Colorado Voters to Decide Between Flat Tax Cap and Graduated Income Tax

By Jared Walczak | Tax Foundation

On Election Day, Coloradans will get to decide on two competing measures on income taxes: an initiated statute that would cap income taxes at the current 4.4 percent rate; and a constitutional amendment that would authorize a graduated-rate individual and corporate income tax, paired with an initiated statute setting new rates, with a top rate of 8.4 percent.

Under Amendment 87, Colorado’s constitution would permit a graduated-rate income tax, and the new higher rates would initially be set at 7.4 percent above $500,000, 7.9 percent above $750,000, and 8.4 percent above $1 million. Rates and brackets could be changed by the legislature at any time.

The proposal also embeds an extreme marriage penalty since bracket widths are the same for single filers and married couples filing jointly. A couple earning $25,000 each faces a marriage penalty of $125. A couple earning $500,000 each faces a marriage penalty of $16,575.

Colorado had a graduated-rate income tax until 1987, when it became the first state to switch from a graduated- to single-rate income tax. (Several other states have always had flat income taxes.) Before the transition, Colorado’s top rate had been 8 percent on income above $10,000 for 24 years. The new top rate became 5 percent, which had previously been the marginal rate between $4,000 and $5,000 in income (about $12,200 to $15,250 in today’s dollars).

The flat tax rate has been reduced multiple times and now sits at 4.4 percent. This is a feature of flat taxes: a rate on all income is harder to raise and more attractive to cut. Should Amendment 87 pass, the initial replacement rate schedule will only impose higher rates on income above $500,000, but the new rates would be statutory, while the authorization for a graduated-rate tax would be enshrined in the constitution, permitting the legislature to adjust rates later.

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