September 2, 2020

Key Findings 

• Proposition 116, “State Income Tax Rate Reduction,” proposes to reduce Colorado’s flat income tax rate, which applies to individuals and businesses, from 4.63% to 4.55%. In its first full year effective, it will decrease state tax revenues by almost $160m—1.7% of total projected collections.
• Dynamic economic and state fiscal impact modeling demonstrates that the true impact of the tax cut will depend upon the extent to which the state government manages a tighter budget by reduction the growth in government jobs. Two scenarios developed in the REMI Tax-PI model suggest that, over the first five years:
  • The private sector in Colorado will add on average between 896 and 1,384 jobs. Depending upon the public sector’s response, the net employment impact will on average be a reduction of up to 324 jobs or an addition of up to 1,514, after accounting for reductions in government employment growth.
  • By year 5, Colorado GDP will have grown between $8.1m and $55.5m above the baseline projection.
  • On average, yearly state government revenue will fall between $170.9m and $176.3m relative to the baseline projection.
  • There will be a crucial trade-off between the economic benefits of increasing private saving and the detriments of constricting state government output.
• The relative loss of revenue that the state faces in the first full year of the cut amounts to about 1.2% of its FY22 general fund balance. The static revenue reduction amounts to a change in the projected FY22 income tax revenue to the General Fund growth from 20% to 17.9%.
• The Tax Cuts and Jobs Act (TJCA) of 2017, a federal tax cut, expanded the states’ tax bases and limited some state deductions, so Colorado’s income tax collection is on the rise beyond baseline projections in the near term. The state projected in its early estimates to collect, on average, an additional $505.7m per year from FY18 to FY25.
• Generally, passage of Proposition 116 will ease some of the hardship the recession has caused the private sector and magnify some of the strain it’s caused the public sector.

Executive Summary

The recession which followed the onset of the COVID-19 pandemic early this year has in its course compelled policymakers on all strata of the political process to develop solutions to the hardship it’s caused workers and small businesses and to re-examine policies and proposals developed before it began. One area of especial interest to those concerned has been tax policy; governments stand to lose revenue, and many individuals have lost, temporarily or permanently, their sources of income. In Colorado, competing visions of the proper ways to address the political dilemma this creates have permeated the discourses about two proposed ballot initiatives aimed at changing the state’s income tax code.

One of these, Proposition 116, which would reduce the state income tax rate from 4.63% to 4.55%, will be included on the 2020 general election ballot. Initiative #271, which would have established a progressive income tax system, failed to qualify for the ballot. The magnitude of this tax cut, according to the proposition’s fiscal impact statement,ⁱ will be about 1.7% (some $160m) of total 2019 income tax collections in its first full year effective; between 2018 and 2019, income tax collections grew just over 8%.ⁱⁱ For every additional $10,000 of taxable income earned, an individual or business will save $8 in income tax under the new rate. An individual who earns $50,000 annually will save $40.

Proposition 116, if passed, will have the effects of reducing state revenue and adding private-sector wealth. In this report, CSI uses dynamic modeling software developed by REMI to estimate the magnitudes of these impacts and establish a range in which they will likely fall. This range is constructed by considering two scenarios. In scenario A, the Colorado government cuts its employment to account for the reduction in its revenue; in scenario B, the state government does not cut any jobs and instead constricts spending elsewhere. A summary of the modeling’s results appears in the table directly below.

Proposition 116’s sponsors hail its potential to alleviate some of the financial strain the current recession has placed upon Coloradoans and their businesses, and its detractors worry that the government spending cuts it would necessitate will harm vulnerable people who utilize state government services. In this report, CSI ou­­­­tlines the details of the measures and projects the impacts it could have across the Colorado economy upon both the private sector and the state.

Proposition 116 Background

Current Income Tax Structure in Colorado

Most states have progressive income tax codes and seven do not tax income at all; Colorado is one of nine states which apply a flat income tax rate to residents at all income levels. The effect of Proposition 116, if passed, would be to reduce Colorado’s current flat rate of 4.63% to 4.55%. The current rate has been effective since 2000, before which it dropped from its original 5% level.ⁱⁱⁱ The income tax regulation in Colorado is inclusive of individual, corporate, fiduciary, and partnership income; this will remain true if Proposition 116 passes.

Income tax collection is managed by the Colorado Department of Revenue, which annually publishes tax revenue data. Below is the latest five-year history of total collections.^iv