A Smarter Way to Sustain Colorado’s Revenue Needs

Written with contributions from Joshua Mantell

The sound rejection of recklessly written tax cut initiatives in Colorado and in Denver should mark the beginning of a smarter conversation about how to fund our communities. A central feature of this debate should be a focus on how to effectively tax wealth. 

At the Bell Policy Center, the question of how we come up with a fair way to fund the services we see as essential to economic mobility is a critical priority. In the last legislative session we worked with partners and policymakers to craft a tax reform package that closed loopholes used by the wealthy and big businesses, redirecting those savings to help low- and middle-income families and small businesses get ahead. These changes will help tens of thousands of Colorado families and local businesses. But to truly meet the goal of creating a smarter, fairer tax code in our state, our leaders need to go deeper into the rules that govern our tax system and make substantial changes.

Here are just a few of the ideas that could not only ensure the wealthy pay their fair share, but actually fund our communities the way we want them to be funded. 

Ending Our Addiction to Sin & Sales Taxes

When Denver voters looked at Initiative 304, they faced a cruel dilemma: Save money on sales taxes or lose free preschool, college scholarships, and mental health services. Fortunately, they rejected this attempt to defund these critical programs, but city leaders would be wise to acknowledge sales tax is one of the worst ways to fund critical priorities. One of the biggest reasons for our unfair tax code is Colorado’s reliance on sin and sales taxes to pay for popular programs. Taxes on marijuana and nicotine, as well as sales taxes on everyday purchases, might sound good at first, but they end up hitting low- and middle-income families the hardest.

Local governments rely on sales and sin taxes because TABOR prohibits them from using other, more progressive tools, like a local income tax, to raise money in fairer ways. And, in Colorado, property taxes are even more complex. 

A Smarter Way to Assess Property Taxes 

Voters across Colorado rejected a statewide measure — Proposition 120 — that would have dramatically reduced property taxes in a one-size-fits-all approach that would have devastated many local communities. Our ongoing debate over how to create a smarter property tax system will continue. Many homeowners have watched as escalating home values have boosted their property taxes and we need a system that can tell the difference between a $400,000 two-bedroom home and a $10 million mansion. While the state legislature has passed a two-year decrease in statewide property assessment rates, much bigger changes are needed to make sure the right people see savings while others pay their fair share. 

One of the most effective ways to tax wealth is to tax property above a certain value at a different rate. But once again, our state constitution prohibits us from taxing property based on value. We can only look at usage. TABOR also prohibits real estate transfer taxes, which many governments across the country use to fund affordable housing programs.

Any exploration of a fairer property tax code must address these barriers.

Close Tax Loopholes

While the tax reform package, mentioned above, closed or reduced many tax loopholes, more can and should be done to ensure an efficient and fair tax code. Further reducing the caps on various tax deductions — like the tax deduction for contributing to a 529 college savings plan or for pass-through businesses — or reforming other deductions, like the ones that allow corporations to carry forward and back losses to significantly reduce their taxes, would do more to promote equitable tax treatment for workers and businesses alike.

The easiest way to eliminate these loopholes would be to “decouple” from the federal tax code and allow Colorado to create a fair and equitable code that works for our state. Currently, our state taxes are calculated based on federal taxable income, which means all deductions and credits at the federal level are already embedded in our state’s tax code. Decoupling would allow Colorado a clean slate to affirmatively choose which tax credits and deductions make sense and add fairness to our state’s code.

Tax Estates and/or Inheritance

Wealth accrues across generations, as assets are passed down from one generation to another. However, in many states, including Colorado, that wealth is able to be passed down tax free. Some states put a tax rate on estates (properties or assets) that are passed down and above a certain dollar threshold, generally somewhere in the $2 million to $5 million range. Taxing estates or inheritances would allow the state to further invest in education, health care, and other important public programs, while possibly reducing some taxes that disproportionately hit low- and middle-income families.

Our current tax system requires low- and middle-income Coloradans to pay more of their share of income in taxes than those at the top. It also excludes many types of wealth from being taxed, which exacerbates the wealth gap in Colorado. It is time for our legislators and policymakers to take up this discussion and demand a smarter way to sustain our revenue base while reducing inequality in our state.