Colorado voters face a stark choice on Election Day between two competing income tax measures: one that would cap rates at the current 4.4 percent, and another that would permit graduated rates with a top rate of 8.4 percent, according to a new analysis from the Tax Foundation published this week. Amendment 87 would authorize the state's first graduated-rate income tax since 1987, while Proposition 136 would lock in the existing flat rate. The report warns that the higher-rate measure would hit small businesses especially hard and could trigger significant economic consequences.
Under Amendment 87, Colorado's constitution would allow progressive tax brackets, with new rates initially set at 7.4 percent above $500,000, 7.9 percent above $750,000, and 8.4 percent above $1 million. The measure also creates substantial marriage penalties since bracket widths remain identical for single filers and married couples filing jointly. A couple each earning $25,000 would face a marriage penalty of $125, while a couple each earning $500,000 would pay $16,575 more than if they filed separately. Among Colorado's 53,640 filers with adjusted gross income above $500,000—those who would face higher marginal rates—30,850 receive partnership or S corporation income, and 14,310 report other business or professional income. Households earning $500,000 or more earn 27 percent more in business income than wage income. The state's 731,000 small businesses employ almost 49 percent of all Colorado workers, with the vast majority structured as pass-through entities taxed on owners' individual returns.
The report argues that high tax rates on income above $500,000 function "to a considerable degree, as higher taxes on small business ownership," and warns that elevated rates would diminish small business profitability and place Colorado firms at a competitive disadvantage against out-of-state competitors. According to the Tax Foundation analysis, economic decisions are made on the margin, meaning when the tax rate on the next dollar of income climbs, business owners are likely to hire fewer workers, postpone capital investment, and scale back expansion plans. The report also notes that many filers will report $500,000 or more in income only once or twice—such as when selling their business or an investment property—making the higher rate a surtax on retirement or the return on many years of entrepreneurship where most gains are realized at once rather than spread across the years of work that went into earning them.
The report points to cautionary examples from other states where top rate increases backfired. In California, where voters approved top rate increases in 2012, a combination of out-migration, reduced in-state investment, slower economic growth, and tax avoidance strategies eroded an estimated 61 percent of the anticipated revenue gains. New Jersey's Treasury Department found that the 2004 adoption of a new top rate of 8.97 percent above $500,000 increased out-migration by 20,000 over the next five years. If both Amendment 87 and Proposition 136 pass, the one receiving more votes would prevail on conflicting provisions, though the state's ballot information book acknowledges the outcome of any conflict remains unclear and would require court resolution. At a 4.4 percent rate, Colorado remains competitive with regional peers, but states are increasingly diverging on income taxes, with voters set to decide which side of the divide Colorado joins.