New Analysis: Replacing Flat Tax Would Improve Colorado's Tax System



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In less than a month, Colorado voters will decide whether to abandon the state’s flat-rate income tax in favor of a more progressive, graduated rate tax.  The main purpose of this reform is to raise nearly $1 billion in new revenue each year to offset the disastrous effects that strict constitutional limits on tax collections (i.e. TABOR) have had on the state’s K-12 education system.  But a new analysis from our partner organization, the Institute on Taxation and Economic Policy (ITEP), shows that the proposal would have another benefit: improving the fairness of Colorado’s regressive tax system (PDF).

According to ITEP’s Who Pays? report, the poorest 20 percent of Coloradans currently spend 8.9 percent of their income paying state and local taxes, while the wealthiest 1 percent pay just 4.6 percent of their income in tax.  One reason for this gap is that unlike most states, Colorado’s income tax uses a single flat rate, and therefore doesn’t live up to its potential for offsetting the steep regressivity of sales and excise taxes.

The proposal being voted on in November (Amendment 66) would change this by giving Colorado a fairer, two-tiered income tax.  Specifically, the Amendment would raise the state’s income tax rate from 4.63 percent to 5 percent on incomes below $75,000, and from 4.63 percent to 5.9 percent on incomes over that amount.  If approved by voters, the gap in overall tax rates paid by Coloradans at different income levels would be reduced.  The wealthiest 1 percent would see taxes rise by 0.8 percent relative to their incomes, while lower-income taxpayers would see just a 0.1 percent increase.

Amendment 66 asks the most of those taxpayers currently paying the lowest effective tax rates.  While most families would see a modest increase in their income tax bills under the amendment, just 16 percent of the revenue raised by Amendment 66 would come from the bottom 80 percent of earners.  The bulk of the revenue (63 percent) would come from the wealthiest 20 percent of Coloradans.  And the remainder (21 percent) would not come from Coloradans, but rather from the federal government as Coloradans reap the benefits of being able to write-off larger amounts of state income tax when filling out their federal tax forms.

As the Colorado Fiscal Institute points out, that 21 percent federal contribution is a big deal.  If Coloradans reject Amendment 66 this November, they’ll essentially be turning down $200 million in federal dollars that their K-12 education system could put to very good use.

Read the report

 

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