share of their income than most surrounding states. And income taxes are just one piece of the puzzle. Colorado has among the lowest property taxes in the country, according to the conservative Tax Foundation, and anyone weighing a move for tax reasons would likely take factors like that into account.
More progressive taxes aren’t a panacea for income inequality, either. With a top rate of 12.3%, plus a 1% millionaire tax, California has the most progressive tax code in the country, according to the left-leaning Institute on Taxation and Economic Policy. It is also the seventh most unequal, with the wealthiest 1% making 30 times the average income of the other 99%, according to EPI. (Colorado ranks 16th in progressiveness and 20th in inequality, by the same metrics, with the wealthiest 1% earning around $1.3 million on average. That’s 21 times more income than the bottom 99% make on average.)
The approaches from the governor and lawmakers may conflict
The ballot isn’t the only option for tax reform.
In an op-ed published in The Colorado Sun, Polis called on lawmakers in both parties to work with him on making permanent a temporary income tax cut triggered this year by TABOR.
“It is my hope that we can reduce the special interest tax subsidies that force all Coloradans to pay an artificially high income tax rate, and provide additional income tax relief to all individuals and businesses in Colorado,” he wrote.
To pay for it, Polis wants to target certain “special interest” tax breaks, including the 20% federal deduction for pass-through income that was enacted in President Donald Trump’s 2017 tax bill. The beneficiaries include sole proprietorships, partnerships and S corporations that are taxed through their owners’ individual income tax returns. Examples include legal, accounting and consulting firms as well as many hedge funds and private equity firms. It also benefits many self-employed Americans that make much less.
Getting rid of it would make the tax code more progressive, because the benefits are skewed to higher incomes. But to many in Polis’ own party, using it to pay for an across-the-board tax cut is the wrong approach.
State Rep. Emily Sirota, a Denver Democrat, is working with Sen. Julie Gonzales on a bill to eliminate the Trump tax break for pass-through income, but wants to use the money to expand two tax breaks that are targeted to the poor and middle class: the Earned Income Tax Credit and the Child Care Tax Credit.
“What Sen. Gonzales and I are aiming to do is to make our tax code fairer in Colorado, so that we are delivering the economic relief to those who actually need it,” Sirota said. “The way we see this philosophically is why should we be treating wage earners’ income different than (business) owners’ income? This is not a tax policy that Colorado asked for or passed.”
Because they wouldn’t raise taxes overall, both Polis’ and Sirota’s efforts could likely be done without voter approval, sidestepping the single biggest hurdle to graduated tax brackets.
To the political right, the left’s newest tax push is likely to fail at the ballot for one of the same reasons past ones have: Voters simply don’t trust the state to spend the money wisely. Election after election, Coloradans have approved local tax hikes and rejected statewide ones, even when they’re earmarked for the same sorts of services, like schools or roads.
Wasserman, though, believes a tax measure will fare better with the 2020 electorate than the low-turnout 2019 contest that elected to keep TABOR refunds by defeating Proposition CC. For one thing, taxes would go up on less than 10% of earners, as opposed to Prop. CC, which sought to eliminate refunds for everyone. And, it sidesteps an even bigger challenge that Prop. CC and other efforts have faced: the question for voters is a lot simpler.
“I think one of the benefits of talking about a graduated income tax is we’re not in TABOR-land,” Wasserman said. “When we get stuck in TABOR-land it becomes this very technical, political, charged, obscure conversation that most Coloradans feel very lost in.”
The new conversation may be easier to digest. But it should also sound familiar: Whether Colorado voters think the state needs more money to spend.