There’s a fair chance you spent last weekend scrambling to get your income taxes done. While we tend to focus on whether we owe money on April 15th or get some of our own money back in a refund, which somehow makes us feel like we won something, we should be looking at our entire tax burden.
So, take a moment and pull out your tax forms from last year for a quick comparison to this year. Assuming you made about the same amount of income, you’ll likely see that you are paying less in total income tax to the federal government, yet somehow more money to the great state of Colorado.
Sure, your federal taxes went down thanks to the Trump income tax rate cuts. But Colorado’s flat income tax rate hasn’t changed at all. So why are you paying more in Colorado income taxes?
The Trump tax cut creates a huge tax revenue increase for Colorado government, call it the “Trump Bump.”
Your Colorado income tax is based solely on your “taxable income” from your federal 1040 form. For your Colorado state income tax form you take your federal taxable income and multiply by our flat income tax rate, 4.63 percent.
But, for most folks, that federal taxable income actually goes up because there are now fewer allowed itemized deductions. For instance, you can only deduct so much interest from a home loan. This larger taxable income isn’t an issue because the new income tax rates are so much lower, your overall federal tax bill goes down.
But when you use that same, now larger, federal taxable income number for your state taxes, your state tax bill goes up because, wait for it, the Colorado state legislature didn’t lower the state tax rate to adjust for the new Trump Bump. A bill to do so passed out of last year’s Republican controlled Senate to, of course, die in the Democrat controlled House.
So, this year you get to pay for yet another tax increase you didn’t get to vote for.
Fortunately, there is a safety valve in our Taxpayer’s Bill of Rights (TABOR) to make sure excess revenue, like that coming from the Trump Bump, goes back to you the taxpayer in a refund. When the state takes in more revenue than what it did the previous year, plus inflation and population growth, it has to refund that money back to you.
So, the Trump Bump should still be refunded back to you. But, wait for it, it won’t.
The analogy that works best for me to understand how the TABOR cap works is a whiskey barrel. Imagine the barrel holds the state budget. As tax revenues pour in we collect it in the barrel. The size of the barrel is the size of last year’s budget plus inflation and population growth.
Under our Taxpayer’s Bill of Rights if more whiskey (taxes) flows into the barrel than the barrel can hold, the excess spills over and falls into the taxpayer’s mug. We call that our TABOR refunds.
So why haven’t we received our TABOR refunds in so very long? Well first we voted to use a much, much bigger barrel in 2005 when we passed Referendum C. But whiskey has been pouring into the barrel so fast we should have had lots of refunds even given the larger barrel.
A vote of the people can always increase the size of the barrel, but as every ballot questions for tax increases show over and over again since Ref C, we don’t want more whiskey or a larger barrel. What’s a greedy legislature to do?
Well, the legislature snuck in a spigot at the bottom of the barrel to let some of the whiskey out into a second barrel not subject to TABOR, so that barrel can never be filled enough to reach the top. When the legislature labels a revenue stream an enterprise fund or a tax increase as a “fee” it doesn’t need our consent at the ballot box.
So, they open the spigot and call it the Hospital Provider Fee, and we don’t get or refunds. They open it again and call it the Faster Fee on our car registrations, and we don’t get our refunds. Mill Levy Freeze, Growth Dividend, there are many names for this deceitful practice. The legislature is working to do it again by calling a payroll tax a “fee” for extended family leave.
Do your own calculations. How much of your federal tax cuts are you losing to the state’s stealth tax increases?
Jon Caldara is president of the Independence Institute, a free market think tank in Denver.