Democrats in the Colorado legislature on Tuesday announced a deal with Gov. Jared Polis to make sweeping changes to the state tax code that reduce income taxes and redirect hundreds of millions of dollars of taxpayer refunds to low-income parents and the middle class.
The tax package, spread across a handful of different bills in the final days of this year’s lawmaking term, represents an escalation of the legislature’s recent efforts to reimagine the Taxpayer’s Bill of Rights — a darling of the conservative movement — as a vehicle for progressive policy.
Under the TABOR amendment, the government must refund money to taxpayers when revenue rises faster than the combined rate of inflation and population growth. This fiscal year, it’s expected to trigger roughly $2 billion in refunds that would go out in 2025 — but lawmakers have wide discretion in how they distribute the money.
The Democrats’ proposal would create more than $700 million in new tax credits aimed at reducing poverty. One, House Bill 1311, would create a new family affordability tax credit for parents who make up to $85,000. Qualifying families could receive as much as $3,200 in refundable tax credits per child under the bill, which received preliminary approval Tuesday in the House.
The other, House Bill 1134 would expand the earned-income tax credit, another refundable tax break that supplements the federal program of the same name, providing thousands of dollars in assistance, primarily to low-income workers with children. The amounts of both tax credits fall as household income rises.
☀️ READ MORE
Taken together, the two measures could cut child poverty by half in Colorado, said Rep. Chris deGruy Kennedy, the No. 3 Democrat in the House, who is sponsoring the family tax credit.
“It’s a trade-off,” deGruy Kennedy told The Colorado Sun in an interview earlier this year. “I’m betting on the idea that an awful lot of Coloradans would say, ‘oh yeah, I’d give up a couple hundred bucks (in TABOR refunds) if that cuts child poverty in half in Colorado.’ ”
In exchange, Kennedy and other sponsors of the tax credits agreed with Polis to cut the state’s income tax rate in years when the surplus exceeds $300 million through a bipartisan bill set to be introduced in the Senate on Tuesday. The governor has said any changes to how TABOR refunds are distributed must be made with an income tax reduction, too.
Democrats in the legislature have chafed at the demand, calling it inequitable, while Republicans have tried to hold the governor’s feet to the fire to get it done. Higher earners pay more in income taxes, so they receive the most financial benefit from a blanket rate cut.
“This approach will keep more money in people’s pockets in the first place without the government unnecessarily over-collecting and then refunding it,” Shelby Wieman, a spokesperson for Polis told The Sun in a statement. “The governor called for income and sales tax rate cuts during his State of the State address and applauds legislators for their work to drive economic growth and save people money.”
Higher earners pay more in income taxes, so they receive the most financial benefit from a blanket rate cut.
For this tax year, the cut would total roughly $450 million — a 0.15 percentage point reduction on the state’s 4.4% income tax rate. The sales tax rate would also temporarily be reduced.
“Largest income tax cut in Colorado history? I’m all over that,” said Senate Minority Leader Paul Lundeen, a Monument Republican and main sponsor of the forthcoming measure, Senate Bill 228.
Nonetheless, conservatives Tuesday railed against other pieces of the tax deal, calling the dramatic expansion of tax credits an “egregious” attack on TABOR.
“I work. I pay into the system,” said Rep. Brandi Bradley, R-Littleton. “And now I’m going to have to pay for those who don’t.
“Perfect,” she added sarcastically. “That’s a great plan.”
The tax credits deGruy Kennedy said were included in the deal with Polis aren’t the only ones competing for TABOR surplus dollars this legislative session.
Lawmakers are also pushing bills that would create new housing tax credits for renters and seniors. Another measure would benefit certain health care workers amid the state’s nursing shortage. There’s also a plan to allow elderly Coloradans to keep a popular property tax break, the senior homestead exemption, if they move.
If any of those bills pass, it would further reduce the amount left for TABOR refund checks, which are distributed after tax credits and property tax reimbursements are accounted for.
The income tax rate reduction would kick in during years where the TABOR surplus is greater than $300 million. Here’s how it would work:
- In years where the surplus is between $300 million and $500 million, the rate cut would be 0.04 percentage points
- In years where the surplus is between $500 million and $600 million, the rate cut would be 0.07 percentage points
- In years where the surplus is between $600 million and $700 million, the cut would be 0.09 percentage points
- In years where the surplus is between $700 million and $800 million, the cut would be 0.11 percentage points
- In years where the surplus is between $800 million and $1 billion, the cut would be 0.12 percentage points
- In years where the surplus is between $1 billion and $1.5 billion, the cut would be 0.13 percentage points
- In years where the surplus is greater than $1.5 billion, the cut would be 0.15 percentage points. Additionally, the state’s 2.9% sales tax would be reduced to 2.77%.
If the surplus is greater than $1.5 billion and there’s money leftover after tax cuts, taxpayers would get a flat refund of up to $197.
If the $197 refunds aren’t enough to extinguish the surplus, refunds would be distributed based on how much a taxpayer earns, that would return smaller sums to lower earners and larger sums to higher earners.
The amounts are all subject to change in the future based on inflation.
Since the surplus this fiscal year, which ends June 30, is expected to be around $2 billion, the 0.15 percentage point income tax rate cut to 4.25% is expected to be triggered for the 2024 tax year for taxes due in 2025, as well as the sales tax rate reduction to 2.77%.
The amount of the additional refunds will depend on what the state’s final revenue picture is when the fiscal year ends July 1. That likely won’t become clear until September, when state budget officials provide updated revenue estimates.