Proposition 121: Colorado state income tax cut

Kevin J. Beaty/Denverite
A view of the Colorado Capitol from Denver Public Library’s central library, Dec. 23, 2021.

This ballot measure would reduce the state income tax rate. The permanent rate would be reduced from 4.55 percent of income to 4.40 percent of income.

In other words, if you currently make $100,000 in taxable income, your bill would shrink from $4,550 to $4,400 — a reduction of about 3 percent.

Here’s the language you’ll see on your ballot:

Shall there be a change to the Colorado Revised Statutes reducing the state income tax rate from 4.55% to 4.40%?

How would it work?

Colorado has a flat income tax rate, meaning no matter how much or how little a person earns, all state residents are taxed at the same rate. The permanent tax rate is currently set at 4.55%.  If Proposition 121 passes, income taxes would be reduced for individuals and corporations in Colorado. 

The average taxpayer, with an income of about $79,000, would save about $119. But the savings would be much greater for the state’s wealthiest people.

For example, someone making a million dollars would save $1,500 in taxes. In all, about half of the savings will go to people who make more than a million dollars a year, who represent less than 1 percent of the taxpaying population, according to state analysts.

But supporters also argue that lower tax rates can have secondary positive effects, such as boosting the overall economy.

In the upcoming fiscal year, the measure would reduce state income tax collections by about $413 million, out of more than $13 billion in individual and corporate income taxes being collected each year.

The income tax rate in Colorado has gradually declined since the late 1980s, when it was set at 5 percent. Most recently, voters approved a slightly smaller reduction in 2020. The state income tax also has been temporarily lowered due to TABOR limits on government revenues.

The change wouldn’t necessarily save taxpayers any money in the short term. Voters are set to get a discount on taxes for several years to come via TABOR refunds. But a lower income tax rate would lower tax obligations permanently, guaranteeing lower taxes even in years when refunds aren’t paid. 

The cut’s effects could become more apparent in future years, if the economy is weaker and the state isn’t exceeding its revenue limits. In those years, a tax cut would mean the government ultimately collects less money.

For a bit of history: Colorado has a flat income tax rate, meaning everyone pays the same percentage of their income. Before 1987, the state had graduated rates, meaning that wealthier people paid higher tax rates.

Estimated impact of Proposition 121 on individual income taxpayers, by income bracket, for state budget year 2023-’24

Income bracketEstimated number of taxpayersCumulative change in taxes owedChange in taxes owed for average taxpayer
$14,999 or less1,198,693-$4.3 million-$7
$15,000 to $29,999477,377-$11.2 million-$23
$30,000 to $39,999247,465-$9.1 million-$37
$40,000 to $49,999197,402-$9.4 million-$47
$50,000 to $69,999285,180-$17.9 million-$63
$70,000 to $79,999267,148-$23.7 million-$89
$100,000 to $149,999227,416-$29.3 million-$129
$150,000 to $199,999106,782-$19.5 million-$182
$200,000 to $249,99956,750$13.4 million-$236
$250,000 to $499,99989,206$32.1 million-$360
$500,000 to $999,99933,309-$24.1 million-$725
$1,000,000 or more29,109-$188.3 million-$6,647
Total3,215,835-$382.3 million-$119

Who’s for it?

The campaign’s organizers include Jon Caldara, president of the libertarian Independence Institute, and Republican state Sen. Jerry Sonnenberg.

“We need to keep business here. We don’t want to turn into California, where our most productive people and businesses are fleeing for lower-tax states,” Caldara said in an interview last year.

Supporters have banded together under the campaign Path 2 Zero, which aims to eliminate the state income tax altogether. They argue that an income tax penalizes productivity.

“People generate income by investing, working, and being productive. … (Higher income taxes) yield less of the very activity required to grow our economy, create jobs, and make everyone better off,” the Path 2 Zero website argues.

Supporters also argue that since the state is running surpluses, it’s a good time to cut the rate. Both the Democratic and Republican candidates for governor agree, in principle, with reducing the income tax rate.

“I think that penalizing income is not good. I've talked about, can we replace it with a pollution tax or more of a carbon tax mechanism to reduce the income tax to zero,” said Democratic Gov. Jared Polis, though he stressed that any cuts should be replaced with new revenue from somewhere else.

Republican challenger Heidi Ganahl said she would try to take the income tax to zero if elected.

“Jared Polis and I actually agree… that zero income tax would be a great incentive for people in Colorado and for businesses and companies to move here and set up shop here,” she said. 

But unlike Polis, Ganahl said she doesn’t want to add other new fees or taxes to offset the loss of revenue. Instead, she suggested the state could reduce its expenses by cleaning up fraud and waste.

Who’s against it?

Progressives and many Democrats have argued against more cuts, saying the state needs money for the challenges it already faces in transportation, schools and more.

“When we hit the first recession, we’ll be taking in less money,” said Scott Wasserman, president of the progressive Bell Policy Center, in an earlier interview. “This will impact K-12 education, health and human services, corrections, higher education, public safety, you name it.”

He and others have argued that an income tax cut would disproportionately benefit wealthy people, who could receive many times the benefit that poor people do. And opponents argue that the economy is too shaky right now to risk a tax cut.

“If a recession occurs, the measure will likely reduce the amount of money available for the state budget, making it harder for the state to respond to economic challenges and provide critical services to those most impacted. Now is not the time to weaken the state’s safety net,” read opposition arguments published in the state’s Blue Book ballot analysis.

Further coverage

Another income tax cut for Colorado in 2022? Maybe — and it could cost the state budget $400 million