Colorado voters will decide between two competing measures that could reshape the state’s income‑tax system. Amendment 87 would amend the constitution to allow a graduated individual and corporate income tax, initially setting top rates of 7.4 % on income above $500,000, 7.9 % above $750,000, and 8.4 % above $1 million. Proposition 136 would statutorily cap both individual and corporate income‑tax rates at the current 4.4 % flat rate.
What Amendment 87 proposes
- Constitutional change – removes the clause that requires a single flat rate, permitting a graduated schedule that the legislature could later adjust.
- Initial rate schedule
- 7.4 % on taxable income > $500,000
- 7.9 % on taxable income > $750,000
- 8.4 % on taxable income > $1 million
- Corporate tax – adds a graduated corporate income‑tax structure, even though progressive rates are rarely used for corporations.
- Marriage penalty – because bracket widths are identical for single filers and married couples filing jointly, couples with similar incomes face a penalty (e.g., two earners at $25,000 each incur a $125 penalty; two earners at $500,000 each incur a $16,575 penalty).
- Small‑business impact – roughly 731,000 Colorado small businesses (≈49 % of state employment) are pass‑through entities; about 30,850 filers with AGI > $500,000 receive partnership or S‑corporation income, and 14,310 have other business income. Higher marginal rates would effectively increase taxes on small‑business owners, potentially reducing investment, hiring, and wages.
What Proposition 136 proposes
- Statutory cap – fixes both individual and corporate income‑tax rates at the existing 4.4 % flat rate.
- Ease of repeal – as a statute, it could be overturned by another simple‑majority vote, and the legislature can amend it without a constitutional amendment.
- Interaction with TABOR – Colorado’s Taxpayer Bill of Rights already requires voter approval for any rate increase, so the cap does not add a new binding constraint beyond existing law.
Potential outcomes if both measures pass
- The measure receiving the higher vote total would control conflicting provisions.
- If Proposition 136 wins the popular vote, its 4.4 % cap would likely prevent any rate above that, effectively leaving high‑income earners untaxed under the statutory language of Amendment 87. The state’s “Blue Book” notes that such a conflict would be resolved by the courts, and the precise outcome is uncertain.
Historical and comparative context
- Colorado operated a graduated income tax until 1987, when it switched to a flat 5 % rate (the top rate at the time). The flat rate has since been reduced to 4.4 %.
- Other states that raised top rates have experienced mixed results:
- California (2012) – out‑migration, reduced investment, and tax‑avoidance strategies cut expected revenue gains by about 61 %.
- New Jersey (2004) – a new 8.97 % top rate above $500,000 was linked to an estimated 20,000 additional out‑migrants over five years.
- New York – the share of U.S. millionaires fell from 12.7 % (2010) to 8.7 % (2022); the state would have collected an extra $10.7 billion in 2022 had the share remained constant.
Economic considerations
- Margin effects – higher marginal rates on the next dollar of income can lead business owners to hire fewer workers, delay capital expenditures, and raise prices where market conditions allow.
- Surtax risk – many filers may only exceed $500,000 once (e.g., upon selling a business or investment property). For them, the higher rate functions as a one‑time surtax on retirement or capital gains rather than a recurring tax on wages.
- Corporate apportionment – Colorado uses a single‑sales‑factor apportionment, meaning the corporate tax effectively acts as a tax on sales into the state, which can translate into higher consumer prices.
Bottom line
Colorado’s election will determine whether the state moves toward a graduated income‑tax structure with higher top rates (Amendment 87) or retains its current low flat rate (Proposition 136). The decision will affect high‑income earners, small‑business owners, and the broader competitive landscape for businesses operating in the state.
Source article: taxfoundation.org
