Effect of Federal Tax Law on Revenue for Colorado and Colorado Taxpayers
Summary Analysis
Institute on Taxation and Economic Policy
Federal tax legislation will reduce federal taxes paid by Coloradans, with 51% of the cuts going to the top 5% of taxpayers. Federal tax rules directly affect the amount of income subject to state income taxes. In Colorado, federal rule changes affecting exemptions, deductions and credits automatically change the amount of income subject to state taxes. The original drafts of federal tax proposals in 2017 contained many changes to itemized deductions which would have increased taxable income in Colorado. The final version of the bill, however, did not contain as many changes that increase taxable income in Colorado, so the net effect of all the changes means that Colorado income tax revenue will not increase substantially. There are various models used to predict the impact of the changes. The Colorado Fiscal Institute (CFI) has a long-time partnership with the Institute of Taxation and Economic Policy (ITEP) and their estimate of the impact on state revenue is significantly smaller than the current amounts predicted by the Colorado Legislature and the Colorado Governor’s Office. This brief explains the various components of the ITEP estimate.
The rule and rate changes in the federal legislation will affect different tax payers differently. Current estimates suggest that Coloradans will pay $6.355 billion less in federal taxes for tax year 2018 due to the changes in tax rules included in the Tax Cuts and Jobs Act of 2018 (TCJA).
Each change in the federal bill affects Colorado taxpayers differently and the changes work in combination on individual tax forms to yield a net overall change per taxpayer. The data presented here combines the estimated individual effects into statewide impact. This analysis provides estimates of the state impact of the many of the individual changes. Finally, the analysis provides a net estimated effect on state collections of all the changes combined.
Elimination of Personal Exemption
The elimination of the personal exemption is estimated to increase state taxes by $861 million, with 83% of taxpayers seeing an increase in state taxes owed because of these changes. The top 20% of income earners in Colorado will pay 29% of the increased liability deriving from the elimination of the personal exemption.
Standard Deduction Increase and Changes to Itemized Deductions
The combined changes to the standard deductions would, if enacted alone, would decrease state collections by an estimated $533 million. The impact of these changes varies dramatically from taxpayer to taxpayer. Sixty-five percent of all taxpayers can expect a tax reduction and 16% can expect a tax increase.
New Deduction for Pass Through Income
The new 20% deduction for most “pass-through” income will result in state tax reductions of $223 million. Sixteen percent of Colorado taxpayers can expect a reduction with .02% experiencing an increase. Of the total tax reduction, 89% will accrue to the top 20% of income earners. Of those experience increases, 100% will be top 20% income earners.
COMBINED EFFECTS
The net effect is a $28 million increase in 2018 state revenue. Forty-five percent of Colorado taxpayers will see a reduction in their state tax bill. Twenty-seven percent of the reductions will be experienced by the top 20% of earners. Thirty-six percent of all Colorado taxpayers will experience an increased state tax liability. The top 20% of earners will pay 43% of the increased taxes.
