Colorado Initiative Uses Schools to End Flat Tax, Seek $1 Billion Tax Hike

Published October 16, 2013

An initiative on the November ballot in Colorado would raise the state income tax $1 billion annually, making it the largest tax increase in state history, according to state estimates. It is the latest measure in a long campaign to use the public schools as a wedge to defeat the state’s Taxpayers Bill of Rights (TABOR) spending limits.

In 1992, Colorado voters passed the TABOR amendment, which requires voter approval for any new tax or increase in taxes. If tax revenues exceed the rate of inflation plus population growth, governments must refund the excess revenues to taxpayers.

Now comes Amendment 66, which would abolish Colorado’s flat income tax of 4.63 percent and impose a new two-tier bracket system. Incomes under $75,000 would be subject to a 5 percent tax (an 8 percent rate increase), and incomes above $75,000 would be subject to a 5.9 percent tax (a 27 percent rate increase).

The proposal has been crafted for majority appeal with the 27 percent tax increase applying only to 26 percent of Colorado tax filers. That group paid 73 percent of Colorado’s income tax in 2009. If Amendment 66 passes, Colorado’s top marginal effective combined federal and state tax rate would be higher than in neighboring states. High-income earners have shown they will move to escape high taxes, increasing the likelihood that Amendment 66 will not collect the revenues the state plans to spend.

Repeated TABOR Rollback Attempts

The initiative follows measures to divert TABOR refunds to schools that were defeated in 1998, 2000, and 2008. However, voters did approve two measures suspending TABOR limits on public school spending. In 2000, voters passed Amendment 23, a measure that required base K-12 spending to increase by enrollment and inflation in perpetuity, with an additional increase of 1 percent above inflation for the first 10 years.

These required increases in education spending have strained other parts of the Colorado state budget. In response, voters in 2005 passed Referendum C, a measure that allowed the state to keep TABOR surpluses for five years and increased total state spending by increasing the TABOR base from which allowable state spending would be calculated. 

Opponents of spending limitations also funded the Lobato case. A group of 26 parents, 21 school districts, and the Mexican American Legal Defense and Educational Fund argued the state legislature was not providing enough funding for a “thorough and uniform” system of public education as required by the state Constitution. Approximately half of the state’s school districts provided funding for the case. Plaintiffs argued that full funding would require an annual increase of $2 billion to $4 billion in a state that had 2012 revenues of just $10.5 billion. In May 2013, the Colorado Supreme Court found the current funding system constitutional, overturning a district court ruling in favor of the plaintiffs.

First Piece in Place

Supporters of education funding increases lost in the courts, but through a collaborative project called the School Finance Partnership, various interest groups and Left-leaning organizations (some of whom favor reform) came together around an agenda to tie the creation of a new School Finance Act to a tax increase proposal. The legislature’s Democratic majority passed the first part, Senate Bill 213, on a party-line basis, rejecting nearly every Republican amendment to inject significant reform into the school spending equation.

SB 213 goes into effect only if voters adopt the constitutional changes in Amendment 66. (If voters defeat the ballot proposal, proponents have until 2017 to pass a tax increase that funds SB 213.) Concerns about Amendment 66’s proposed two-tiered tax and its impacts on families and small businesses have provoked more than the usual opposition. Residents of some suburban and rural communities would forfeit substantially more in new taxes than their local schools would receive in new revenue, prompting claims that the new school finance formula is unfair.

Ben DeGrow ([email protected]) is senior education policy analyst for the Independence Institute, a Denver-based free market think tank, and author of the recent issue brief, “Amendment 66: Unfair and Overpriced.”  Linda Gorman ([email protected]) is director of the Institute’s Health Care Policy Center and author of a recent issue paper on Amendment 66, “A Billion-Dollars Worth of Bad Ideas.”