Colorado could expand low-income tax credit while shrinking TABOR refunds

Kevin J. Beaty/Denverite
At least two Colorado state flags fly over the State Capitol on Friday, Aug. 14, 2020.

A bill proposed by Colorado Democrats during the special session would offer nearly $200 million of tax benefits for more than 400,000 lower-income Colorado taxpayers.

The measure, which appears likely to pass in the coming days, would expand the state’s Earned Income Tax Credit, with the potential to provide hundreds — or thousands — more dollars to eligible households. 

“The only way you can get the credit is if you work. So it is a federal and state tax credit that puts money back in the pockets of working families,” said Sen. Rhonda Fields, a Democratic sponsor of the bill.

But the change would also reduce the size of next year’s TABOR refund payments that go to all taxpayers, drawing criticism from conservatives. Next year’s refunds may shrink by about $50 per taxpayer.

HB23B-1002 is under consideration in the special legislative session that is playing out this weekend. The session is largely focused on property taxes, but Democrats have added several policies to benefit lower-income Coloradans who are less likely to own homes.

The state’s Earned Income Tax Credit is based on a federal credit by the same name. Currently, the state’s EITC equals a quarter of the federal credit a household receives. Under the current proposal, the state match would double to 50 percent for the current tax year.

Paying for the expanded tax credit would cost the state just more than $180 million, which would come from the $3.5 billion TABOR surplus that the state expects to pay in refunds.  Sen. Chris Kolker, a sponsor, argued the move would ensure that lower-income renters also get help from the special session.

“These renters are getting hit hard, and this affects them too,” said Kolker, a Democrat.

Republicans have criticized the measure, largely because of its effect on refund payments. They framed that change as a taking that would hurt a wide range of people. And they pointed to the failure of Prop. HH as evidence that Colordans want to keep TABOR refunds as they are.

“Of course we want to help the low-income families,” said Rep. Gabe Evans, a Republican from Fort Lupton. “So let’s give them clean taxpayer relief, let’s give them clean tax cuts instead of picking winners and losers, taking money from folks who are by no means rich.”

It would not be the first time that TABOR surplus money has been used to fund this credit — that’s happened four times in the past, including under Republican rule, before it became a permanent credit. 

But it would be the second significant change to TABOR refunds to come out of this year’s special session. Democrats also are proposing to “flatten” TABOR refunds, paying everyone the same refund regardless of their income and tax burden.

If the “flat refunds” change passed alone, all taxpayers would get about $850. The expansion of EITC would reduce those “flat” refunds to about $800. 

With the two changes combined, any household making less than $104,000 would ultimately still come out with larger refunds. That’s just more than half of all Colorado taxpayers. Some would only see a slight increase, while others could see hundreds of dollars more, plus any benefits they get from the EITC change.

Meanwhile, those households making more than $104,000 could lose anywhere from $100 to more than $2,000, depending on their income, when all the new laws’ effects are combined.

How much the expanded EITC would be worth:

The value of the credit is based on a person’s income and the number of dependents they support. The credit is larger for people with more children. And it is largest for people in the middle of the income range — so, someone making $20,000 will generally get a larger credit than those with higher or lower incomes.

Number of childrenMaximum income (single or head of household filer)Maximum state EITC value for tax year 2023 (current law)Maximum state EITC value for tax year 2023 (proposed)
3 or more$56,838$1,858$3,716
Source: NerdWallet data on federal EITC and CPR News analysis. “Income” refers to adjusted gross income (AGI). Income limits will differ for married joint filers.

The EITC is refundable, meaning taxpayers can receive the credit in cash, rather than as a discount on their taxes. The state version of the benefit is also available to taxpayers who have an Individual Taxpayer Identification Number, or ITIN, which people who aren’t citizens can use to pay their taxes.

“You can have folks who aren’t even citizens of the country getting more money out of the system than was originally paid into the system,” Evans said.

But supporters described the credit as a crucial lifeline. At a Saturday committee hearing, one witness said her EITC payment saved her from eviction after she and her children escaped domestic abuse.

The Tax Foundation describes the federal EITC as “an effective anti-poverty program,” saying that it keeps millions of children nationwide above the poverty line. It “promotes workforce participation, at least among select groups,” because of the way it scales up with income. But it can also become a disincentive as workers start earning enough for it to phase out, according to the nonprofit.

The federal EITC was established under Republican President Gerald Ford and subsequently expanded by presidents of both parties, including Ronald Reagan.

Colorado lawmakers have moved to expand the state credit in recent years. In 2021, it was only worth 15 percent of the federal credit. Earlier this year, some Republicans supported the eventual expansion of the match to 38 percent, which indirectly reduced TABOR refunds by reducing state revenues.

The current measure is also sponsored by Reps. Mary Young and Jenny Willford, both Democrats. It passed out of the state House on Saturday and is now in the state Senate.

Editor’s note: This article was updated on Nov. 19, 2023 to clarify the TABOR effect of the earlier EITC expansion.