Proposition 121, the initiative itself, would simply reduce Colorado’s income tax rate from 4.55% of the federal taxable income line on your state tax return to 4.40%, beginning with the 2022 tax year. But for at least some voters, what’s really interesting about Prop 121 is how different Coloradans would benefit and how the measure might impact state services.
The measure is expected to reduce state income tax collections by $412.6 million in state budget year 2023-24. Income tax revenue normally makes up the lion’s share of the state General Fund, which funds general state responsibilities including education and health care needs. For state budget year 2020-21, the state income tax generated $10.7 billion, which accounted for 68.4 percent of General Fund revenue.
Colorado voters passed the Taxpayer’s Bill of Rights (TABOR) in 1992. A major part of TABOR requires the state to take actions, including providing direct refunds to taxpayers or adjusting tax rates, if the state collects more revenue than its revenue cap under TABOR. Most readers probably got a check from the state fairly recently, and that was due to TABOR. And it is expected that the state income tax rate would be temporarily reduced from 4.55% to 4.50% for tax years 2022-24 because the state expects TABOR surpluses. If Prop 121 passes, the impact on state services could depend on whether the state collects tax revenue above the TABOR cap, or below the TABOR cap.
During years when the state collects money over the TABOR limit, Proposition 121 will reduce the amount of money returned to taxpayers through possible TABOR refunds, and will not change the amount of money available to pay for state operations. During years when the state collects less than the limit, Proposition 121 will reduce the amount of money available for state government operations. The state currently expects TABOR surpluses through at least budget year 2023-24.
Proposition 121 is a statutory measure, not Constitutional, and would pass with a simple majority vote. It was citizen-initiated, meaning that citizens had the measure drafted and needed to gather sufficient petition signatures to put the measure on the ballot. The tax rate decrease does not have a sunset date, so it would stay in effect indefinitely. Under TABOR, increasing this tax rate – even back to the rate it was before – would require another vote of the people.
Some readers probably already know that our state income tax rate is a flat rate – that is, lower-earning taxpayers pay the same percentage rate as higher-earning taxpayers. However, if voters approve a flat rate income tax reduction like in Prop 121, higher-earning taxpayers could get significantly larger tax breaks in raw dollars. This chart from the Colorado Blue Book for budget year 2023-24 helps illustrate:
Pro:
- Expenses are increasing all over Colorado, and even a small tax break could help families or individuals have money available to pay a bill or buy groceries.
- In years where there is a TABOR surplus, Prop 121 would not impact state services.
Con:
- Flat rate income tax reductions are regressive, benefiting higher income earners in real dollars much more than lower income earners.
- In years where there is not a TABOR surplus, the state government might need to cut programs or services due to reduced General Fund revenue.
- The tax decrease does not sunset, so to increase the rate again would require another vote of the people.
Richard’s Take
Vote NO. My major problem with this initiative is that it’s a permanent tax cut, at least until someone runs another ballot measure. Under TABOR, it would take another vote of the people to increase the tax rate if it seems necessary, and it’s typically tougher to get voters to increase a tax than to decrease. Major problem number two is that a flat-rate income tax reduction typically gives more money back to wealthier taxpayers than to lower-income earners who could really benefit from a break.
Prop 121 is co-sponsored by Jon Caldara of the Independence Institute, and Caldara and friends have a long history of trying to use the initiative process to reduce government revenues or get people a solid tax break.
I’ll quote myself from 2020: “In essence, putting fiscal policy on the ballot via initiatives seems to have made Jon Caldara of the Independence Institute a sort of special-level 101st legislator, one with the ability to bypass the Joint Budget Committee or fiscal analysts or transportation planners or human services providers who might understand what’s best for the state or the broader range of people.”
I see no reason to revise my statement from 2020 even slightly, so here we go again.
Voters should consider that income tax revenue makes up about two-thirds of a typical year’s General Fund budget, and the General Fund pays for important state services from which most of us benefit. Depending on state economic conditions relative to TABOR caps, Prop 121 could cut this source of General Fund revenue indefinitely. Voters also ought to consider that if Prop 121 passes AND the initiative to fund affordable housing with income tax revenue (Prop 123) also passes this year, the two initiatives could potentially combine to take a solid chunk out of General Fund available revenue in years without TABOR surpluses. Furthermore, neither of the initiatives offer a way to rebuild the General Fund if it’s depleted, at least without going to voters for a tax increase.
This is just me speaking, but if I had to choose between 121 and 123, I’d prefer more affordable housing than another tax break for people who might not need it that badly. Caldara or his allies will more than likely run another initiative to cut government revenues in another election before too long, so don’t worry, folks, he’ll have something to do next time around if this measure fails.
