Democratic governor Jared Polis has laudably bucked his party to prioritize scrapping the tax. Now, he must back up his rhetoric with action.
Democratic governor Jared Polis has laudably bucked his party to prioritize scrapping the tax. Now, he must back up his rhetoric with action.
O n the third day of Colorado’s 2023 legislative session, Democratic lawmakers announced a plan to claw back taxpayer refunds granted under Colorado’s Taxpayer’s Bill of Rights (TABOR) and redirect the money to public schools.
Rather than supporting his fellow Democrats’ proposal during his state of the state address last month, Governor Jared Polis suggested using TABOR refunds to decrease the state’s income-tax rate.
The address marked the first time Polis had explicitly proposed using TABOR-refund dollars — which come out of state revenue surpluses — to lower the income-tax rate as part of his push to eliminate the state’s income tax altogether. Whereas he’d previously suggested a carbon tax as a means of replacing lost income-tax revenue, his new proposal closely mirrors a plan first pitched in 2021 by the Independence Institute, the Denver-based center-right think tank where I work.
Polis Prioritizes More Income-Tax Cuts in State of the State Address
Polis was just reelected to his second term as governor by nearly 20 points. The first State of the State address at the start of any governor’s term sets the agenda and tone for the next four years, and Polis used the opportunity to make his aims clear: He wants the state to continue making incremental progress toward the elimination of the income tax.
Discussing tax reform during his address, Polis said, “I was proud to have supported two successful income-tax cuts at the ballot and since I took office our income-tax rate has gone from 4.63 percent to 4.44 percent, helping produce strong economic growth and low unemployment.”
Polis’s remarks echoed his previous praise of two ballot measures initiated by Independence Institute president Jon Caldara. In 2020, voters approved Proposition 116, reducing the income-tax rate for all individuals, businesses, and trusts from 4.63 percent to 4.55 percent. Proposition 121, which voters adopted last November by a 30-point margin, dropped the rate again, from 4.55 to 4.4 percent.
“It’s no secret that I, and most economists, despise the income tax,” Polis added. “I don’t expect that we can fully eliminate the income tax by our 150th anniversary [in 2026], but let’s continue to make progress.”
Polis first explicitly announced his desire to eliminate the income tax at a conservative political conference in the summer of 2021. He restated that position repeatedly on the campaign trail last year. But for those — like me — who were holding their breath to see if Polis would maintain his stance on the issue after winning reelection, his State of the State address came as a huge relief. Directly after saying we need to “continue to make progress” toward fully eliminating the income tax, he added, “With healthy budget surpluses from our strong economy, we should further reduce the income-tax rate for everybody.”
Polis’s Path to Zero Income Tax
With these words, Polis wasn’t just reaffirming his commitment to eliminating the income tax; he was going further than he’d ever publicly gone before. For the first time, he was suggesting that TABOR refunds should be used to lower the rate, an idea originally proposed by the Independence Institute in 2021 when we launched an initiative we call “Path to Zero.”
Here’s how that initiative works.
The TABOR amendment to Colorado’s constitution limits the amount of revenue the state can keep and spend each year, requiring the state to refund revenues accrued once the limit is hit back to taxpayers. This is the reason Colorado taxpayers received $750 checks in the mail from the state last August and September.
In surplus years, a reduction in the income-tax rate reduces TABOR refunds rather than cutting into the state budget — so long as the tax cut does not reduce revenues by more than the amount of the surplus. Last year, for example, Proposition 121 lowered the income-tax rate by 0.15 percentage points, reducing revenues by around $400 million. Because the state’s revenue surplus amounted to nearly $4 billion, the tax cut came nowhere close to having any impact on the state budget. Instead, the tax cut simply reduced TABOR refunds by a little over 10 percent. Taxpayers did not lose a single refund dollar; they just kept more money with each paycheck, leaving less surplus revenue for the government to refund on Tax Day.
Governor Polis was spot-on when he said in his State of the State address that, “With healthy budget surpluses from our strong economy, we should further reduce the income-tax rate for everybody.”
The Independence Institute’s Path to Zero plan would do just that. It would require the state to issue TABOR refunds through income-tax cuts and then make the new rate permanent moving forward. In this way, the state could use excess revenues to ratchet down the income-tax rate over time, just as Polis suggested last week.
Polis did not say, however, that we should use the entire surplus only to lower the income-tax rate, as the Independence Institute has proposed. He was silent on the question of how much of the surplus should be used on a rate reduction.
The Next Step on the Path to Zero
Critics might point out that revenues — and thus TABOR refunds — are projected both by Colorado’s Office of State Planning and Budgeting (OSPB) and its Legislative Council Staff (LCS) to fall below 2022 levels over the next few years. If state economists’ projections are accurate, implementing the Independence Institute’s Path to Zero plan last year with an approximately 1.5-point income-tax-rate reduction could have forced temporary budget cuts over the next few years.
OSPB and LCS agree that state revenues will only decline for the next two to three years, before steadily increasing and reaching new record highs thereafter. But let’s look at the numbers and determine how much Colorado can safely lower the income-tax rate without ever pushing the budget into the red and thus triggering budget cuts (barring some unforeseen catastrophe).
LCS predicts that TABOR refunds will decline from approximately $3.73 billion in FY22 to a low of $1.37 billion in FY25. The governor’s office expects TABOR refunds to hit their low in FY24 at $470 million before revenues begin trending back up. Based on estimates included in a recent LCS fiscal note, each 0.01 percent reduction in the state income-tax rate reduces state revenue by approximately $30 million.
Thus, under the far more pessimistic OSPB forecast, Colorado could safely reduce the income-tax rate by about 0.15 percentage points, to 4.25 percent, without forcing cuts to the state budget. While more conservative than the approach the Independence Institute recommended, this would keep Colorado on the path to zero income tax, and it’s the minimum reduction the Polis administration should shoot for.
As the state’s economy grows and state revenues continue to rise, the TABOR formula allows the government to grow at the rate of population growth plus inflation. Revenue growth above that will produce more TABOR refunds in the future — and thus more opportunities to reduce the income-tax rate without cutting into the state budget.
If the OSPB’s projections prove accurate, Polis can safely ask the legislature for further income-tax reductions starting in 2025, after revenues pick back up. If the LCS’s projections are accurate, meanwhile, Colorado can reduce its income-tax rate to 3.95 percent right now without impacting the state budget today or in the future.
And should some unforeseen economic catastrophe cause revenues to plummet after one of these rate reductions, forcing state budgeters to make cuts, TABOR allows the legislature to bring the income-tax rate back up at any time with the approval of Colorado voters. In 2005, following the dot-com crash, voters approved Referendum C for this very reason. The measure has allowed state spending to increase by an additional $33.8 billion beyond the former TABOR limit growth trajectory between FY2006 and FY2023.
Executive Leadership on Display
In a National Review piece published after the 2022 election, I gave an account of the incremental steps Colorado has taken to reduce its income tax and the role Governor Polis has played in that process. Up to that point, Polis had been supportive of efforts by the Independence Institute and others to reduce the income-tax rate, but he had taken a backseat in those efforts. The piece ended with a call for Polis to take the lead on this issue in his second term.
Last month’s State of the State address was a good start, because instead of backing Democratic legislators’ plan to eliminate TABOR refunds and redirect the money to public schools, he suggested reducing TABOR refunds by cutting income taxes. Polis’s willingness to stand by his support of TABOR refunds and light a path forward for his zero-income-tax agenda in the face of opposition from his own party is laudable.
Now, he just has to follow through with the kind of courageous action voters expect from a governor with broad popular support.