Prop 116’s all about money, but would the distribution of the tax cuts give coins to some and greenbacks to others?

In Brief: Proposition 116 would reduce the State of Colorado’s personal and corporate income tax rates from the current 4.63% of federal taxable income to 4.55%. If Prop 116 passes, the new rate would go into effect for tax year 2020, and there is no sunset date for the new rate, so it would continue indefinitely. Prop 116 is statutory, not Constitutional.

Why or Why Not?: In 2020, progressive/liberal forces in Colorado drafted an initiative titled “Fair Tax Colorado,” which would have established a progressive income tax structure with higher rates for wealthier Coloradans and lower rates for Coloradans of lower income. Also in 2020, conservative forces drafted a measure that would have reduced state income tax rates across the board. The Fair Tax Colorado proposal did not gather enough valid petition signatures to qualify for the 2020 ballot, but the flat tax reduction measure now known as Prop 116 did get the necessary signatures.

Proponents are pitching Prop 116 as having benefits along the lines of an economic stimulus, since people will spend their tax cut money in the economy, which could increase business revenue and protect or create jobs. Opponents say Prop 116 is regressive, giving most of the flat tax rate dollar amount benefits to wealthier Coloradans while lower-income Coloradans get relatively small reductions.

Prop 116 is expected to reduce state income tax revenue by about $154 million in its first full year, about $170 million in the second year, and economic performance would determine the numbers in years to follow. Income tax revenue makes up about 66% of the state’s General Fund, from which the state funds general services including education, health care, and public safety. The state cannot operate on deficit spending, so a reduction in revenue often requires reductions in spending, which may also lead to layoffs or furloughs of public employees.

Readers might see or receive politically-motivated state budget numbers pertaining to Prop 116. Here are a few points for context:

  • The General Fund for FY 2019-2020 was $12.2 billion. Income tax revenue goes to the General Fund.
  • The total state budget for FY 2019-20 was $32.5 billion, but this includes roughly $9 billion each in both federal spending and cash funds, with federal health care spending like Medicaid and college tuition as a cash fund among the largest specific items. If you see this $32 billion number in ads, be careful because political operatives are probably trying to persuade you that the state budget’s so big that cuts won’t matter. When it comes to Prop 116, the General Fund number in the point above is more relevant than the total budget.
  • Due to the pandemic, the state had to cut about $3.3 billion from its budget just several months ago. Federal pandemic aid helped forestall certain cuts in state services, but the future of federal aid is uncertain moving forward.

Prop 116 Pro:

  • Not a proponent website but an announcement about Prop 116: https://i2i.org/independence-institute-launches-tax-reduction-ballot-initiative/
  • Most Coloradans would receive a tax break, which could pay for something an individual or family would use. Even the smallest of tax breaks might pay for a small amount of food.
  • If money from the tax reduction is spent in Colorado, it could provide some economic stimulus and preserve or create some jobs.

Prop 116 Con:

  • https://fairtaxcolorado.org/
  • It’s a flat tax reduction, and wealthier Coloradans will get most of the total dollars while lower-income Coloradans who may really need help will get very little.
  • The State of Colorado would take a revenue hit, estimated at nearly $154 million for the first full year and $170 million for the second. The state might need to cut services, programs, or employment to make up for the reduction in revenue.
  • Public employees who are laid off or furloughed will have less money to spend in the Colorado economy.

Richard’s Take: Vote NO. Prop 116 is a perfect illustration of the dark side of regressive tax policy, especially in our current economic condition.

First, wealthier Coloradans, who may already have most of what they need – or are at the bare minimum probably not lacking for the basics of survival like housing and food – will receive the lion’s share of the benefits. Second, the State of Colorado would lose significant revenue for its General Fund, which is a potential source of funding for programs and services that could help the truly struggling get through hard times. Third, lower-income Coloradans will only receive tiny tax reductions, while services that may get cut due to lack of state revenue might be of more benefit to individuals and families than the tax reduction. Fourth, there is no sunset date, so using the simplest numbers, a $154 million revenue reduction for one year could mean at least a $1.54 billion total revenue reduction over 10 years.

Conservatives In Colorado have long argued that the state should use General Fund money to better fund transportation, yet Prop 116 would cut General Fund revenues and make such spending on transportation more difficult if not impossible. You could do some pretty significant rural highway construction with even a part of $1.54 billion over the next 10 years, but if Prop 116 passes that money’s not available. Colorado certainly has major problems right now with people facing housing insecurity, homelessness, unemployment, health care issues, and other serious challenges that a state with reduced revenues might be less able to address. This is exactly the wrong time to emulate the old Kansas “cut taxes first, ask questions later” model, and Prop 116 is a regressive policy vehicle that deserves defeat.