New legislation has been introduced that is crucial towards creating a more sustainable state budget, as well as putting broad-based income tax relief for Coloradans ahead of special interest loopholes.
Senate Bill 25-138, sponsored by Sen. John Carson, a Republican from Douglas County, improves on a similar bill passed last year by first reducing the state income tax and then zeroing it out by 2035.
In 2024, the legislature passed Senate Bill 228, which temporarily lowers the income tax rate from the current baseline of 4.40%, depending on the amount of tax revenue overcollected by the state under the Taxpayer’s Bill of Rights, or TABOR.
For example, if the TABOR surplus exceeds $300 million but is less than $500 million in a given year, the refund mechanism will “buy down” the income tax rate by 0.04% to 4.36%.
In years with a large TABOR surplus (like this one), the income tax rate will be temporarily lowered from 4.40% to 4.25%, the maximum cut allowed by the bill.
However, the refund mechanism will not be triggered at all if the surplus does not exceed $300 million.
Making tax cuts permanent
Under SB-138, this year’s tax reduction to 4.25% would serve as the new baseline for future reductions, with the ultimate goal of phasing out the state income tax entirely by 2035 or sooner, depending on subsequent cuts.
For several years, Independence Institute has suggested doing precisely what SB-138 now aims to accomplish—using the TABOR surplus to reduce the state income tax (the institute also recommends removing special interest tax expenditures in order to maximize potential tax cuts and ensure broad-based relief).
Rather than refunding overcollected revenues back to taxpayers, the mechanism would simply allow Coloradans to keep more of their own money from the start, granting them the freedom to spend or save it as they please.
Colorado voters have made their desire to pay less in state income taxes loud and clear, easily passing Independence Institute-backed ballot measures lowering the income tax in 2020 and then again in 2022.
SB-138 simply builds on these recent efforts to increase economic freedom and fiscal responsibility.
Ignore the fear mongering
Those who oppose cutting the income tax routinely turn to scare tactics around lost revenue to fund essential government programs and services. Make no mistake, we’ll be hearing complaints about an existing budget shortfall, with progressive lawmakers pointing to the taxpayer protections in TABOR as the problem, rather than their own overspending.
The reality is that the Democrat-dominated legislature has passed an unprecedented number of special interest tax loopholes since Governor Polis came into office.
These tax breaks reduce government revenue while allowing politicians to manipulate the redistribution of taxpayer money to serve their special interests.
According to the state’s own projections, the TABOR surplus was forecast to be $1.79 billion prior to last year’s legislative session. Thanks largely to all these special interest tax breaks, it is now projected to be just $356.3 million.
That is over $1.4 billion of overcollected tax dollars that would have otherwise been returned to Colorado taxpayers, but which will now be funneled to special interests instead.
The money is there
Based on data from the Department of Revenue’s annual report and research from Independence Institute, that $1.4 billion being siphoned off to special interests could have instead been used to lower the state income tax by almost 0.50 percent without impacting the state budget.
As I have previously explained, the current budget shortfall was actually caused by state government misspending federal COVID-19 funds, cooling inflation, and the exorbitant number of targeted tax breaks passed in the last few years.
Should lawmakers remove these special interest tax loopholes, they would immediately uncover the means to implement SB-138. In other words, the money is there to lower taxes across the board, thus benefiting all Colorado taxpayers, rather than a “special” chosen few, while maintaining funding of state programs and services.
SB-138 is an important step to setting Colorado back on track to creating a sustainable budget. Colorado would also become more economically competitive. The state currently ranks just 32nd in tax competitiveness, according to the non-partisan Tax Foundation.
However, it first would mean legislators must admit they have a spending problem, rather than a funding one.
Nash Herman is a fiscal policy analyst at the Independence Institute, a free market think tank in Denver.
