Perspective: Zero state income tax would save Coloradans money
Murrey is CQ After three years of increasing taxes and fees on Coloradans, Gov. Jared Polis has decided to make affordability his top priority as he faces reelection. If his rhetoric is sincere, he will follow his own advice and work to eliminate the state income tax. He already has a roadmap for how to do it.
Since the 2022 legislative session kicked off last month, Colorado Democrats have been singing in perfect harmony about how they will rescue Coloradans from the rising cost of living in this state by lowering taxes and slashing government fees.
“If there is one thing that you take away from today,” the governor tweeted from his personal twitter account following his state of the state address, “let it be my optimism for the days ahead, our commitment to Moving Colorado Forward by saving people money, improving affordability, and making our state a better place for everyone.”
The landing page for Colorado Senate Democrats places the same slogan from the governor’s tweet, “Move Colorado Forward,” front and center. The text below it begins, “Colorado Democrats are laser-focused on saving you money.”
They ripped this song directly out of the hymnal already well-worn from use by Colorado Republicans and right-leaning groups across the state. But Polis and his allies have decided to join the chorus, trying desperately to appear fiscally pious leading into this year’s November election.
Their proposals to save Coloradans money, however, would do very little to unbury the state from the mountain of new costs they have heaped on residents since the Democratic party seized unified control of state government in 2019.
The governor knows that. He also knows the best way to ease the financial burdens Coloradans increasingly face: Reduce the state income tax.
At the 2021 Steamboat Institute Freedom Conference in August, the moderator asked Gov. Polis what the state’s income tax rate should be. He didn’t miss a beat.
“It should be zero,” he said.
If Democrats are truly “laser-focused on saving you money,” they will hold the governor to his word. Abolishing the income tax would put an average of about $2,800 per year back into the pocket of every person in the workforce.
But since the start of his term, Polis has consistently increased taxes and fees rather than cutting them. And he and his party have repeatedly circumvented the state’s constitution to do so.
Democrats flout the Constitution
In a section commonly known as the Taxpayer’s Bill of Rights or “TABOR,” Colorado’s constitution requires voter approval for tax increases. The governor has obstinately thumbed his nose at the requirement.
In TABOR’s own language, the government “must have voter approval in advance for … any new tax, tax rate increase … or a tax policy change directly causing a net tax revenue gain.”
To a layman, this may sound relatively straightforward, but the state’s notoriously partisan supreme court has managed to carve out multiple exceptions to the rule. Most notably, the court has said that if legislators simply call taxes “fees,” they can disregard TABOR’s voter approval mandate.
This and other loopholes created by the courts have allowed Polis and his cronies to increase taxes and fees by billions of dollars over the past few years without asking voters.
The cost of living under Polis’ rule
Legislators first began exploiting these loopholes more than a decade ago with fees such as the Hospital Provider fee and the FASTER fee. In the past three years, however, Colorado Democrats have used these loopholes at an unprecedented level.
Even the left-leaning Denver Post last year observed, “(T)his session was full of examples of Democrats trying to creatively overcome TABOR.”
They’re right. In the 2021 legislative session alone, the governor signed into law over $5 billion in new taxes and fees — all without voter consent. Those bills will take more than $600 million out of taxpayers’ pockets in the first year alone.
The so-called infrastructure bill, for example, will generate nearly $4 billion in new taxes over the next decade.
The bill included $2 billion in gas and diesel fees. Voters rejected a 2018 ballot measure to increase the gas tax, so Democrat legislators knew a gas tax increase would likely fail at the ballot again. To avoid repeating voters’ rebuff, legislators called the taxes “fees” so that it never appeared on the ballot after passing through the Legislature. To make matters worse, the Legislature indexed the fees to inflation, so they will continue to increase indefinitely as the cost of living goes up.
The bill also created brand new fees on food delivery and ride-sharing services like Uber and Lyft, amongst other things. Polis signed it with fanfare from fellow Democrats.
An astute reader may recall that voters passed Proposition 117, commonly known as the “Vote on Fees” initiative, in 2020 to prevent these shenanigans. Undeterred by the express will of the people, Democrats simply found new, creative ways to levy taxes and fees without voter consent, circumventing the recently passed measure.
House Bill 21-1105 raised fees on certain electric and gas consumers, costing them $27 million in the forthcoming fiscal year alone. HB 21-1208 creates a new enterprise funded by fees on insurance companies. It will generate over $4 million in new revenue per year, the cost of which homeowners will likely pay via increased premiums.
Polis and his allies directed several assaults on affordability at Colorado businesses, too. In a series of bills passed in 2020 and 2021, Colorado Democrats stripped businesses of certain tax benefits originally granted by Congress as part of the bipartisan CARES Act. The provisions were intended to help businesses stay afloat during mandatory lock downs imposed by Polis and other governors across the country.
When unemployment claims skyrocketed during the lockdowns, the state’s Unemployment Insurance Trust Fund went $900 million in debt. The federal government has sent Colorado $65 billion to address these kinds of pandemic-related challenges. Nonetheless, Democrats on the Joint Budget Committee are currently squabbling with the governor over exactly how much of that debt to pass on to Colorado businesses.
Moreover, Colorado businesses and their employees face billions of dollars in new payroll taxes thanks to the 2020 mandatory paid family leave law championed by Colorado Democrats.
Don’t fret! Polis now assures us. Relief is on the way.
Polis proposes paltry penance
This year, the Polis administration will waive the government fees required to start a new business in the Centennial State. And the new gas taxes — he wants to delay them, conveniently until after the November election.
Democrats have proposed several other measures to demonstrate their newfound fiscal conservatism. Altogether their proposals recompense only a small portion of the new costs foisted on individuals, families, and businesses across the state.
Senate Democrats’ 2022 agenda states that they want to “cut fees for small businesses as well as driver’s licenses, vehicle registration, professional licenses for nurses and teachers, and other items.”
As a consolation for the billions in new fees created by last year’s transportation bill, for example, Democrats decreased vehicle registration fees by $11.10 this year and $5.55 next year.
A couple glaring problems stand out with this approach to saving Coloradans’ money.
First, the savings our leaders have offered pale in comparison with the costs they imposed. Gov. Polis reached into your pocket and took $10. He now wants you to believe that he’s doing you a favor by returning ten cents.
Second, their proposed reforms do nothing to prevent government from reinstating the suspended fees after the election.
Reducing the state income tax would solve both problems.
How to save Coloradans money
To the first point, reducing the state income tax is the easiest and most straightforward way to offset all the new costs inflicted on Coloradans in recent years. More importantly, this approach would prevent politicians from unilaterally piling the costs back on after their reelection.
The state constitution allows the government to reduce the income tax rate without putting the change on the ballot. Legislators can likewise reduce, suspend, or eliminate fees without a ballot question. Herein lies the difference: Lawmakers can reimpose fees without voter consent; they lack the authority to increase the income tax rate without voter approval.
If legislators reduce fees this year to win votes, that provides voters with no assurances that those fees will remain suspended after the election. By supporting an income tax reduction, Democrats can assure voters that the new savings will remain until voters choose via ballot referendum to give them up.
The people of Colorado have already begun to blaze the trail.
In 2020, voters approved a ballot measure, which reduced the state income tax from 4.63 to 4.55%. That saved taxpayers over $200 million last year and received praise from Gov. Polis in this year’s state of the state address.
Last year, another citizen’s initiative gathered enough signatures to put an income tax rate reduction on the ballot again this November. If approved by voters, Initiative 31 would reduce the rate to 4.40%.
With all the praise Polis has given the 2020 tax cut, voters should expect his enthusiastic endorsement for this year’s initiative, also. Still, the measure falls long short of eliminating the income tax entirely, as the governor proposed.
Fortunately, Independence Institute came up with a way to continue reducing the tax rate over time:
1) Require the state to issue all future TABOR refunds through income-tax reductions and 2) Make any new income-tax rate created by these reductions permanent.
These reforms would put the journey to no income tax on autopilot. Rather than requiring new legislation or ballot measures for each additional rate reduction, this would create an automatic trigger for reducing the income tax.
The policy would also prevent any surprises for appropriators that can come when voters reduce taxes from one year to the next. The rate reductions would kick in when the state issues refunds. This will never cause the state to collect less revenue than expected. Revenue forecasts would give appropriators several years of forewarning that tax collections will exceed the TABOR limit and lead to a permanent rate reduction in future years.
The Colorado Republican caucus has introduced two pieces of legislation to accomplish exactly what we have proposed.
In addition to filing Initiative 31 with Jon Caldara — which voters will have a chance to approve this November — Sen. Sonnenberg has introduced legislation to reduce the income tax rate from 4.55 to 4.40%. He also introduced a bill to automatically ratchet the income tax rate down during times of government excess.
The rate reduction would save taxpayers $900 million in just two years — enough to offset about half of the gas tax increase. The second proposal’s ratchet-down mechanism would save Coloradans even more over time, and the savings would begin this year.
Legislative Council Staff forecasts billions of dollars in state revenue surpluses over at least the next three years. If the suggested reforms were in place now, taxpayers would continue to receive refunds from those overflows, but they would also see permanent income tax rate reductions moving forward.
Time for Polis to follow through
Gov. Polis spent about a third of his state of the union address this year talking about affordability, at one point even emphasizing, “If it isn’t clear, saving Coloradans money and keeping our state affordable is my top priority this session.”
But talk is cheap.
If Polis wants to save us money, he should demand that his caucus send legislation to his desk this session to immediately reduce the state income tax. He should push for additional legislation with a mechanism to ratchet the rate down further whenever the state experiences a surplus.
Independence Institute has already marked out the path to zero income tax. Colorado Republicans have paved that path with viable legislation. Polis and the Democrats need only to walk down it.
Ben Murrey serves as Independence Institute’s Director of Fiscal Policy, working to promote fiscal responsibility in Colorado government and to defend the Taxpayer’s Bill of Rights in the state’s constitution.
Gov. Jared Polis talks to members of the media in his office during a news conference after his State of the State address last month at the Capitol in Denver.