When Jared Polis ran for governor in 2018, he told voters he wanted to make the tax code more even-handed by taking away deductions and using those savings to lower everyone’s taxes.
Last year, he arguably took steps in that direction by supporting legislation to eliminate certain tax deductions for businesses and also endorsing Proposition 116, an across-the-board income tax rate reduction.
This year, the legislature plans to increase state revenue by $270 million annually by eliminating existing tax benefits for businesses and residents, but neither the legislature nor Governor Polis have announced a plan to translate those reforms into tax cuts for all as promised.
In a December 2019 op-ed for the Colorado Sun, Polis doubled down on his campaign promise regarding income tax reform, saying, “Last year I called for a revenue neutral tax reform proposal that would have eliminated deductions and loopholes that benefit special interests in order to cut taxes for all.”
In 2020, he began to get what he asked for. In June, the legislature sent him House Bill 20-1420. The bill eliminated from the state tax code certain federal tax provisions passed as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It also disqualified higher earners from the twenty percent pass-through—or qualified business income (QBI)—deduction included in the 2017 Tax Cuts and Jobs Act (TCJA). After signing 1420 into law, Polis helped to offset the effective tax increase by supporting a reduction in state income tax rates with Proposition 116, which was passed in the November election.
Pairing these two reforms—broadening the base and lowering the rate—makes the tax code fairer and reduces taxes across the board. It’s a move in the right direction whenever lawmakers do this. While criticisms HB 1420 have serious merit, what happened in 2020 is exactly what Polis advocated for, and in principle, it exemplifies sound tax policy. The income tax should be neutral and low.
Fortunately, we have a governor who understands that. “[A] broader base taxed at a lower rate leads to greater economic growth with the ancillary benefit of preventing the corrosive influence of crony capitalism,” Polis explained in his December op-ed.
The tax code is currently littered with loopholes and deductions for people at all income levels. Sadly, when our legislature passes legislation in the name of eliminating tax loopholes, those efforts tend to simply transfer special tax benefits from higher earners to lower earners. They do not truly broaden the base—or at least not much.
The 2020 income tax bill eliminated pandemic-related tax benefits for certain businesses, but it also extended new tax credits to undocumented immigrants. Needless to say, that’s not exactly neutral base broadening. This year’s income tax bill has similar problems.
The income tax legislation working its way through the legislature this year, House Bill 21-1311, if signed by Governor Polis, would increase state revenues by about $270 million per year from reduced or eliminated deductions. Those include limiting how much a taxpayers can deduct from state income taxes when itemizing, eliminating the capital gains deduction at the state level, and reducing the state deduction granted taxpayers who save for their child’s education. It also extends the QBI changes from last year through tax year 2025.
Most of that new revenue will pay for increasing tax credits and deductions for other residents. Of the $270 million in reduced tax benefits from some, $213 million will go to new tax benefits for others. This includes further expanding the Earned Income Tax Credit (EITC) and extending the state Child Tax Credit (CTC) to undocumented immigrants.
Instead of a base-broadening measure, HB 1311 mostly serves as transfer of tax benefits from one group of people to another. Nonetheless, it does broaden the base enough to generate a $57.2 million-per-year net tax revenue gain by FY 2023-24.
If the governor wishes to stay true to promise for “revenue neutral tax reform” that would “eliminate deductions and loopholes” and “cut taxes for all,” he will veto this bill. It does none of that.
If instead he chooses to appease the anti-jobs and anti-growth Progressive wing of his party by signing the bill, then he ought to at least partially salvage his past promises by supporting a future income tax rate reduction to offset the tax increases he approved.
Ben Murrey is director of fiscal policy at the Independence Institute, a free market think tank in Denver.
