Colorado lawmakers next year will likely have to wrestle with how to handle Taxpayer’s Bill of Rights refunds after voters in November slashed the income tax rate, eliminating one of the state’s three reimbursement mechanisms.
State law requires lawmakers to slash the income tax rate to 4.5% when the TABOR cap on government growth and spending is exceeded by more than the amount it takes to reimburse local governments for any property tax exemptions claimed by local seniors and disabled veterans. This year, that is projected to be $161 million of the more than $3.5 billion in TABOR cap excess.
But in November, voters approved Proposition 121, which permanently cut Colorado’s income tax rate to 4.4% from 4.55%, making the income tax TABOR refund mechanism moot since the rate is now below 4.5%.
Nonpartisan legislative staff and Gov. Jared Polis’ office expect there to be tax revenue in excess of the TABOR cap over the next three years. The cap is calculated using inflation and population rates. Unless state lawmakers act to change the refund process, the majority of TABOR surplus money will be distributed to Coloradans through the third reimbursement mechanism: checks tied to the amount of their income, with bigger refunds going to higher earners and smaller refunds going to lower earners.
“I do think this is something we’re going to have to think about,” said Sen. Rachel Zenzinger, an Arvada Democrat and chair of the Joint Budget Committee. “I don’t think it’s on people’s radar right now.”
Polis and Democrats in the Legislature this year moved up when refunds were sent to Coloradans to August and September from April 2023 and made the refund checks a flat sum — $750 for individual filers and $1,500 for joint filers — rather than tied to income level.
(Coloradans will get a second refund check in April to account for the few hundred million dollars not refunded through the flat-rate reimbursement mechanism.)
The change in the timing and distribution of the TABOR refunds was only for one year, however, and Polis hasn’t endorsed extending the new system. “My priority would be to reduce the income tax rate,” the governor told The Colorado Sun in November.
The governor also said he’s “not an advocate” of linking TABOR refund checks to income levels.
“I would be happy to entertain some compromise if part of it is an income tax cut, part of it was a refund,” Polis said.
Polis will likely face pressure from progressive fiscal policy groups and from Democrats in the Legislature, who control the House and Senate by wide margins, to issue flat refund checks. The policy groups and many Democratic lawmakers feel an income tax rate cut and refund checks tied to income tiers are unfair because they mean people with higher incomes get more benefit.
“We would really not like to see the income tax rate used as a rebate mechanism,” said Scott Wasserman, who leads the liberal-leaning Bell Policy Center. Wasserman said he thinks that if the income tax rate is used as a rebate mechanism, people over a certain income level should not get refunds.
The size of the refund check a Colorado taxpayer gets through the income-level-dependent TABOR refund mechanism depends on which of six income tiers they fall into:
- People who make less than $44,000, which represents roughly 35% of Colorado taxpayers.
- People would make between $44,000 and $88,000, which represents about 27% of Colorado taxpayers.
- People who make between $88,001 and $139,000 which represents roughly 17% of Colorado taxpayers.
- People who make between $139,001 and $193,000, which represents some 9% of Colorado taxpayers.
- People who make $193,011 and $246,000, which represents about 4% of Colorado taxpayers.
- People who make $246,001 and above, which represents roughly 7% of Colorado taxpayers.
Coloradans who make $246,001 get about 16% of the total refund amount despite making up a much smaller percentage of the taxpayer population.
Proposition 121 takes effect in tax year 2022, which complicates the Legislature’s TABOR refund plans for the 2021-22 fiscal year, which ended June 30. The state was expected to refund about $150 million through an income tax rate reduction, money that will now have to be refunded as part of reimbursements in the 2023-24 fiscal year, which begins July 1.
On Dec. 20, Legislative Council Staff and the Office of State Planning and Budgeting provided their quarterly economic and tax revenue forecasts to the JBC, and their projections for how much revenue the state will collect in excess of the TABOR cap over the next three years were wildly different.
The Legislative Council Staff forecast that tax revenue will be above the cap by $2.5 billion in the current fiscal year, which began July 1, $1.5 billion in the 2023-24 fiscal year and $1.4 billion in the 2024-25 fiscal year.
The tax revenue forecast from the governor’s office was less rosy. It predicted $2.34 billion in revenue above the TABOR cap in the current fiscal year, $469 million in the 2023-24 fiscal year and $736 million in the 2024-25 fiscal year.
Both agencies warned that there’s a high risk of a recession in the coming months, which could dramatically alter their projections.
The JBC is required to draft its budget based on the less optimistic of the two forecasts.
According to the planning and budgeting office projections, assuming that the Legislature doesn’t change the TABOR refund formula and sticks with refund checks based on income, the average single-filing taxpayer will receive an additional $224 check in the current fiscal year, a $592 check in the 2023-24 fiscal year and an $82 check in the 2024-25 fiscal year.
