Colorado's 8.4% top rate threatens flat-tax edge

Colorado progressives submitted 157,000 signatures Monday for a ballot measure replacing the state's 4.4% flat tax with progressive brackets up to 8.4%, the region's highest top rate.

"Every signature represents a Coloradan who believes our tax system can be fairer," said Kathy White, executive director at the Colorado Fiscal Institute, part of the Protect Colorado's Future coalition behind the measure.

Initiative 195 would create six income brackets: 3.7 percent for the first $25,000 of individual income, 4.2 percent for $25,001 to $100,000, 4.4 percent for $100,001 to $500,000, then 7.4 percent above $500,000 and 8.4 percent above $1 million. The coalition says 97 percent of Coloradans would pay less, with a median-income household earning $95,470 saving $316 annually. A household earning $1 million would pay $15,925 more.

The measure would also exempt new revenue from Colorado's Taxpayer's Bill of Rights, the 1992 constitutional amendment that caps revenue growth at population growth plus inflation. That would give Democrats controlling the statehouse a larger spending allowance while making revenue more volatile, since high-earner income fluctuates with capital gains.

The brackets would not be adjusted annually for inflation, meaning more taxpayers would rise into higher brackets as incomes grow. Small businesses that pay tax at individual rates on pass-through income would face sharp increases, with a family farm that has a good year hit with a higher tax bill.

Colorado's 8.4 percent top rate would rank far above its neighbors: Wyoming has no income tax, Arizona taxes at 2.5 percent, Utah at 4.45 percent, Oklahoma at 4.5 percent, Nebraska at 4.55 percent, Kansas at 5.58 percent and New Mexico at 5.9 percent. Colorado's low flat rate has been a draw for businesses and young professionals, contributing to the state's population surge over the past two decades.

Washington, Rhode Island, Maine Tax Millionaires

The Colorado effort is part of a broader progressive campaign. Democrats this year have imposed millionaire taxes in Washington state (9.9 percent), Rhode Island (8.99 percent) and Maine (9.15 percent). Proponents argue the graduated tax is needed to compensate for federal Medicaid cuts in last year's GOP tax bill, but the Congressional Budget Office projected last month that federal Medicaid spending will increase 34 percent over the next decade despite those reforms.

TABOR Exemption and the Competing 4.4% Cap

Advance Colorado, a conservative group, submitted nearly 190,000 signatures for a countermeasure that would cap the state's income tax rate at 4.4 percent. If both measures pass, the one receiving the most votes takes effect. Voters will also decide Proposition NN, which would allow the state to keep TABOR refunds for K-12 education funding — the third such attempt in seven years after failures in 2019 and 2023.

The state's fiscal pressures add urgency to the debate. Lawmakers have closed billion-dollar deficits over the past two years, with legislators this spring cutting Medicaid, affordable housing and other key programs. The shortfalls stem partly from TABOR's revenue constraints, which limit government tax revenue to population growth plus inflation, as well as overspending on certain programs and the end of pandemic-era relief money.

Democratic Gov. Jared Polis, who cannot run for re-election this year, has called a graduated income tax "absolutely devastating" to Colorado's economy. The state's coalition behind the measure counters that the additional roughly $2 billion in annual revenue would fund healthcare, education and early childhood programs.

The November outcome will determine whether Colorado maintains its low-tax competitive position or joins the high-tax states many of its residents left behind. If the measure passes, neighboring states like Utah stand to benefit from any out-migration of high earners and businesses. If it fails, progressives may return with a revised proposal in a future cycle, as they have done with TABOR overrides in 2019 and 2023.

This article is for informational purposes only and does not constitute investment advice.