Colo. Tax Vote Offers Insights On Framing Policy

Law360 (November 19, 2020, 4:06 PM EST) --
Trey Rogers
Trey Rogers
Colorado voters were anything but consistent in deciding the fate of 2020 ballot measures. Some results suggested a progressive tilt: A ban on late-term abortions was soundly defeated; voters approved a paid sick leave program for workers; and a proposal to reintroduce wolves in the state passed, albeit narrowly.

The same can be said about initiatives on fiscal issues. Voters repealed the state's decades-old Gallagher Amendment that has kept residential property taxes artificially low and approved a new tax on cigarettes and vaping products to raise money for preschool education.

But the passage of Initiative 116, by nearly 16 points, was one of a few measures that bucked the trend. The measure lowered the state income tax rate from 4.63% to 4.55%. It was funded and supported by right-wing interests that have fought for decades to limit the size and growth of state government.

While Initiative 116's decrease in the income tax rate is small, its effect on the state will be substantial. For individuals, the average decrease in taxes will be about $37 per year, the cost of a tank of gas. But its impact on the state budget will be an estimated $203 million reduction in fiscal year 2020-2021 and a $154 million reduction in fiscal year 2021-2022, ultimately amounting to a $1 billion decrease in revenue over the next 10 years.

That's significant money in a state that can't raise taxes without voter approval, especially with state tax revenue already down billions because of the COVID-19 recession. Initiative 116 comes at a time when our state was already unable to adequately fund critical needs like transportation and education.

For these reasons, moderate and business interests, like the Denver Metro Chamber of Commerce, opposed Initiative 116. The chamber's economic development professionals do not see our state's income tax rate as a hurdle to attracting companies or investment in new jobs to Colorado. Our current, flat 4.63% rate was already among the lowest in the country.

Of more concern to Colorado business leaders is the state's inability to invest in infrastructure and our future. When we can't efficiently move people or goods or maintain access to recreational opportunities in our mountains because of poor transportation infrastructure, that impacts our economic success. When our schools fail to give our kids the skills and education that employers need, that is a hurdle to economic development.

So, how can we reconcile the anti-tax message in the passage of Initiative 116 with the pro-tax message in the passage of the tobacco and vaping products tax and the repeal of the Gallagher Amendment? Both of the latter outcomes will result in higher taxes on the voters, directly or indirectly, and seem inconsistent with a vote to reduce the state's income tax rate.

First, it is clear that Colorado voters want a voice in how their tax money is spent. Since the passage of the state's Taxpayers Bill of Rights, known as TABOR, in the 1982 election, voter approval has been required for all tax increases in Colorado. Since TABOR, only a handful of tax increases have passed while many others have failed.

Those that were successful tied revenue to a specific purpose. This year's tobacco and vaping products tax initiative is a good example. Its revenue will primarily fund preschool education, a cause the measure's proponents knew from early polling to be popular with voters.

Similarly, the repeal of the Gallagher Amendment was intended to ease the burden on rural taxpayer funded services like fire protection. The Gallagher Amendment set a ratio of residential property taxes to all other property taxes, including those on commercial property.

As Colorado's residential property values increased faster than commercial property values, residential rates had to be cut to maintain the ratio, and thus the burden on commercial property increased. In rural Colorado, where property values have not appreciated as much or as quickly as in metropolitan areas, and where there is less commercial property, tax revenues have lagged.

The result has been a real strain on local services funded by property taxes. While the repeal of Gallagher won't increase residential property taxes, it will prevent future reductions that would have otherwise occurred. A well-funded campaign to educate voters about the trade-off between future property tax reductions and the impact on local services resulted in passage.

Unlike those two measures, which carefully balanced cost and benefit, Initiative 116 will simply reduce the state's general fund. Its passage won't gore any particular ox. Given the opportunity for a tax cut, even a modest one, without a specific negative impact, the voters approved.

That same notion leads to a second way to reconcile the voter's decision to both cut and increase taxes in 2020, which can be summed up with this poetic explanation of popular tax policy, often attributed to former U.S. Sen. Russell Long: D-La., "Don't tax you. Don't tax me. Tax that fellow behind the tree."

Since TABOR, Colorado voters have approved taxes on tobacco, vaping products and marijuana — that's it. In each case, a majority voted to tax the minority that uses these products. They taxed the fellow behind the tree. On the other hand, Initiative 116 offered every Coloradan who pays income tax — a vast majority of voters — the opportunity for a rate reduction and they took it. Don't tax you, don't tax me.

The repeal of Gallagher seems to run counter to this notion, but not really. The repeal will impact residential property tax rates. While a majority of Coloradans own their home, and thus pay property taxes, the percentage has dropped over the years and now stands at 63.5%. Of course, rents are affected by property tax rates, but that impact is less obvious and more attenuated than a direct tax.

And, as noted above, the repeal of Gallagher won't raise taxes. It will prevent future cuts, but again, that impact is less obvious and more attenuated than an actual tax increase. Weighing the loss of future property tax reductions against the problem of inadequate local services, voters chose to support repeal.

Compared to most states, it is relatively easy to put a citizen-initiated measure on the Colorado statewide ballot — proponents just need about 125,000 petition signatures from registered electors. This makes Colorado a laboratory of sorts for new policy ideas. That said, getting on the ballot here does not assure a measure's passage.

Those interested in pursuing tax policy changes in Colorado would do well to note that the state's voters may vote to increase taxes only for the right reasons, and even then, they would prefer the burden of the increase to fall on someone else.



Trey Rogers is the chair of the board of the Denver Metro Chamber of Commerce and a partner at Recht Kornfeld PC

Disclosure: The Denver Metro Chamber of Commerce publicly opposed Initiative 116.


The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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