Colorado’s economy is highly dependent on the performance of small businesses. They often pay taxes through the individual income tax, and will be hit hard by Amendment 66 tax increases. The Tax Foundation notes that raising the tax rate by passing Amendment 66 will “not encourage” continued post-recession economic recovery, especially in areas of the state that are struggling.
Further, Colorado’s median household incomes have remained flat. The Tax Foundation concludes that “Increased tax liability reduces after-tax income for low- and middle-income Coloradans, making it more difficult for them to afford basic necessities such as food, shelter, utilities, and health insurance.”
The report cites a 2011 Ernst and Young study showing that in 2007, 95 percent of Colorado firms were sole proprietorships (68 percent of businesses), S-corporations (18 percent of all businesses), or partnerships (9 percent of all businesses). For these companies, business profits are “passed-through” to their owners’ individual tax returns. They are taxed as individual income, and the business profits they use to grow show up as high individual incomes in the tax statistics.
In another recent Tax Foundation offering, the 2013 State Business Tax Climate Index, Colorado’s business tax climate ranking dropped two places to number 18. Its rating was harmed by a high total sales tax, a poor unemployment insurance ranking, and the way the state treats business net operating losses. Colorado’s ranking was helped by its relatively low property, income, and corporate tax rates.
But that’s just the current picture, without a billion dollar tax increase. Passage of Amendment 66 will raise income and corporate tax rates, leading to further deterioration of the state business tax climate.
Amendment 66 supporters like to say that the tax increase is equal to an ice cream cone or “only” a couple of movie tickets a month. The Tax Foundation skewers this comparison, noting that at the $30,000 income level Amendment 66 supporters like to use, an extra $4 per month is closer to one less meal than it is to one less ice cream cone, and that at $50,000 a year the additional tax would be equal the cost of heating the average household’s house for a month during the winter.
Profits from pass-through business make up a disproportionate fraction of the higher income brackets. Amendment 66 would hike their tax rate by 27 percent to start, with the prospect of more tax increases if new school spending outstrips new revenues. At the higher income levels reported by small businesses, the extra tax might be equal to the software license, desk, phone, or chair that an employer needs in order to hire a new employee, or to part of the taxes that a firm has to pay whenever it hires an additional person.
People who say that Amendment 66 only increases taxes on the rich are overlooking the large numbers of small businesses that show up in the higher individual income brackets. Colorado pass-through companies file a disproportionate share of returns among high income tax filers, and the profits reported on those returns are used to grow the businesses that provide 57 percent of all Colorado employment. As a group, the small firms that will be hit hardest by Amendment 66 are also the state’s largest employer. Businesses with fewer than 20 employees make up 88.6 percent of all Colorado businesses, and they employ 73.8 percent of Colorado employees.
(For more, including a good discussion of the incoherent economic arguments fielded by Amendment 66 supporters, see “Colorado Amendment 66: A $1 Billion Tax Increase on Small Businesses and Individual Taxpayers” Fiscal Fact No. 397, at the Tax Foundation’s website.)
Linda Gorman is director of health care policy at the Independence Institute, a free-market think tank in Denver.
