Proposition 116 Benefits Wealthiest Coloradans Most
By Chris Stiffler and Elliot Goldbaum
The real cost of an income tax cut
This November, Colorado voters will consider whether or not to lower Colorado’s income tax from 4.63% to 4.55%. Before you get your ballot, it’s important to understand who will benefit the most from Proposition 116, and why a tax cut will result in big cuts to critical community services.
First, a little background on Colorado income taxes.
Colorado is constitutionally required under TABOR to tax income at a single rate – meaning a family earning the state’s median annual income of $70,000 pays the same rate as someone earning an annual income of $500,000 (the threshold for the wealthiest 1%).
Because of this requirement, any statutory increase or reduction in the income tax rate can’t be targeted to benefit or protect low- and middle-income families.
In fact, since Colorado’s tax code is tied to federal deductions and exemptions, and because people who earn low and middle incomes pay more of their income in sales and other types of taxes, any income tax cut puts an outsized share of the money into the pockets of those with the most.
Meanwhile, even though the coronavirus pandemic has hit them especially hard, Proposition 116 won’t do much for low- and middle-income workers and their families.
What it will hit hard is funding for our state’s public services. If voters pass Proposition 116, it will have immediate effects on many priorities in the state budget. The measure will reduce state revenue by $158 million in the first year alone.
Because income taxes are the largest revenue source for the General Fund – the part of the state budget responsible for funding K-12 schools, Medicaid, state colleges and universities, courts, prisons, and human services like child welfare and behavioral health – any reduction in the income tax rate directly affects those services.
Here’s a practical example of what happened to education funding when last time we cut taxes: In the late 1990s, Colorado’s income tax rate was 5.0%. When lawmakers cut the income tax rate in 1999 and 2000 to the final rate of 4.63%, it directly affected funding for public services. Colorado’s investments in K-12 education, higher education, and other public services have fallen behind when taking inflation and population growth into account.
The wealthiest see the greatest reduction in taxes
Proposition 116 won’t just result in cuts to important services, it will flow disproportionately to the richest Coloradans. As you can see in the chart below, Proposition 116 will effectively take millions of dollars for education and health care and put more than two-thirds of it into the pockets of those who make more than $100,000 a year.
Contrary to claims from proponents of Proposition 116, it would provide little “relief” to Coloradans hit hardest by the coronavirus pandemic. Our analysis shows the richest 1% would see the amount they pay in taxes fall by a greater amount than the dollar amount of the reduction for the bottom 70 percent of taxpayers.
One in four Coloradans won’t pay any less in taxes
An income tax cut also leaves out many Coloradans altogether. Because a portion of Colorado taxpayers have higher deductions than taxable income (and thus zero income tax liability), an income tax rate reduction has no effect on 25 percent of Colorado taxpayers. Of those 672,000 taxpayers with no income tax liability, more than half have incomes below $25,000, and 80 percent of them make less than $46,000.
And how much would those who do stand to pay less in taxes get to keep? As you can see in the chart below, not much. For someone with an adjusted gross income (AGI) of $60,000, Proposition 116 would be enough for a tank of gas. For someone with an AGI of $25,000, it would buy you a vanilla latte. A millionaire will get $725.
For someone who makes $5,000,000, on the other hand, that’s a nice chunk of change.
The wealthy already pay a smaller percentage of their income in taxes
Regardless of whether voters approve Proposition 116, Colorado’s tax code is unfair and upside down. That’s because sales and property taxes take up a bigger share of income for people who work low- and middle-wage jobs compared to wealthier people.
The sales tax is the biggest culprit. A household making $32,000 a year pays 5.0% of their income in sales tax, whereas a millionaire pays sales taxes totaling less than 1% of their income. Coloradans earning low incomes also pay a higher rate of their income in property taxes compared to wealthier households. Overall, people in households earning $32,000 pay 9 percent of their annual income in state and local taxes. Compare that to households earning $400,000 a year, who pay around 6.5% percent of their incomes in state and local taxes.
If that wasn’t enough, because high-wage earners are disproportionately white and workers who are Black, Indigenous, and people of color disproportionately work low- and middle-wage jobs, income tax cuts like Proposition 116 worsen our already racially inequitable tax code.
During a time when hundreds of thousands of Coloradans are unemployed, seeing their hours reduced, or dropping out of the workforce altogether to care for their families, many of us relying on the public services that income taxes fund more than ever.
Proposition 116 worsens our already unfair tax code, takes funding away from critical services, and gives an outsized share of the money in reduced taxes to the wealthiest 1% of Coloradans.
Voters should carefully consider the costs of this irresponsible tax cut before they turn in their ballots.
