Five years ago, legislative Democrats and their allies warned voters against passing Proposition 116, a measure that cut income taxes by over $150 million annually.
Teachers’ union leaders described the proposition as ‘flat-out irresponsible,’ while Democratic lawmakers anticipated cuts to schools, health care, and transportation.
Despite these warnings, voters overwhelmingly supported the tax cuts.
Gov. Jared Polis also backed the reductions, dismissing concerns from his party’s members.
For a time, these cuts seemed to pose no immediate threat.
State revenue continued to grow steadily, remaining above the limits set by the Taxpayer’s Bill of Rights (TABOR).
However, the situation has shifted dramatically.
Recent sweeping federal tax cuts signed by President Donald Trump have left Colorado facing a budget shortfall of up to $800 million, the first time since 2020 that the revenue is expected to fall below the TABOR cap.
This cap restricts state spending to a calculated limit based on population growth and inflation, leading to refunds to taxpayers when collections exceed this limit.
Until recently, large surpluses made tax cuts feasible without jeopardizing state services, but now lawmakers find themselves searching for solutions to address this sudden deficit.
Chris DeGruy Kennedy, a former state representative and current president of the Bell Policy Center, articulated the impact of these decisions, stating, ‘We do these short-sighted things, because some groups want to shrink government.’
He noted how tax cuts had little immediate damage when the state was above the TABOR cap but underscored the adverse consequences now that revenue collections are plummeting.
Gov. Polis defended the tax cuts, stating, ‘The income tax cuts save every taxpayer money and are what helped grow our economy.’
His office attributed the current budget crunch to the federal tax law and posited that without such tax cuts, unemployment would be worse, and economic growth would have stalled.
Ally Sullivan, a spokesperson for the governor, added that the federal changes left a substantial hole in the Colorado budget.
Historical patterns offer caution: subsequent income tax cuts during periods of previous TABOR surpluses frequently led to budget crises.
In the late 1990s, lawmakers significantly slashed income tax rates amidst rising surpluses, only to face severe budget constraints during economic downturns in the subsequent years.
These past experiences raise concerns that the same pattern could repeat itself, as highlighted by Cobian and Berman of the Bell Policy Center.
They warned of the consequences when revenue drops and Colorado finds itself below the TABOR cap once again.
Despite the challenges, there is a somewhat optimistic outlook for the future.
Predictions from the Colorado Legislative Council staff suggest that the TABOR surplus could return by the next budget year in July 2026, heralding a potential rebound of $760 million in taxpayer refunds.
However, lawmakers have also played a significant role in the current fiscal troubles.
By repeatedly cutting local property tax rates in response to increasing home values, they have unintentionally contributed to the budget crisis.
These reductions do not influence state tax revenues directly but shift the burden of educational funding back to the state, which has already been grappling with financial strain.
In the previous year alone, lawmakers cut over $260 million in property taxes for school districts, further compounding an already tight budget.
Recognizing the potential for history to repeat itself, legislative Democrats have taken steps to address voter concerns over tax cuts.
In 2024, while pressure mounted to cut income taxes again, they insisted that such reductions be temporary and contingent upon a sufficient TABOR surplus to avoid service cuts.
Last tax year, the income tax rate temporarily fell to 4.25%, resulting in a significant reduction of over $450 million on income tax bills.
This year, the rate has reverted to 4.4%, and with the recent federal tax impacts, legislative analysts do not anticipate tax cuts would resume until the 2027 budget year.
In 2021, the legislature enacted a law compelling ballot measures that seek to cut taxes to specify which state services would be affected.
Additionally, Proposition GG was passed by voters, mandating transparency in the effects of proposed tax changes on various income levels.
These legislative measures aim to ensure voters are fully informed about the implications of tax reductions, a step that conservative groups contest.
Advance Colorado, a political nonprofit advocating for tax cuts, even attempted to block the 2021 law but was unsuccessful in court.
In light of these developments, Kennedy believes that providing voters with accurate information about the risks associated with tax cuts will foster more informed decision-making in future elections.
As the situation unfolds, Colorado finds itself navigating the thin line between tax relief and fiscal responsibility, reflecting a delicate balance that will define its budgetary future.
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