Over the summer, Governor Polis publicly aligned himself with what the Independence Institute has said for years: the appropriate income tax rate for Colorado is zero.
At the Steamboat Institute’s Freedom Conference in August, the governor affirmed, “[The state income tax] should be zero.” In his words, taxing income “discourage[s] productivity and growth.”
His observation alludes to a common adage in government: “If you want less of something, tax it.” Winning gainful employment, getting a pay raise, starting a successful business, creating and selling a new product that improves lives — these are all examples of activities that will lead to a higher income tax bill, and thus, activities Colorado’s income tax discourages.
It’s simple; if you want more of these things, quit punishing them. That’s Governor Polis’ message, but it’s certainly not an original idea.
Independence Institute has worked tireless for decades to educate voters and policymakers about the merits of reducing the income tax burden on Coloradans. Starting in 1987, our economists helped to craft the policy moving Colorado to a single, flat income tax rate. In 1992, we played an integral role in the passage of the Taxpayer’s Bill of Rights (TABOR). We worked to lower the income tax twice, in 1999 and 2000. Along the way we have fought and defeated countless tax increases that would have put a strain on Colorado families and businesses. And last year, through our issue committee, we gave voters the opportunity to lower income taxes again with the passage of Proposition 116.
Four decades of experience has taught us that the big victories are won through persistent small battles over the long haul. TABOR was a big victory for taxpayers and for democracy, requiring government to ask voters for permission before raising taxes. Eliminating the income tax would be another huge win.
Now we have Governor Polis on board — an important ally for sure — but the Path to Zero will still take innovative thinking and leadership.
Continuing to lead on the issue, Independence Institute has already begun circulating petitions to give voters another opportunity to lower the income tax rate — this time from 4.55 percent to 4.4 percent. This battle is important, but getting all the way to zero will require additional reforms.
Through the ballot, voters need to do two things. First, they should require the state to issue all future TABOR refunds through income-tax reductions. And second, they should tell the state to make any new income-tax rate created by these reductions permanent.
This approach makes sense for several reasons. First, incrementally ratcheting down the income-tax rate over time would ensure the cuts never blindside state budgeters. Fortunately, Proposition 116 did not cause any unexpected revenue shortfalls, as revenues exceed the TABOR limit even with the cut. But hypothetically, a tax cut in the first week of November could reduce expected state revenues after the executive branch has already submitted its formal budget request to the legislature.
If TABOR refunds automatically triggered future rate reductions, however, budgeters in the executive and legislative branches would know the change is coming well in advance. They could simply rely on revenue forecasts, which typically provide three years notice that a refund — and thus a tax rate reduction — is coming.
In addition, in any year a rate reduction went into effect under this plan, the cut would not impact the state budget. That’s because it would only happen in a year when the state is so flush with cash that revenues already exceed the maximum amount allowed by the state Constitution. In some cases, that may cause a downward revision in a future year’s revenue forecast from above the TABOR cap to below it, but such a change would allow the state a couple years to plan.
The current Legislative Council Staff (LCS) economic forecast projects that, for at least the next three fiscal years, tax receipts will generate the maximum amount of revenue that the Constitution permits the state to collect. That means taxpayers should expect to receive TABOR refunds for the next three years. If the suggested reforms were in place now, taxpayers would continue to receive their refunds via income tax refunds, but they would also see permanent income tax rate reductions moving forward.
Combined, these reforms pave a Path to Zero income tax that Colorado can travel on autopilot. If adopted, the changes would directly save Colorado families thousands of dollars every year once fully realized — $2,850 based on average income tax assessments in 2017, and likely more in future years. They would also have the indirect benefit — as Governor Polis pointed out — of encouraging productivity and growth. They would bring jobs, opportunities, and higher wages to our state.
The governor is right. It’s time for Colorado to get on the Path to Zero. Let’s join him.
Ben Murrey is fiscal policy director at the Independence Institute, a free market think tank in Denver.
