Colorado Budget Surplus Triggers Income Tax Rate Reduction

In 2019, the Colorado income tax rate will be reduced from 4.63% to 4.50%. This temporary rate reduction is permitted under the Taxpayer’s Bill of Rights (TABOR) amendment to the Colorado State Constitution.

It applies to all income tax returns for tax year 2019, including:

  • personal income tax returns;
  • corporation income tax returns;
  • partnership and S corporation income tax returns; and
  • fiduciary income tax returns.

Taxpayer’s Bill of Rights (TABOR) Amendment

The TABOR amendment was approved by voters in 1992. It limits the amount of revenue the state can keep. The amendment also requires voter approval for certain tax increases. The TABOR limit is equal to the lesser of:

  • the prior fiscal year’s revenue limit grown by Colorado inflation and population growth, or
  • the current fiscal year’s revenue.

In 2005, Colorado voters approved Referendum C. This allows Colorado to hold and spend an amount of revenue above the TABOR limit base. However, the amount is limited by a cap.  Colorado must refund surplus revenue above the TABOR cap to taxpayers. There are three refund mechanisms:

  • local government property tax exemption reimbursements;
  • temporary income tax rate reductions; or
  • a six-tier sales tax refund.

Temporary Income Tax Rate Reduction

A temporary state income tax reduction from 4.63% to 4.50% is available if:

  • the TABOR surplus exceeds the cost of reimbursing local government property tax exemptions; and
  • there is enough surplus to fund the rate reduction.

There are no special steps required to receive the rate reduction. Colorado will automatically apply the reduction when taxpayers file their 2019 income tax returns. According to the Colorado Department of Revenue, the 2019 TABOR rate reduction will result in a:

  • larger refund for taxpayers that over withheld in 2019; or
  • smaller bill for taxpayers that did not withhold enough or make estimated tax payments.

Proposition CC

TABOR has faced some challenges since adoption. The most recent was Proposition CC, a November 2019 ballot measure. Proposition CC would have allowed Colorado to keep revenue it currently refunds under TABOR. Colorado would have spent the funds on education and transportation. But, voters defeated the ballot measure.

By Catherine S. Agdeppa, J.D.

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All stories by: CCHTaxGroup