Colorado Proposition 121, State Income Tax Rate Reduction Initiative (2022)

Proposition 121, also known as the State Income Tax Rate Reduction Initiative, was a ballot measure in Colorado that passed in the November 2022 election. This measure reduced the state income tax rate from 4.55% to 4.40%, providing tax relief to individuals and businesses while also impacting state revenue and services.

Background on Colorado’s Income Tax Rate

Colorado has utilized a flat income tax rate system since 1987, meaning all taxpayers pay the same rate regardless of their income level. Over the past few decades, the rate has gradually declined from 5% originally to 4.55% in 2020 after voters approved a reduction through Proposition 116.

Proposition 121 represented a further tax cut, lowering the rate by an additional 0.15% to 4.40%. This change applies to the income tax paid by individuals, estates, trusts, and corporations operating in Colorado.

Details of Proposition 121

The key components of Proposition 121 include:

• Reducing the state income tax rate from 4.55% to 4.40% starting with tax years beginning January 1, 2022.
• Applying to income tax paid by individuals, estates, trusts, and both domestic and foreign C corporations.
• Representing an estimated $154 million annual revenue loss for the state based on current income tax receipts.

Proposition 121 was placed on the ballot through Colorado’s initiative petition process. The primary backers were the Independence Institute, a free market think tank, and Republican State Senator Jerry Sonnenberg.

Supporters of Proposition 121

The main arguments in favor of Proposition 121 focused on providing tax relief for Colorado taxpayers and stimulating economic growth. Supporters contended that allowing people to keep more of their income would boost consumer spending and make Colorado more competitive in attracting businesses and workers.

Key groups backing Proposition 121 included:

• Independence Institute
• Colorado Rising Action
• Defend Colorado
• Coloradans for Civil Liberties

Opponents of Proposition 121

Opponents emphasized that reducing the income tax rate would mean a loss of state tax revenue used to fund education, infrastructure, health care, and other public services. They argued Colorado could not afford this revenue reduction.

The main groups opposed to Proposition 121 were:

• Keeping Colorado Great
• Coloradans Coming Together

Election Results

When votes were counted on November 8, 2022, Proposition 121 passed comfortably:

• Yes Votes: 1,581,163 (65.24%)
• No Votes: 842,506 (34.76%)

Arguments For and Against Proposition 121

The debate over Proposition 121 centered on a few key themes regarding tax policy and the role of government.

Reasons to Support Proposition 121

Tax relief was the main focus of supporters. They contended reducing income tax rates would:

• Allow people to keep more of their hard-earned money
• Help offset cost of living increases like inflation and rising housing costs
• Provide financial relief to struggling households

In terms of economic impacts, supporters argued the tax cut would:

• Encourage consumer spending, boosting businesses
• Attract more workers and companies to the state
• Make Colorado more competitive with lower-tax states

Reasons to Oppose Proposition 121

Maintaining state revenue was the priority for opponents. They contended the tax cut would:

• Reduce funding available for K-12 education, transportation, health care programs, and other services
• Force cuts to important public investments and programs
• Take away dollars needed for core government functions

There were also concerns thatupper-income earners would benefit disproportionately from an across-the-board rate cut.

Broader Context and Implications

Proposition 121 represents an incremental but noteworthy change to Colorado’s income tax structure. Evaluating its longer-term effects requires looking at factors like:

History of Colorado’s Income Tax Rate

• 1987: Initial flat tax rate of 5% adopted
• 1999: Rate lowered to 4.75%
• 2000: Rate reduced to 4.63%
• 2020: Proposition 116 cut rate to 4.55%
• 2022: Proposition 121 further reduces rate to 4.40%

This continuing downward trend provides substantial tax relief but also shrinks a major revenue source.

Comparison to Other States

Colorado’s 4.40% flat tax rate remains moderately higher than some competing states:

• Utah: 4.95% flat rate
• Arizona: Ranges from 2.59% to 4.5%
• Texas: No income tax

But the change moves Colorado closer to parity and could aid competitiveness.

Impact on Budget and TABOR

• The $154 million annual revenue loss will lower funds available for the budget at a time when demands are increasing.
• Ongoing tax cuts also move the state closer to hitting its TABOR revenue limit, which could trigger even more significant fiscal constraints.

Proposition 121 thus provides individuals and businesses with tax relief but also creates budgetary challenges policymakers will need to manage carefully in coming years.

Conclusion

Summary of Proposition 121

Proposition 121 successfully lowered Colorado’s individual and corporate income tax rate from 4.55% to 4.40%, continuing a multi-decade trend of reducing income taxes in the state. Supporters achieved their goal of providing additional tax relief, but at the expense of state revenue.

The measure passed comfortably with over 65% of the vote as arguments favoring more income remaining in taxpayers’ hands resonated strongly. However, debates over balancing tax relief with funding for education, infrastructure, and other public services will likely continue.

Outlook Going Forward

Income taxes make up nearly two-thirds of Colorado’s General Fund revenue, so the reduction from Proposition 121 will significantly impact budget deliberations in the years ahead. Policymakers will be challenged to maintain spending on core services while adhering to constitutional restraints on taxes and spending.

Voters have shown a continued appetite for income tax relief. But countervailing concerns over adequately funding schools, transportation, health programs and more could lead to future proposals aimed at balancing tax rates with desired service levels. The tension between these conflicting priorities promises robust policy debates for Colorado in the coming years.

FAQs

Q: When did the income tax rate reduction take effect?

A: The new 4.40% income tax rate took effect for tax years starting on or after January 1, 2022. It impacted taxes owed for 2022 and future years.

Q: Who benefited the most from Proposition 121?

A: All taxpayers experienced a reduction in their income tax bill. But higher income earners benefited more in absolute dollars since they pay more in taxes overall.

Q: What happens if economic growth does not offset the lost revenue?

A: The state would need to cut services, find other revenue sources, or utilize reserve funds. Lower-than-expected economic growth could make budget shortfalls worse.

Q: Could Colorado return to a graduated income tax system in the future?

A: It’s unlikely in the near term, but voters could approve a ballot initiative to create a tiered system with higher rates for upper incomes.

Q: Did Proposition 121 affect property, sales, or other taxes?

A: No, it only impacted the state income tax rate. Other Colorado tax rates were not changed by Proposition 121.