Candice Horbacz
On Election Day, Coloradans are confronted with a stark choice that could redefine the state’s fiscal landscape for generations: two competing ballot measures offering fundamentally different visions for income taxation. At stake is whether Colorado will maintain its long-standing flat tax rate or transition to a progressive system, with profound implications for individuals, businesses, and the state’s economic competitiveness.
The primary conflict centers around an initiated statute, Proposition 136, that proposes to permanently cap individual and corporate income taxes at the current 4.4 percent rate. In direct opposition is Amendment 87, a constitutional amendment paired with an initiated statute, designed to authorize a graduated-rate individual and corporate income tax with a top rate reaching 8.4 percent. This electoral showdown represents a critical juncture for Colorado, forcing voters to weigh the principles of tax simplicity and economic stability against those of progressive taxation and expanded public funding.
The Push for a Graduated Tax: Understanding Amendment 87
At the heart of the debate is Amendment 87, a constitutional amendment that seeks to fundamentally alter Colorado’s tax structure. Should it pass, the state’s constitution would no longer mandate a single, flat income tax rate. Instead, it would permit a graduated-rate income tax, a system where higher earners pay a larger percentage of their income in taxes. This change is not merely statutory; by embedding the authorization for a graduated tax within the constitution, Amendment 87 aims to establish a lasting framework for future tax policy.
Accompanying Amendment 87 is an initiated statute that sets the initial graduated rates. Under this proposal, income thresholds would be established, with increasing rates applied to higher income brackets. Specifically, the rates would initially be set at 7.4 percent for income above $500,000, rising to 7.9 percent for income above $750,000, and culminating in a top rate of 8.4 percent for income exceeding $1 million. A crucial aspect of this statutory component is that, once the constitutional amendment is in place, the state legislature would gain the power to adjust these rates and brackets at any time, without further voter approval, offering significant flexibility in future fiscal policy.
Proponents of Amendment 87, often including progressive advocacy groups, labor unions, and those focused on increased funding for social programs, argue that a graduated tax system is inherently fairer. They contend that it asks those with greater ability to pay to contribute more, thereby easing the burden on lower and middle-income families. The official title of the linked initiative, "Establish Graduated Income Tax and Dedicate New Revenue to Education, Healthcare, and Childcare Initiative," clearly signals the intended beneficiaries of the projected increased revenue. Supporters believe this additional funding is crucial for addressing pressing state needs, from improving public education and expanding access to healthcare to bolstering childcare services, thereby strengthening the social safety net and investing in Colorado’s future. They might point to growing wealth disparity and argue that the current flat tax disproportionately benefits the wealthiest residents, while a graduated system could redistribute resources more equitably.
However, the proposed structure of Amendment 87 also introduces significant complexities and potential drawbacks. One of the most contentious elements is the embedded "marriage penalty." Under the proposed system, bracket widths for married couples filing jointly would be identical to those for single filers. This design means that two individuals with similar incomes who marry could see a substantial increase in their overall tax bill. For instance, a couple each earning $25,000 would collectively face a marriage penalty of $125. This penalty escalates dramatically for higher-income couples; a couple each earning $500,000, for example, would face an estimated marriage penalty of $16,575. Critics argue that such a penalty discourages marriage or unfairly burdens married couples, contradicting principles of tax neutrality and potentially impacting family financial planning.
A Look Back: Colorado’s Flat Tax History
Colorado’s flirtation with graduated income taxation is not new; the state had such a system in place until 1987. For 24 years prior to that, Colorado’s top income tax rate stood at 8 percent on income above $10,000. This historical precedent provides crucial context for the current debate. In 1987, Colorado became the first state in the nation to transition from a graduated-rate income tax to a single-rate, or flat, income tax. This move was part of a broader national trend in the 1980s towards tax simplification and supply-side economics, which posited that lower, flatter tax rates would stimulate economic growth by encouraging investment and productivity.
Following the transition, Colorado’s new top rate became 5 percent, which had previously been the marginal rate applied to income between $4,000 and $5,000 (equivalent to approximately $12,200 to $15,250 in today’s dollars, adjusting for inflation). Since that pivotal shift, the flat tax rate has been reduced multiple times, reflecting a consistent policy direction of lowering the tax burden. It now stands at 4.4 percent. The history of Colorado’s flat tax underscores a key characteristic of such systems: a rate applied uniformly across all income levels tends to be more resistant to increases and more amenable to cuts. This is often attributed to the broad impact of any rate change, making it politically challenging to raise a flat rate that affects all taxpayers, while cuts are often broadly popular. The current debate challenges this long-standing principle, with Amendment 87 aiming to reintroduce the ability to apply different rates to different income levels, thereby creating a pathway for higher rates on top earners.
The Constitutional Pathway of Amendment 87
A notable aspect of Amendment 87 is its strategic legal construction, designed to facilitate its passage. Colorado’s constitution currently stipulates that "all taxable net income to be taxed at one rate, excluding refund tax credits or voter-approved tax credits, with no added tax or surcharge." To circumvent the need for a higher approval threshold, Amendment 87 proposes to amend this provision by simply eliminating the prohibition on a graduated-rate schedule, rather than adding new language that explicitly establishes one. The amended provision would read: "require all taxable net income to be taxed with no added surcharge."
This unusual construction has a specific legal purpose: by primarily removing existing constitutional language rather than adding new, substantive provisions, the amendment can be ratified with a simple majority vote. Ordinarily, Colorado constitutional amendments require a 55 percent supermajority to pass, a higher bar intended to ensure broad consensus for fundamental changes to the state’s governing document. This procedural choice highlights the strategic maneuvering by proponents to maximize the chances of their measure’s success, acknowledging the political challenge of securing a higher vote threshold. Critics, however, may view this as an attempt to bypass the spirit of the supermajority requirement for significant constitutional alterations, potentially eroding the democratic safeguard for fundamental state law changes.
Economic Ramifications: Impact on Small Businesses and Investment
The economic implications of a shift to a graduated income tax, particularly one with significantly higher top rates, are a central point of contention. Colorado’s economic landscape is heavily reliant on small businesses, which employ nearly 49 percent of all Colorado employees – approximately 731,000 individuals. A vast majority of these businesses operate as "pass-through entities," such as S corporations, partnerships, and LLCs. This means that their business income is not taxed at the corporate level but is instead "passed through" to their owners and reported on their individual income tax returns.
Data from the Internal Revenue Service reveals the significance of this structure: among the 53,640 Colorado filers with adjusted gross income above $500,000 – the demographic targeted by the proposed higher marginal rates – a substantial 30,850 receive partnership or S corporation income. Additionally, 14,310 have other business or professional income. In fact, households earning $500,000 or more derive 27 percent more from business income than from wage income. This demographic reality suggests that higher tax rates on these income brackets function, to a considerable degree, as higher taxes on small business ownership and entrepreneurship, directly impacting their operational costs and investment capacity.
Opponents of Amendment 87, including various business associations, chambers of commerce, and conservative fiscal policy groups, argue that such increased tax burdens would directly impact small business profitability, placing Colorado’s businesses at a competitive disadvantage against rivals in other states with more favorable tax climates. The anticipated consequences include a reduction in investment and growth, potential business attrition as owners seek more advantageous locations, suppressed wages for employees, and ultimately, higher prices for consumers as businesses attempt to offset increased costs.
Economic theory suggests that decisions are often made "on the margin." When the tax rate on the next dollar of income rises, business owners are incentivized to adjust their behavior. This could manifest as hiring fewer workers, delaying crucial capital investments, or scaling back expansion plans. While businesses may attempt to raise prices to cover higher tax costs, their ability to do so will largely depend on market conditions and the operating environment of their competitors.
Furthermore, the "wealthy" demographic targeted by Amendment 87’s higher rates is not monolithic. Many filers may report income exceeding $500,000 only once or twice in their lifetime, often due to a singular event such as the sale of a business they built over decades or the liquidation of a long-term investment property. For these individuals, the higher rates would function as a significant surtax on retirement savings or the culmination of years of entrepreneurship and risk-taking, where gains are realized in a lump sum rather than spread out over time. This raises concerns about disincentivizing long-term investment and entrepreneurial ventures, as the cumulative reward for years of effort could be significantly reduced by a one-time high tax liability.
Corporate Income Tax and Apportionment
Beyond individual income, Amendment 87 also proposes to raise the corporate income tax rate, establishing a graduated-rate system for businesses. Many economists argue that progressive rate schedules make little sense for corporate income taxes, as the size of a business bears little direct relation to the income or wealth of its shareholders. A low-income individual might hold shares in a massive multinational corporation through their 401(k), while a wealthy household might own a stake in a much smaller, privately held company. The corporate tax, therefore, does not always align with the progressive intent of taxing wealthier individuals, potentially creating unintended burdens on a broad spectrum of investors.
Colorado, like most states, utilizes "single sales factor apportionment" for corporate income tax. This method taxes a corporation based on its share of sales within Colorado. As economic analyses have frequently pointed out, this effectively transforms the corporate income tax into a tax on sales into the state, which is ultimately reflected in higher prices for consumers. This means the tax is not costless for the state nor is it solely borne by investors; it has a tangible impact on the purchasing power of Coloradans and the overall cost of goods and services within the state.
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