Colorado’s Proposition 116 asks the seemingly simple question of whether businesses and individuals would like to reduce their income-tax rate. But as analyses and the conflicting opinions of business groups show, the issues surrounding the question are far from simplistic.
Colorado’s 4.63% income-tax rate, which applies to both residents and companies, would drop to 4.55% if approved by voters in November. It’s a slightly more moderate version of a bill from Sen. Jerry Sonnenberg, R-Sterling, that had attempted to drop the income-tax rate to 4.49% but died in a Senate committee.
The latest proposal, which is being pushed by Sonnenberg and the free-market Independence Institute, would drop the amount of income-tax burden for someone earning $50,000 a year by about $40 a year or of a company or individual with $1 million in income by $800. And it would reduce state income-tax collections $154 million in the fiscal year that begins in July 2021, according to the nonpartisan Colorado Legislative Council.
Sonnenberg said in an interview that while the savings may not seem like a ton of money, he believes even that limited amount is better off in the hands of individuals and businesses than it is in the hands of the state government, where it represents 1.2% of the expected general fund. A single mother can buy school supplies for her child or a small business can get around to fixing a needed piece of equipment at a time when take-home pay has been cut and revenue has declined significantly due to the coronavirus pandemic, he noted.
“This $150 million is a drop in the bucket and is irrelevant to government but is very important to individuals and businesses,” Sonnenberg, who operates a farm, said. “The business owner, just like an individual, can spend that money better than the state.”
But state Sen. Dominick Moreno, D-Commerce City, disagreed, particularly after serving on the Joint Budget Committee that was responsible for paring down the general-fund budget for the current fiscal year by about $3.3 billion, or 25%, following massive revenue shortfalls. Legislators made significant cuts to education and health care spending in particular, and a loss of more than $150 million will make it that much harder to begin putting money back into those areas or think about boosting spending in an area like transportation, he said.
“They are designed to strangle the state government and not allow us to serve the communities that need it the most,” Moreno said in a Sept. 24 media briefing about 116 and Proposition 117, which would require citizen approval of any significant new fee-based enterprises. “The reality is, disproportionately these ballot measures would benefit the wealthiest Coloradans.”
The Colorado Legislative Council analysis determined that about 75% of taxpayers will receive a tax cut of $50 or less from the measure, while filers reporting incomes of more than $500,000 will receive more than half of the total tax savings. Organizations such as the Colorado Education Association and the Colorado Consumer Health Initiative also have come out against Proposition 116.
A report from the Common Sense Institute also predicted that state-government revenue will fall between $171 million and $176 million annually versus a baseline projection if voters approve the tax cut. But it argued that the dynamic effects of the tax cut also will generate significant new tax revenue as the lowered tax rate increases spending by residents and firms.
By the fifth year of the tax break, Colorado gross domestic product will have grown between $8.1 million and $55.5 million over baseline projections because of the extra spending, and the private sector will have created an average of 896 to 1,384 new jobs over annual projections, the CSI report predicted. That could lead to as many as 1,514 new jobs in any given year — or a loss of 324 jobs economy-wide, depending on how much the tax cut causes the public sector to contract, it added.
“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,” report authors Chris Brown and Erik Gamm wrote.
The National Federation of Independent Business’ Colorado chapter came out in support of Proposition 116, citing the tax cut it will give to businesses. State director Tony Gagliardi has said many times during the pandemic that businesses are struggling just to stay open and that any help they can get or extra burden they receive could push them to survival or closure.
Despite predictions of private-sector growth, though, the Denver Metro Chamber of Commerce decided to oppose Proposition 116. President/CEO Kelly Brough said at the organization’s annual meeting on Sept. 3 that the state’s income-tax rates are not hurting its ability to attract and retain businesses, but a reduction in revenue could hurt the state’s ability to increase transportation and education funding.
Sonnenberg, a longtime advocate of increasing dollars for highways, argued that the issue around transportation funding in the Legislature is an issue of priorities that won’t be substantially affected by a 1.2% drop in general-fund revenue. A recent Colorado Legislative Council forecast noted that the state brought in $900 million more in the fiscal year that ended June 30, more than making up for future cuts in income-tax revenue.
But Adam Fox, CCHI director of strategic engagement, said that regardless of the amount, the state cannot afford to cut hundreds of millions of dollars when it’s struggling to make up from such already deep cuts to its budget. And, once again, the debate over Proposition 116 is anything but simple.