Editor’s note: Gov. John Hickenlooper recently said many of the Coloradans he met on the campaign trail were surprised to learn that the state has one of the lowest tax burdens in the country. Facing another $1 billion shortfall in the state’s budget, is it time to consider a tax hike? A liberal policy group recently proposed six mix-and-match versions of a tax increasea strategy designed to see which combination might pass muster with the state’s title board. All of the initiatives would increase Colorado’s flat income tax rate of 4.63 percent. Today we explore two sides of that issue.
I loved the ’80s as much as the next guy. Who didn’t like moon-walking to school, wearing one glove and watching “Beverly Hills Cop”?
Well, dust off those Duran Duran albums because Michael J. Fox has just stepped out of a souped-up DeLorean to deliver to Colorado a tax plan we shed decades ago.
In the mid-’80s, Colorado scrapped its inefficient, escalating income tax system for one simple, flat-rate income tax, which brought even more to the state coffers. It’s worth remembering just why we made that change.
Then, as now, Colorado’s income tax was tied to the federal tax code. As the Reagan tax-rate cuts came into effect, the tax base was broadened because loopholes were closed. That is, higher income earners couldn’t hide as much money from taxation.
At the time, Colorado had a tax rate structure where higher income earners paid well over 8 percent tax. And with the federal changes, these high producers were going to get soaked in Colorado compared to other states. The legislature was rightly worried that they would move out of Colorado and go to states that didn’t punish productivity.
At the same time, the new Reagan tax code created much larger standard deductions and exemptions, which saved lower income folks from paying taxes they otherwise would have.
The General Assembly knew a flat-tax income tax for businesses and households was the answer. But at what rate?
Barry Poulson from the University of Colorado then predicted that the revenue-neutral flat-tax rate should be 4.25 percent. His prediction turned out to be correct. The legislature voted in an excessive 5 percent rate, which brought in tens of millions of dollars more to the state than did the previous escalating tax structure.
Jumping forward to today, fans of all things ’80s have pulled back their Flock of Seagulls hairdos and turned off VH-1 long enough to propose a return of big-hair, escalating income tax rates.
This proposal would be economic suicide for Colorado. Why? Two words: Incentives matter. Even those who lost their hearing at an Oingo Boingo concert have learned that when we tax something, we get less of it. And what we need now, in 2011, is economic growth and jobs. We mustn’t tax it.
Spiraling taxes rates for business mean fewer jobs. It’s not rocket science. The furry alien ALF would even recognize that if employers and higher-income earners have to pay a larger percentage of their budget to taxes, they have less to hire workers and invest. This will strangle our economic recovery before it starts.
Jobs and capital are very mobile now, able to go faster than that car from “Knight Rider.” They flee from high-tax states to low-tax ones.
Just look at the results of the 2010 census. States with low or no income tax gained population (and therefore congressional representation) because people and employers moved there. Texas, the biggest winner of all with four new congressional seats, has no income tax. I mean, why else would you live in Texas? All the states that lost population were high-tax states.
This retro proposal also calls for a new sales tax to be imposed on most services. Imagine paying a tax to your barber, the guy who paints your house, or the kid who mows your lawn.
It hurts lower-income earners most of all. Not only does the proposal impede employment, it also massively expands the most regressive of all taxes: the sales tax.
This ’80s plan also calls for ending the constitutional prohibition on state property taxes. Forget about the local control we have now over property tax. Think of the mischief that will come when legislators under the Gold Dome start collecting and disbursing local property taxes.
And don’t fall for the old “the state is underfunded” sob story. On a per capita basis, Colorado is right there in the national average for combined state and local taxes. What states are the highest? New Jersey is No. 1; New York is No. 2; and California is No. 6. All are in horrible fiscal crisis.
The answer to Colorado’s fiscal challenges is not increasing taxes with a failed old system, but spending the money the government already takes from us more wisely.
Hey, look, “The Breakfast Club” is on TBS!
Jon Caldara is president of the Independence Institute and can be heard weeknights at 10 p.m. on 850 KOA radio.
