The voters of Colorado on Tuesday gave themselves a tax break by overwhelmingly passing Proposition 121, allowing hardworking Coloradans to keep more of what they earn.
The initiative, put forward by Colorado’s free market think tank, the Independence Institute, permanently reduces the state income tax rate from 4.55% to 4.4% starting in tax year 2022. Thanks to the measure, the average Colorado taxpayer will save about $120 per year on their tax bill.
“This is the second income tax cut in a row that voters have approved since 2020,” said Independence Institute President Jon Caldara who, together with state Senator Jerry Sonnenberg, sponsored the citizen’s initiative that put the measure on the ballot. “Voters are sending a clear message that they want to make Colorado more competitive and attract the most productive people and businesses to our state.”
In 2020, Caldara and Sonnenberg also sponsored Proposition 116, which reduced the income tax rate from 4.63% to 4.55%.
The same year in response to COVID-19, the state of Colorado forced mom-and-pop businesses to shutter while allowing large box retailers like Target and Walmart to remain open. Meanwhile, Independence Institute worked to bring equal tax relief to all Coloradans with Prop 116, which like this year’s Prop 121, provided the exact same tax rate reduction to all businesses and families across the state.
Limiting the tax burden imposed on Coloradans and pushing back against government overreach has been a core part of Independence Institute’s mission since it opened its doors in the 1980s.
“This kind of work is a major focus of the institute,” Caldara said. “We brought Colorado the flat income tax in 1987. We helped make the Taxpayer’s Bill of Rights (TABOR) a reality in 1992. And we’ve fended off tax increases for decades. This year, our work shepherded another income tax cut across the finish line, marking one more victory for the hardworking people of Colorado.”
Since the start of 2021, Colorado has experienced the highest increase in the cost of living of any state in the nation, making tax relief especially meaningful.
An increase in the money supply via fiscal and monetary stimulus, combined with global supply chain bottlenecks, has pushed prices up nationwide. Polices at the state level, however, caused differences in inflation across the country.
According to the Federal Reserve Bank of St. Louis, “[T]he money supply is important because if the money supply grows at a faster rate than the economy’s ability to produce goods and services, then inflation will result.”
States do not control the money supply, but because public policy can have a substantial impact on an economy’s ability to produce goods and services, state policymakers have a handle on one of the levers that induces inflation.
Since Democrats took unified control of Colorado’s state government in 2019, they have bombarded Coloradans with costly policies that have weighed down the state’s economy. These decisions have driven up prices at a faster pace in Colorado than in the rest of the nation.
In 2021, Senate Bill 21-260 created $5.4 billion in new fees on things like gas, ride-sharing, and delivery services. Those fees continue to increase the cost of critical goods and services in the state. Housing codes resulting from state and local policies have pushed already high housing costs even higher. And policies like the 2019 Senate Bill 181, which imposed new regulations on the state’s energy producers, have contributed to rising energy prices. The price of energy affects the prices of nearly everything else in the economy.
Proposition 121 will help to counteract some of the damage government has done, but there is more work to do. The recent growth in government-imposed costs on the economy have far surpassed the taxpayer savings from the last two income tax cuts.
That’s why Independence Institute, where I serve as director of the fiscal policy center, has launched its Path to Zero income tax plan. The plan would create a mechanism to automatically ratchet down the income tax rate anytime the state government experiences a surplus under TABOR. In this way, we can automatically phase out the income tax over time without jeopardizing the state budget.
Governor Polis endorsed Proposition 121, and he has publicly supported eliminating the state income tax. We join him in celebrating today’s tax cut and we look forward to working with his administration to put Colorado on the Path to Zero income tax during his second term.
Ben Murrey is fiscal policy director at the Independence Institute, a free market think tank in Denver.
