Colorado Democrats are furious that Gov. Polis called for income tax cuts earlier this month during his State of the State address. If he can pass a sustainable budget and eliminate tax breaks, there will be enough surplus to substantially cut income taxes.
According to a recent report by the Independence Institute, under the tax reform agenda Polis campaigned on, the state could lower its income tax rate to 3.25% without affecting state spending. The governor is clearly right to call on the legislature to cut the tax rate, but he shares the blame for his party’s past failures to get it done.
During his address, the governor said, “As demonstrated by our healthy surplus in Colorado, taxes are simply too high…I challenge Democrats and Republicans to work together to improve our economic growth and success by…cutting the income tax rate.”
Since the 2018 gubernatorial race, Polis has consistently advocated for tax reform that reduces special interest tax breaks and uses the state surplus to cut Colorado’s income tax rate for everyone. The Independence Institute report, however, found he has accomplished the exact opposite during his tenure.
According to the report, legislation passed during Polis’ tenure has increased tax handouts for special interests by $450 million in the current state fiscal year. That’s about $130 more that would have been returned to every Colorado taxpayer as a refund under the Taxpayer’s Bill of Rights (TABOR). Instead, it went to special interests because of the governor’s policies.
Nonetheless, eliminating tax breaks for special interests—or what state budget writers call “tax expenditures”—remains central to the governor’s push for phasing out Colorado’s income tax. Reducing tax expenditures allows the state to lower tax rates without reducing state spending.
Colorado’s tax code determines the tax revenue the state collects each year, but TABOR limits how much revenue the state can keep and spend. When the tax code collects revenue above that limit, the state must return the excess collection to taxpayers as a TABOR refund.
Colorado’s tax code, with its 4.4% flat income tax, will continue to over-collect taxes, according to the latest revenue forecast by the nonpartisan economists at Legislative Council Staff (LCS). Governor Polis has consistently joined Independence Institute in calling for the state to stop the practice of intentionally over-collecting taxes. Like the libertarian-leaning think tank, he argues the state should lower the income tax rate to prevent over-collection.
The projected $1.79 billion TABOR surplus for the upcoming fiscal year would allow for a reduction in the state income tax rate from 4.4% to 3.82% without influencing state spending, according to Independence Institute’s estimate. But Polis wants to go a step further.
Since the campaign trail, the governor has maintained that he wants to increase state revenue by eliminating “special interest tax giveaways” and “using the proceeds to reduce people’s income tax.” Specifically, he proposed slashing $1.6 billion per year in tax expenditures, thus increasing the state surplus by the same amount, and then using the surplus to cut the income tax rate for everyone. Had he done this, the state would have a surplus large enough to cut the income tax rate to 3.25% without affecting spending on state programs.
Rather than eliminating special interest handouts by $1.6 billion annually, his policies expanded them by about $450 million in the current fiscal year and $200 million next fiscal year. Based on the trend since Polis took office, the 2024 legislative session will substantially increase this amount in future years.
These expansion of tax handouts to special interest groups shifts the burden of funding government spending on everyone else and reduces TABOR refunds. They also reduce the surplus available for cutting the income tax rate.
Despite this, the state continues to collect historic surpluses, yet the governor has failed to advance a single income tax rate reduction through the state legislature. On the contrary, he has remained silent as legislative Democrats killed six separate bills that would have cut income taxes using state surpluses.
Republican legislators Rose Pugliese, Scott Bottoms, and Barb Kirkmeyer introduced a bill this session to lower the income tax rate to 4.0%. Polis also has an opportunity to have an even greater surplus to cut the rate more this session by passing a sustainable budget that holds state fund appropriations below the rate of population growth plus inflation. These steps would rightfully put income taxes on a fast path to zero.
If Gov. Polis stands silently by, letting his party quietly kill the tax cut bill in committee or unsustainably grow the budget, and then signs bills that further expand special interest tax handouts, that will be counter to his recent promises.
Vance Ginn, Ph.D., is president of Ginn Economic Consulting, senior fellow at Independence Institute and Americans for Tax Reform, and was previously the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20. Follow him on X.com at @VanceGinn.
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