Why Democrats are combining a $700 million child tax credit with a $450 million income tax cut

Kevin J. Beaty/Denverite
The Colorado State Capitol building, seen from atop the downtown Sheraton hotel. Dec. 29, 2023.

Colorado Democrats say they have reached a billion-dollar tax deal that combines the priorities of progressive lawmakers and Gov. Jared Polis. 

The plan will offer significant new tax credits for low-income families, while also cutting income taxes across the board. The package could benefit both low-income and wealthy Coloradans, but it also would shrink TABOR refunds.

The state’s lower-income families could get annual tax credits worth anywhere from a couple hundred dollars to more than $3,000 per child for the poorest households. The new “family affordability tax credit” would pay out an estimated $700 million per year or more.

“We believe that by prioritizing kids in a policy like this, we're going to be able to make a big difference in their lives,” said Rep. Chris deGruy Kennedy, a Democratic architect of the deal.

Meanwhile, the proposal would also include an across-the-board cut to income taxes.

It would reduce the state’s income tax rate, from 4.4 percent to as low as 4.25 percent — which could save taxpayers about $450 million for taxes paid next April. Because Colorado has a flat tax rate, much of the savings would go to higher-income households who have larger tax bills. (The rate could float back up in future years, depending on the economy.)

Next year’s income tax cut would be worth $150 for a family making $100,000, or $1,500 for a family making $1 million. The income tax was previously reduced by conservative-backed ballot measures in 2020 and 2022.

The package also would include a statewide sales tax cut that only kicks in when the state’s economy is especially strong.

The overall tax proposal — playing out across multiple bills — was a political compromise, according to deGruy Kennedy. He and other left-leaning Democrats want to see a substantial expansion of the state’s tax benefits for poor children.

Meanwhile, in his State of the State speech this year, Polis said he would support combining a tax cut with progressive tax reforms.

“I know some Democrats in the past have been skeptical of reducing our income tax rate, but cutting the income tax rate is the most effective way to further our economic growth,” he said.

Taken together, the changes would significantly reduce the pool of money that is available for TABOR refunds. So, while many households will see gains from the tax credits and tax rate cut, they’ll also receive smaller refund checks from the state.

It’s hard to immediately sort out how the complex package would benefit different households. But the people least likely to benefit are those whose income is too high to qualify for expanded tax credits, but not high enough to gain a large benefit from the income tax cut.

“I'm not going to try to make it sound like everything we do here is a win-win-win-win-win. This is a question of priorities.  We know that we have been failing Colorado kids in a variety of ways for a long time,” deGruy Kennedy said.

The package also would make changes to how the remaining refunds are distributed. In years with lower surpluses, all taxpayers would receive an identical refund of about $200. But in higher surplus years, the usual “tiered” refund model would return, with bigger refunds for higher-income taxpayers.

The proposed child tax credit is similar to the federal child tax credit, and it revives a state credit that was previously offered in 2022. 

It would be worth up to $3,200 per child, per family, for the youngest children in the poorest families. But it would gradually scale down at higher income levels, ultimately zeroing out around $85,000 for joint filers, according to a recent fiscal note.

The legislature also is working on a temporary expansion of the state’s Earned Income Tax Credit that has moved forward in recent days.

Many of the tax proposals in the package are conditional — growing, shrinking, and changing depending on the size of the state’s TABOR surplus to limit impacts on the state budget during a recession.

One part of the package — the one that cuts the income tax rate — has Republican support. "This legislation will keep more money in taxpayers pockets instead of forcing them to wait for the government to issue refunds," said Republican House Minority Leader Rose Pugliese, a cosponsor of the tax-cut portion of the package, in a written statement.

However many Republicans are unlikely to support expanded tax benefits for low-income families.

In a statement, the governor’s office expressed support for the proposals.

“The Governor is optimistic that the legislature will deliver a meaningful income and sales tax cut that will help our economy grow and keep more money in families' pockets,” wrote spokesperson Shelby Wieman. 

Polis’ office also praised the proposed child tax credits, saying they would “lift tens of thousands of Colorado kids and Colorado families out of poverty, and build on the state’s work to deliver meaningful savings to Colorado families in a fiscally responsible way.”

The bills have just over a week to clear the legislature before the session ends on May 8 — meaning lawmakers face a fast-paced and complex debate in the days ahead.

This is a developing story. This article aims to explain the initial details disclosed by lawmakers and will be followed by future coverage of the specifics of the bill and reactions to it.