Democrats in Colorado are attempting one of the biggest changes to the state’s tax code in years.
Two new proposals introduced Monday are meant to deliver relief for lower-income families and small businesses by effectively raising the taxes of certain large businesses and wealthier people, lawmakers said.
The bills would raise about $400 million a year by eliminating or reducing some of the tax deductions taken by higher-income taxpayers and businesses, and then spend most of that money — about $250 million — on measures aimed at helping lower-income families and small businesses.
“I think the word ‘fairness’ is my North Star here — ensuring that we are supporting our low-and middle-income Coloradans and small businesses, and not protecting the special interests walking the halls of the Capitol,” said state Rep. Emily Sirota, who is cosponsoring the new bills, HB 1311 and HB 1312, with state Rep. Mike Weissman and senators Chris Hansen and Dominick Moreno.
The plan has the support of Gov. Jared Polis, whose spokesperson, Shelby Wieman, described it as “an important step toward much needed relief” for the families and small businesses that were hit hard by the pandemic.
Taxes have long been a difficult question for Democratic lawmakers, who generally support bringing in more revenue to accomplish their policy goals. The Taxpayer’s Bill of Rights, or TABOR, says that lawmakers can’t raise taxes without voters’ permission. And the law also locked the state into a “flat” income tax rate, making it difficult for Democrats to deliver on their promises of taxing the rich.
The new bills attempt to avoid those limits. Weissman said that the changes would not require voter approval, even though they would bring in new tax revenues. Instead of changing tax rates, the bills focus on altering definitions and removing deductions. Courts have ruled that lawmakers can change deductions, credits and so-called loopholes without violating TABOR.
The changes were inspired, Weissman said, by policies in other states — and by the pandemic. Last year, lawmakers passed a similar package of tax credits and changes, some temporary, as they tried to offset cratering sales and income tax revenues because of the shutdown.
The economy and the state budget are faring much better now. But the sponsors said the bills would provide crucial support to small businesses and people with lower incomes, who have seen a much slower recovery.
“By making some changes here that we believe have a solid foundation in research, in the practices of the states, we can have a more fair, we can have a moral tax code,” Weissman said. “We can do a better job of fostering opportunity for everyone in our state.”
Polis highlighted several of the ideas in this package in his annual address earlier this year, including an increase to the state’s Earned Income Tax Credit and the creation of a state Child Tax Credit.
“From the start of my administration, we have worked together to make Colorado’s tax code more fair by getting rid of special interest tax breaks that benefit the few, and using those savings to lower taxes for the rest of us,” he said.
The governor also expressed support for the slight reduction in income taxes that voters approved last year. Other Democrats didn’t like that change, saying it took away needed money, but Polis said that both the tax cut and his own proposals would deliver tax relief.
“It’s hard to really gauge, when it comes to Gov. Polis, which side of the tax debate he’s going to fall on in any case. Sometimes he’s on both,” said conservative organizer Michael Fields, who helped pass the tax cut.
Fields said that the new tax package included some things he could support, especially the idea of focusing on lower-income and middle-income people. But he argued that Democrats may set off unintended consequences by eliminating some tax benefits, such as businesses cutting jobs or relocating.
Republican leaders in the legislature weren’t immediately available for comment on Monday. The bills may rank among the state’s biggest tax changes in years, if they pass. In 2010, amid the Great Recession, Democrats eliminated a series of tax exemptions worth about $118 million, despite unanimous Republican opposition.
Meanwhile, voters may have a chance to approve some tax changes later this year, too. Fields and his organization, Colorado Rising Action, are gathering signatures to put two measures on the November ballot. One would effectively cut property tax bills by 9 percent, or about $1 billion — partially canceling out the increases many are seeing due to their rising property values.
Here are some of the biggest new annual spending items
These would reduce government revenues by giving it to people and businesses:
- $104 million: Create and eventually expand a state Child Tax Credit. This credit would pay up to $600 for each child under the age of 5. It would go to families with joint incomes under $85,000. (Single parents could make up to $75,000.) This credit would be “refundable,” meaning that people who don’t have state tax obligations would simply receive a check from the government in that amount.
- $48 million: Expand the state version of the federal Earned Income Tax Credit. The EITC is a refundable federal credit for people making less than about $60,000, depending on how many children they have. Currently, the state of Colorado chips in an extra refund worth 10 percent of the federal credit. The new bill would raise that to 20 percent, and it would expand eligibility for both younger and older people.
- $71 million: Exempt more businesses from paying business personal property taxes, which are annual taxes based on the value of assets such as computers and furniture. Right now, businesses with less than $8,000 of stuff are exempted. The bill would raise that cap to $50,000 worth of businesses assets, and it would compensate local governments that lose revenues as a result.
- Other items include $10 million to create new tax incentives for employee-owned businesses and $18 million to allow retirees to deduct their full social security benefits from their taxes. The bills would send an additional $150 million to the general fund, which can be used for general state expenses.
Here’s where the package would find the money to pay for its proposals
- $111 million: For people making more than $400,000, cap itemized deductions at $30,000 for individuals and $60,000 for couples. Itemized deductions allow people to reduce the taxes they pay by subtracting certain expenses — such as mortgage interest and medical expenses — from their income.
- $50 million: Eliminate the state portion of the “pass-through” deduction for certain business owners. Basically, the 2017 federal tax law allowed certain business owners to chop off about 20 percent of their personal tax bills. Last year, state lawmakers said that discount should no longer apply to Colorado taxes. The new bill would make that change permanent. (It would exempt people making less than $500,000 — or $1,000,000 jointly — allowing them to keep taking the deduction.)
- $20 million: Eliminate the capital gains deduction. Currently, Colorado taxpayers can be exempted from paying state taxes on capital gains in some cases. That deduction would be eliminated, forcing more people to pay state taxes when they sell assets like land, stock and businesses, in addition to federal taxes.
- Other changes: Cap deductions for contributions to 529 college-savings plans at $15,000 for joint filers.
- $80 million: Make it tougher for insurance companies to claim a major deduction on their business taxes. The original deduction rewards companies with offices in Colorado, but the sponsors say that it has done little to encourage job growth.
- $40 million: Eliminate a “loophole” that allowed insurance companies to pay lower taxes on their sales of annuities, compared to financial institutions.
- $25 million: “Clarify” the deductions that oil and gas companies can take on certain costs.
- $17 million: Limit the use of a discount, known as the “vendor fee,” for retailers that do more than $1 million in monthly sales. This is basically money the state remits back to businesses to cover the hassle of collecting sales taxes.
- Other changes: Change the way Colorado taxes multi-state businesses, stop companies from using off-shore tax havens, change how businesses can deduct expenses for meals; and codify how tax assessors put values on business personal property tax.
Editor's note: This article was updated to correct a description of state capital gains taxes.
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