Imagine if Colorado had no state income tax.
Last week at a conservative political conference, Gov. Jared Polis floated the idea of reimagining Colorado’s state tax structure to eliminate income taxes, as nine other states have done.
Polis opined that Colorado’s income tax, “should be zero. We can find another way to generate the revenue that doesn’t discourage productivity and growth and you absolutely can, and we should.” Polis told the conference that he would want the change to be revenue-neutral and that he wouldn’t want to increase sales or property taxes to get it done.
Polis was speaking hypothetically and he made it clear that it wasn’t all or nothing. Indeed, the Colorado legislature would never make this change right now.
However, Polis made it clear that progress in that direction would also be good. And, in fact, Colorado voters in 2020 overwhelming approved Proposition 116 which reduced the state income tax rate from 4.63% to 4.55%.
Colorado voters appear to have an appetite for some downward income tax change and another measure could be placed on the ballot to reduce this amount further next year. Signatures are being gathered until late October to place the income tax reduction to 4.4% on the ballot.
Nine states, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming, don’t tax earned income at all. The states without an income tax still have to pay for infrastructure like roads and schools. Unless you cut services drastically, which is a non-starter in a state like Colorado, residents in these states still pay other taxes to keep the state running, such as sales taxes on purchases or property taxes on homes and businesses.
Colorado is one of 10 states that has a flat income tax rate. Flat taxes subject all Coloradans and incomes to the same singular tax rate (as opposed to our current federal progressive tax system where higher amounts of income are taxed at ever-increasing amounts, known as ‘tax brackets’). A flat tax can be regressive and unfairly disadvantages lower tax earners.
Since taking office, Polis has been a trailblazer on tax reform measures. From helping small businesses by eliminating the business personal property tax, ending state taxes on social security for seniors, funding the state child tax credit for the first time, and doubling the state earned income tax credit, Polis has made tax reform a key agenda of his administration.
But those changes were at the margin. Eliminating income taxes, which totaled an estimated $10.7 billion in fiscal year 2021, would mean serious increases in other existing taxes … for example, that amount is over three times the amount of state sales taxes collected. Personal income taxes make up about two-thirds of the money in Colorado’s General Fund, which is the area of the state budget that covers K-12 education, higher education, public health and public safety, among other things.
Given that these remarks were made at a conservative conference, they could be written off as something said in the heat of the moment. The idea the governor hinted at, that taxes disincentivize work or other investment, might be true, but Colorado’s basically middle of the pack total tax burden was seemingly no impediment to the state’s strong economic rankings pre-pandemic.
In 2012 and 2013, Kansas Gov. Sam Brownback, a believer in the theory that taxes hamper economic growth, dramatically slashed state income taxes only to have the plan backfire and future legislatures replace the lost revenue to restore public services. A study by the Center for Budget and Policy Priorities found that the performance of its economy during the lower tax period lagged other states. Similar findings were documented by others including the Brookings Institution. In this thought experiment, Polis took care to say he would replace the revenue immediately.
So whether this idea was for real or just part of a “blue sky” conversation remains to be seen. But in the meantime, all Coloradoans have a stake in any change in tax policy and deciding how the state can improve its tax structure.
But a few key questions can guide the next steps: Will a new system be easier to comply with? Is the current tax system too unfair to lower-income groups, a concern of some like Denver-based think tank Bell Policy Center? Would the new taxes to replace lost income taxes, be predictable, stable, and efficiently collected? Who would pay more and who would pay less and will these shifts be transparent?
Here’s my safest bet: Gov. Polis wasn’t offering a concrete tax reform proposal. There are 10.7 billion reasons why Colorado is not ready to move forward with Plan Zero. But he deserves credit for starting a conversation about creating a better tax system that could be less onerous on some residents and more pro-growth and targeted to more fairly spread the tax burden.
Doug Friednash is a Denver native, a partner with the law firm Brownstein Hyatt Farber and Schreck and the former chief of staff for Gov. John Hickenlooper.
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