Many Colorado families will find themselves paying hundreds of dollars more when they file state income taxes this year. My wife and I will pay almost $800 more. To put that in context, this amount is the high end of our grocery budget (including pet food) for one month for our family of seven. This tax increase does not reflect any increases in business activity or incomes, nor did Coloradans get to vote on it. Rather it is solely a result of federal changes under the Trump tax plan.
Estimates of the annual windfall to the state from this tax hike from former Governor Hickenlooper’s office range from $270 million to $340 million. To ease this new burden on families, the Colorado legislature should consider implementing what’s known as a Universal Charitable Credit.
This tax increase came about because Colorado is one of 17 states that uses federal taxable income as the basis for determining taxpayers’ state taxable income. Steve Malanga, author of the book Shakedown: The Continuing Conspiracy Against the American Taxpayer, points out, “Without changes, many states will see a boost in their own tax revenues because of how local tax codes are pegged to the federal code.”
In 1987 Colorado reverted from using federal adjusted gross income to federal taxable income. This created essentially a floor for taxpayers at which income is shielded from Colorado state income taxes. The following table shows how the amount of income shielded changes in 2019.
|Married Filing Jointly Family of…||2017 Federal Tax Law||2019 Federal Tax Law||2019 over 2017 CO Tax Bill Increase|
|Income Shielded||Income shielded|
|2||$ 20,800.00||$ 24,400.00||$ (166.68)|
|3||$ 24,850.00||$ 24,400.00||$ 20.84|
|4||$ 28,900.00||$ 24,400.00||$ 208.35|
|5||$ 32,950.00||$ 24,400.00||$ 395.87|
|6||$ 37,000.00||$ 24,400.00||$ 583.38|
|7||$ 41,050.00||$ 24,400.00||$ 770.90|
|8||$ 45,100.00||$ 24,400.00||$ 958.41|
|9||$ 49,150.00||$ 24,400.00||$ 1,145.93|
|10||$ 53,200.00||$ 24,400.00||$ 1,333.44|
As you can see, for taxpayers like myself and others who welcomed an additional child this past year, we will owe many hundreds of dollars more per year in state income taxes, simply because of this critical change in the Trump tax plan. Below is another illustration of this radical tax increase using the Colorado median family income amount for 2017 ($84,918). This table shows that the federal standard deduction is taken. These estimates are solely related to the CO income tax bill, no others.
|Married Filing Jointly Family of…||2017 Estimated Tax Bill||Effective Income Tax Rate (Old)||2019 Estimated Tax Bill||Effective Income Tax Rate (New)|
|2||$ 2,969.00||3.50%||$ 2,802.00||3.30%|
|3||$ 2,782.00||3.28%||$ 2,802.00||3.30%|
|4||$ 2,594.00||3.05%||$ 2,802.00||3.30%|
|5||$ 2,407.00||2.83%||$ 2,802.00||3.30%|
|6||$ 2,219.00||2.61%||$ 2,802.00||3.30%|
|7||$ 2,032.00||2.39%||$ 2,802.00||3.30%|
|8||$ 1,844.00||2.17%||$ 2,802.00||3.30%|
|9||$ 1,657.00||1.95%||$ 2,802.00||3.30%|
|10||$ 1,469.00||1.73%||$ 2,802.00||3.30%|
As can be clearly seen, there is a permanent increase in the effective tax rate in Colorado for families with children. All families with children will experience this increase in their effective tax rate. The larger their family size, the more taxes they will owe.
So what is the best way for legislators to move forward in addressing this issue? Let’s consider how some other states have addressed this question. Georgia, South Carolina, Iowa and Maine updated their tax codes last year in anticipation of the federal tax changes, protecting their taxpayers from higher state taxes. Georgia made tax code changes that not only eliminated the windfall the state would have received, but also cut taxes by an additional $516 million over five years. Other states have addressed this problem effectively, but their solutions made their tax codes significantly more complicated. Changing Colorado’s state income tax code in ways that would make it more complicated does not help taxpayers.
Governor Polis has suggested a tax cut to reduce the state income tax rate from 4.63% to about 4.49%. His changes would likely be “revenue neutral,” meaning the elimination of tax giveaways and loopholes. But this does not address the fact that the effective tax rate has increased for people with more children.
The best solution should be rooted in protecting taxpayers from this higher tax burden while positively impacting Colorado communities. It would also need adequate support from voters. The right answer is a Universal Charitable Credit (UCC). A nonpartisan, nonprofit organization called “We Do Better” already exists to undertake the vital task of educating and promoting the ideas behind this type of tax change. It follows the example of the Arizona Charitable Credit in advocating for other states to adopt this policy. This credit has a 20-year record of success and actively protects taxpayers by limiting the state’s explicit tax revenue.
The Arizona version of a UCC works as follows: State income tax filers can take a nonrefundable tax credit for voluntary cash contributions to either a qualifying charitable organization (QCO) or a qualified foster care charitable organization (QFCO). For contributions towards a QCO, married couples filing jointly may take a credit of up to $800, while all other filers can take a credit of no more than $400. If a single tax filer only donates $200 then they can only take a credit of $200, and so on. For donations to a QFCO, a $500 credit is available to those filing individually and a $1000 credit is available to married couples that file jointly, according to “We Do Better”.
Arizona taxpayers have the option of taking advantage of both credits, if it doesn’t result in a net refund to the taxpayer. Essentially, a taxpayer cannot generate a profit from donating to these organizations. However, if the credit would result in a net refund, a tax filer may still carry forward unused amounts for up to five years.
A UCC is different than the charitable tax deductions that many taxpayers are familiar with when filing federal income taxes. It is a dollar-for-dollar reduction in a taxpayer’s liability (bill). If a family of four making the Colorado median family income of $84,918 were to have the ability to take advantage of a similar UCC, then their estimated tax liability would be reduced from $2,802 to $2,002, simply by voluntarily contributing $800 to a QCO.
According to the “We Do Better” site, a qualifying charitable organization in Arizona is defined as: “a 501(c)(3) that spends at least 50% of its budget on services to Arizona residents who receive TANF [Temporary Assistance for Needy Families] benefits or low-income residents of this state and their households. Low-income individuals is defined as “persons whose household income is less than 150% of the federal poverty level.”
As of 2017, there were over 811 qualifying charitable organizations and 36 qualifying foster care organizations in Arizona.
The UCC in Arizona has been a resounding success. In 2016, approximately $52 million was redirected from Arizona taxpayers to qualifying nonprofits. The largest beneficiaries were St. Mary’s Food Bank, the St. Vincent De Paul Society, the Salvation Army, the Community Food Bank of Southern Arizona, and Goodwill Industries. Some of these organizations are a little more well-known than other qualifying organizations, so there has been a large movement towards creating coalitions of nonprofits designed to educate tax filers on what they do. If Colorado were to implement a similar tax credit it would have a similar positive impact on our local communities.
Colorado legislators should take up a version of UCC. Since not all taxpayers will choose to take advantage of this tax credit, it may be ideal for Colorado to implement a credit of $1000 for single tax payers and $2000 for married filing jointly tax payers. Starting with as large a credit as possible would be ideal in order to bring as many taxpayers on board with the new program. The example provided from Arizona makes it clear that nonprofits, taxpayers, and communities all benefit immensely from this tax credit.
The passing of a significant Universal Charitable Credit in Colorado is a simple and equitable solution that would allow taxpayers to choose where they direct their dollars, providing a boon to Colorado charities, while at the same time easing the burden of higher state income taxes for families.
Karl Honegger is a graduate of the University of Northern Colorado. He obtained his Master of Professional Accountancy from the University of South Dakota. Karl is currently employed as an accountant for an energy company in Denver. He can be reached at email@example.com.