News outlets in Colorado reported last week that researchers at the University of Denver recommended tax hikes to fill yawning future budget gaps. In fact, the researchers made no recommendations. What they did was offer two scenarios for public consideration by which the state could meet its obligations (download the study summary). The first scenario included only program cuts. The second included only tax hikes. Even though the tax-hike scenario has already drawn fire, it is no radical proposal. The hikes, as detailed to the Colorado Independent by the director of the study, would establish rates that would still compare favorably with those in its neighbor-state competitors of the Great Plains and Mountain West.
Center for Colorado’s Economic Future Director Charlie Brown said that, for example, the proposed elevated income tax rates would land in the middle of the rates in place in the ten “inter-mountain states,” by which he means Arizona, Colorado, Idaho, Kansas, Nebraska, New Mexico, Nevada, Montana, Utah and Wyoming. He added that, once full comparison research has been completed by the Center, he believes the “more productive” graduated income tax rates proposed for Colorado will “compare favorably to [the income tax rates of] the other states except for [Wyoming],” which has no income tax.
Brown said Colorado’s low sales tax rate would remain as is in the scenario drawn up by the researchers but that it would be broadened to include personal services, like pet grooming and auto repair. The fact that Colorado’s sales tax rate is lower than all of the other nine states considered, except Montana, which has no sales tax, would mean that in Colorado the “per capita burden would [remain] unquestionably competitive.”
Brown also believes that the research will show that the Center’s proposed property tax adjustments, including a uniform state-wide mill levy, will help clean up “the mess” that is the state’s present system and that it will deliver “per capita burdens that would be favorable over all.”
Details on these kinds of comparisons will appear in the Center’s full narrative report due out in the coming weeks.
Relevant excerpts from Brown’s email responding to questions sent by the Colorado Independent:
[O]n the individual income tax, of the 10 states in the intermountain west, our proposed rates would fall in the middle of the graduated rates of those states. Of the 10 states, 9 have an income tax (Wyoming, with its big revenue producing severance tax, has no income tax). Our rates would compare favorably to ID, KS, MT, and NE. AZ and NM have lower top rates, and UT has a flat rate of 5%. In all cases, the brackets are substantially lower than the ones we propose, so more of their taxpayers would pay the top rate (in all cases except for AZ, nearly all of their taxpayers pay the rate in the top bracket). What all of this means is that we need to compare “effective tax rates” in these states with the effective rate that would result from our option of a 6.1% top rate. Another way to do the comparison would be to compare the per capita income tax burden among these states. Due to the lag in reporting, we would need to simulate our proposal for 2008 to do that. My gut tells me that once these comparisons are done, we will compare favorably to the other states except for WY on the income tax.
On the sales tax rate, at 2.9% we have the lowest state rate by far of the 8 other states levying a sales tax (MT has no sales tax). Of our neighbors, WY has the lowest rate at 4%. The rest of the intermountain west is between 4.75% (UT) and 6.5% (NV). Our proposed base would most likely be more broad than many of these states, but again, due to our low rate, the per capita burden would unquestionably be competetive.
On the property tax, the per capita burdens would be favorable over all. The distortion in our tax system between residential and non residential property, and our business personal property tax already make Colorado less competetive to certain kinds of businesses. At the end of our summary we noted some areas that need to be studied in depth. The property tax is one of them. It is a real mess. In the end, the impact of a uniform levy for schools depends on what your business is and where you are within the state.