3 Ways Colorado Could Tax Wealth
By Caroline Nutter, tax policy analyst
Since 1980s, the rich have gotten richer. A lot richer. Recent research from economists at the University of California, Berkley show just how stark the reality is:
That economic inequality is only getting worse is obviously a national issue not unique to Colorado. However, the state’s constitutionally mandated flat tax rate, which causes us to rely heavily on naturally regressive sales taxes and fees, helps make it so Coloradans who earn low and middle incomes contribute a larger percentage of their income in state and local taxes than high-income Coloradans. A 2020 article in The Colorado Sun put it best: “In the Colorado tax code, it pays to be rich and it’s expensive to be poor.”
There are a number of policy solutions to this inequitable distribution of who pays the taxes that fund our public services, including implementing a graduated income tax and finding ways to offset the amount of taxes paid in sales taxes by people who earn low incomes.
Another policy solution that has grown in popularity since coming to the forefront over the past two years: wealth taxes. Wealth taxes have been proposed as a means to combat growing income inequality, including the racial inequities created by our current tax code (the people with the very highest incomes are disproportionately white, while people who earn low incomes are disproportionately Black and Brown compared to Colorado’s overall population).
Just this week, a bill to establish a federal “ultra-millionaire” tax was introduced by Sen. Elizabeth Warren of Massachusetts and Reps. Pramila Jayapal of Washington and Brendan Boyle of Pennsylvania.
All of these plans center around the concept of progressive taxation, or the idea that the more money someone makes, the higher their tax rate ought to be. The federal government began progressive taxation in earnest following the ratification of the 16th amendment to the US Constitution, which authorized a federal income tax. This effort ramped up during the Second World War, when President Franklin D. Roosevelt pushed for broadening the tax base and curtailing “entrenched greed” by taxing the wealthy and undistributed corporate profits.
In the 1960s, Congress again enacted progressive tax reform that eliminated some key tax expenditures for big business and oil industries. But by the 1980s, anti-tax sentiment was growing, and President Reagan ushered in a conservative revival of deregulation and tax cuts. Some of these policies included lowering corporate tax rates as well as the top income tax rates for high earners. The highest income tax rate would be reduced five more times between 1981 and 2021. In Washington, there was a bipartisan belief that the benefits given to the wealthiest in society would eventually “trickle down” to benefit everyone.
In reality, that hasn’t happened.
In a 2020 study conducted by the London School of Economics and King’s College, researchers looked at 18 countries over 50 years, comparing those that passed tax cuts for richer citizens and those that didn’t. The study found that, in each country, tax cuts for the wealthiest individuals dramatically increased their income but did nothing to significantly affect economic indicators like unemployment rates or Gross Domestic Product compared to countries that did not cut taxes for the wealthy.
Now, more than 100 years after it first gained popularity, progressive tax reform is seeing another revival, this time with an emphasis on taxing wealth. More and more legislators, fair tax advocates, and average citizens are beginning to criticize the preferential tax treatment given to certain types of income over others—primarily, the preference given to income from the sale of assets (also known as “capital income”) over wage income. At the federal level, wage income is taxed at rates between 10 and 37 percent, while the federal tax rate for income earned by the sale of long-term stocks and dividends ranges from 0 to 20 percent. In 2018, almost 70 percent of capital income went to the top 1 percent, and more than 50 percent went to the top 0.1 percent—that means more than half of the income held by the wealthiest U.S. households is taxed at lower rates than income earned through work.
Though Colorado can’t change preferential tax treatment of capital income at the federal level, we can take steps to create more fair and equitable ways to tax wealth at the state level:
State Taxes on Inherited Wealth
An estate or inheritance tax is a tax on property such as cash, real estate, stocks, bonds, and other assets that are transferred to a person’s heirs when they die. In 2001, the federal government levied an estate tax and had a federal credit that allowed states to “pick up” a share of federal estate tax revenues. In 2001, Congress cut both the federal estate tax as well as the federal credit to states; a policy change that today means just 1 in 1,000 estates are taxed at the federal level. As of 2019, 17 states and D.C. have their own inheritance taxes that generate about $4.5 billion in state revenues annually. Colorado does not currently have an estate tax. Colorado could either restore an estate tax to the pre-2001 federal limit or adopt a stand-alone estate tax that would be targeted at the wealthiest.
State Taxes on Property
Like Colorado’s income tax structure, our property taxes are also regressive. instead of taxing higher-value properties at a higher rate, property taxes are collected as a flat percentage of a property’s assessed value, regardless of the income of the owner or the value of the property. Colorado could inject progressivity into the property tax structure through a mansion tax. There are two primary ways to implement a mansion tax: through property taxes, or through real estate transfer taxes. Colorado could increase its real estate transfer tax, also known as the taxes or fees incurred at a time when the home is sold, for homes above a certain value, or it could add an additional tax for higher-value properties collected each year through the property tax structure. 39 states and D.C. have enacted mansion taxes.
State Taxes on Capital Gains
Colorado taxes its capital gains at the same rate as ordinary income: 4.55 percent. Colorado could raise its income tax rate on capital gains, in line with the federal income tax code, which taxes long-term capital gains at 0-20 percent depending on your income bracket. Colorado could also eliminate the “stepped-up basis” loophole that allows people to inherit assets such as stocks, bonds, or real estate without paying any taxes on the appreciation that occurred on those assets before they inherited them.
State Constitutional Barriers to Wealth Taxes
While these policy solutions would go a long way towards addressing Colorado’s inequality problems, enacting them will take more than just passing a bill at the legislature. While most Coloradans are familiar with Colorado’s requirements for voter approval of all tax increases, the state constitution does more than just mandate tax increases go to the ballot. Many of the policies outlined above would require placement of a constitutional amendment on the ballot, which would require either a two-thirds majority of the legislature to refer to voters, or tens of thousands of petition signatures from all 35 state Senate districts. This underscores the need for constitutional tax reform in Colorado.
While the procedural barriers to these policies are large, there does appear to be strong support for them: a 2020 poll conducted by Reuters/Ipsos found strong bipartisan popularity for wealth taxes, and suggests such measures could pass at the ballot.
Colorado’s tax code, along with the federal code, are written to advantage the wealthy. It’s time for tax policy that makes sure the wealthiest, whose bank accounts and assets seem to only grow larger, pay their fair share and use that money to fund critical public services that make our nation and our state more prosperous for everyone, regardless of people’s skin color, where they were born, or how well-connected they are.
