Candice Horbacz
On Election Day, Coloradans are poised to make a monumental decision regarding the state’s income tax structure, as two diametrically opposed ballot measures present voters with a stark choice between maintaining a flat tax rate and embracing a progressive system. At the heart of this fiscal battle are Amendment 87, a constitutional amendment paired with an initiated statute advocating for a graduated-rate individual and corporate income tax with a top rate of 8.4 percent, and Proposition 136, an initiated statute seeking to statutorily cap income taxes at the current 4.4 percent rate. The outcome of this electoral contest will not only redefine Colorado’s tax landscape but could also have profound and lasting implications for its economic competitiveness, business environment, and public services for decades to come.
A Deep Dive into Amendment 87: Paving the Way for Progressivity
Amendment 87 represents a significant departure from Colorado’s current tax philosophy. It is a two-pronged initiative designed to fundamentally alter the state’s constitution and establish new tax rates. The first component is a constitutional amendment that would explicitly permit a graduated-rate income tax, overturning the existing constitutional mandate for a single, flat rate. This constitutional change is strategically crafted to require only a simple majority for passage, achieved by proposing to "eliminate" existing restrictive language rather than adding new, which would typically necessitate a 55 percent supermajority in Colorado for constitutional amendments.
The second component of Amendment 87 is an initiated statute that sets the initial higher rates for this new graduated system. Under this proposal, income thresholds would be established where higher marginal rates apply: 7.4 percent on income above $500,000, 7.9 percent on income exceeding $750,000, and a top rate of 8.4 percent for income above $1 million. Crucially, the measure also dedicates any new revenue generated by these higher rates to vital public services, specifically education, healthcare, and childcare. This dedication forms the core of the argument put forth by proponents, who contend that the wealthiest Coloradans should contribute more to fund critical state needs, fostering greater equity and opportunity across the state. They argue that a progressive tax system ensures that those with the highest capacity to pay bear a larger share of the tax burden, allowing for robust investment in human capital and social infrastructure. Furthermore, if Amendment 87 passes, the legislature would gain the authority to modify these rates and income brackets at any time, providing significant flexibility for future fiscal policy adjustments.
Understanding Proposition 136: Bolstering the Flat Tax Tradition
In stark contrast, Proposition 136 aims to solidify Colorado’s long-standing commitment to a flat income tax. This initiated statute seeks to statutorily cap both individual and corporate income tax rates at their current level of 4.4 percent. Proponents of Proposition 136 argue that maintaining a low, flat tax rate is essential for fostering a competitive business environment, attracting new investment, and retaining high-income earners and successful enterprises within the state. They assert that tax certainty and a predictable, stable tax burden are crucial for economic growth and job creation.
As a statutory change, Proposition 136 also requires only a simple majority to pass. However, its nature as a statute means it is less binding than a constitutional amendment. A future legislature could amend or repeal it with another simple-majority vote, and voters could likewise repeal it. Despite this, its passage would send a clear message from the electorate regarding their preference for fiscal conservatism and restraint. It functions primarily as a bulwark against potential future rate increases and serves as a direct alternative to Amendment 87, aiming to override any conflicting provisions should both measures receive sufficient votes. For advocates of Proposition 136, the measure is about protecting Colorado’s economic vitality and ensuring that the state remains an attractive place for businesses and individuals to thrive without the disincentives of higher taxation.
Colorado’s Unique Tax History: A Timeline of Fiscal Evolution
Colorado’s journey with income taxation offers crucial historical context for the current debate. The state was not always a bastion of flat-rate taxation. In fact, until 1987, Colorado operated under a graduated-rate income tax system. For 24 years prior to that transition, the state’s top income tax rate stood at 8 percent, applied to income exceeding $10,000 (an amount equivalent to approximately $25,000 to $30,000 in today’s dollars, illustrating how historical thresholds can differ significantly from modern income levels). This system was in place for decades, demonstrating that graduated taxation is not alien to Colorado’s fiscal heritage.
The pivotal shift occurred in 1987 when Colorado became the first state in the nation to transition from a graduated-rate income tax to a single, flat rate. This move was driven by a desire to simplify the tax code, enhance economic competitiveness, and potentially stimulate growth. The new top rate was initially set at 5 percent, which had previously been the marginal rate for a much lower income bracket (between $4,000 and $5,000 in 1987, roughly $12,200 to $15,250 in today’s purchasing power). Since then, the flat tax rate has seen several reductions, ultimately settling at its current 4.4 percent. This gradual decrease is often cited by proponents of flat taxes as a key advantage: a single rate applied to all income is generally harder to raise politically and more susceptible to calls for reduction, reflecting a broader preference for lower taxation.
Further shaping Colorado’s fiscal landscape is the Taxpayer’s Bill of Rights (TABOR), adopted in 1992. TABOR is a constitutional amendment that profoundly impacts state and local government finance. It requires voter approval for any tax rate increase and limits government spending based on population growth and inflation. This constitutional constraint means that even if the legislature wished to raise income tax rates, it would require a statewide vote. Both Amendment 87 and Proposition 136 are direct responses to TABOR’s requirements, seeking voter approval for their respective tax changes. The current ballot measures are therefore not just about tax policy but also about the ongoing tension between government revenue needs and taxpayer protections enshrined in the state constitution.
Economic Ramifications: A Deeper Analysis of Potential Impacts
The economic implications of either measure passing, especially Amendment 87, are subject to intense debate and scrutiny. Opponents of Amendment 87, and proponents of Proposition 136, frequently highlight several areas of concern.
Small Business Burden: Colorado’s economy is heavily reliant on small businesses. According to data from the U.S. Small Business Administration, Colorado’s 731,000 small businesses employ nearly 49 percent of all employees in the state. A vast majority of these businesses, such as S corporations, partnerships, and LLCs, are structured as "pass-through entities." This means their income is not taxed at the corporate level but rather "passes through" to their owners’ individual income tax returns.
Internal Revenue Service data reveals that among Colorado’s 53,640 filers with adjusted gross income above $500,000—the primary group targeted by Amendment 87’s higher marginal rates—a significant portion derives income from business ownership. Specifically, 30,850 receive partnership or S corporation income, and 14,310 have other business or professional income. Households earning $500,000 or more actually earn 27 percent more in business income than in wage income. This suggests that the proposed higher marginal rates on individual income would, to a considerable degree, function as higher taxes on small business ownership. This could reduce small business profitability, potentially putting Colorado-based enterprises at a competitive disadvantage against rivals in states with lower tax burdens. The economic theory of decisions made "on the margin" suggests that when the tax rate on the next dollar of income rises, business owners are less incentivized to expand, hire more workers, or invest capital. The result could be a combination of reduced investment and growth, business attrition, lower wages for employees, and potentially higher prices for consumers, depending on market conditions and competitor pricing.
The Marriage Penalty: Amendment 87’s proposed structure also introduces a significant marriage penalty. This occurs when a household’s overall tax bill increases solely due to a couple marrying and filing taxes jointly. The penalty arises because the income bracket widths for single filers are identical to those for married couples filing jointly. This means two individuals earning similar incomes, when married, quickly push their combined income into higher tax brackets, facing a greater tax burden than if they had remained single. For example, a couple each earning $25,000 (total $50,000) would face an estimated marriage penalty of $125. This penalty escalates dramatically with income; a couple each earning $500,000 (total $1 million) could face a marriage penalty as high as $16,575 under the proposed rates.
The "Non-Wealthy" High-Income Earners: Critics also point out that the higher tax rates would apply to many individuals who are not "wealthy" in the conventional sense of having consistently high annual incomes. Many filers might report income exceeding $500,000 only once or twice in their lifetime, typically when they sell a long-held business or a significant investment property. For these individuals, the proposed graduated tax would act as a substantial surtax on their retirement savings or the culmination of many years of entrepreneurial effort and risk-taking, where the gains are realized in a single taxable event rather than spread over numerous years.
Corporate Income Tax Considerations: Amendment 87 also includes a graduated corporate income tax. Economists often argue that progressive rate schedules make little sense for corporate income taxes because the size of a business is largely irrelevant to the income of its shareholders. A low-income household might hold shares of some of the world’s largest corporations through their 401(k), while wealthy individuals might own a stake in a small, privately held corporation. Colorado, like most states, employs a single sales factor apportionment method for corporate income tax, meaning a corporation is taxed based on its share of sales within Colorado. As economists have noted, this effectively makes the corporate income tax a tax on sales into the state, which typically translates to higher prices for consumers rather than being solely borne by investors or the corporation itself.
Out-of-State Precedents and Warnings: States that have implemented significantly higher top income tax rates have often faced unintended consequences. California, for example, saw voters approve increases to top rates in 2012. Subsequent analysis suggested that a combination of out-migration of high-income earners, reduced in-state investment, slower economic growth, and sophisticated tax avoidance strategies eroded an estimated 61 percent of the anticipated revenue gains, causing broader harm to the state’s economy. Similarly, New Jersey’s Department of the Treasury assessed that the adoption of a new top rate of 8.97 percent above $500,000 in 2004 led to an increase in out-migration by 20,000 residents over the subsequent five years. In New York, the Citizens Budget Commission found that the state’s share of the nation’s millionaires fell from 12.7 percent in 2010 to 8.7 percent in 2022. They estimated that New York would have collected an additional $10.7 billion in individual income tax revenue in 2022 if its share of millionaires had remained constant, highlighting the significant fiscal cost of high-net-worth individuals relocating. These examples serve as cautionary tales for Colorado, suggesting that substantial tax increases on high earners and businesses may not always yield the expected revenue and can have broader negative impacts on a state’s economic dynamism.
The Unforeseen Conflict: A Potential Legal Quagmire
Perhaps the most intriguing and uncertain aspect of this election is the scenario where both Amendment 87 and Proposition 136 pass. Colorado election law stipulates that if two conflicting measures pass, the one receiving the most votes prevails on any conflicting provisions. This creates a complex legal and practical dilemma.
A straightforward interpretation suggests that if Proposition 136 receives more votes, it would cap individual and corporate income tax rates at 4.4 percent. If Amendment 87 also passes, allowing for graduated rates but then being constrained by Proposition 136’s higher vote count, the outcome is ambiguous. One literal, albeit highly unlikely, reading could imply that Proposition 136 might strike the higher rates proposed by Amendment 87, potentially leaving income above $500,000 entirely untaxed if Amendment 87’s statute is strictly interpreted as only imposing taxes above 4.4 percent. Such an outcome, however, is clearly not intended by either measure’s proponents and would create significant textual tensions and fiscal chaos.
It is far more probable that courts would intervene to reconcile the legislative intent, likely interpreting the outcome to mean that a graduated rate taxation system would be permitted, but the top rate, regardless of income level, could not exceed 4.4 percent. This would effectively nullify the revenue-generating intent of Amendment 87’s higher rates while still altering the constitutional framework. The state’s official ballot information booklet, commonly known as the "Blue Book," candidly acknowledges this uncertainty, stating that the precise outcome of any conflict between the two measures is unclear and would ultimately have to be resolved by the courts. This potential for post-election litigation adds another layer of complexity and uncertainty to an already high-stakes electoral decision.
The Broader Stakes: Colorado’s Economic Identity in the Balance
At its current 4.4 percent rate, Colorado maintains a competitive position among its regional peers, many of which have also reduced income tax rates in recent years as part of a national trend towards lower, flatter taxation. However, states across the U.S. are increasingly diverging on income tax policy. While a growing number of states are actively pursuing low or no income tax rates to attract businesses and residents, a smaller but vocal contingent of states is doubling down on much higher, progressive rates, often driven by a desire to fund expanded public services and address income inequality.
Colorado voters now stand at a critical juncture, tasked with deciding which side of this national divide their state will join. The choice is not merely about numerical percentages; it’s about the fundamental economic philosophy that will guide Colorado’s future. Will the state prioritize fiscal stability, business competitiveness, and a broad-based, low-rate tax system? Or will it opt for a progressive structure, aiming to enhance public services through higher contributions from its wealthier residents and businesses? The decision on Election Day will profoundly shape Colorado’s fiscal stability, its attractiveness as a place to live and do business, and its capacity to fund essential public programs for generations to come.
