TABOR Rebates and Tax Credits:
Aggregate Impacts from House Bill 24-1134, House Bill 1311, and Senate Bill 24-228
Executive Summary
This report analyzes three bills affecting Colorado state tax rebates and credits, estimating their impacts on households across the income quartiles and on poverty rates in Colorado. This analysis adds to existing analyses of each bill individually by providing an analysis of the combined impact of these bills that accounts for offsetting distributional impacts. The three bills analyzed are described briefly below.
Senate Bill 24-228: TABOR Rebate Mechanisms. The bill adds two TABOR rebate mechanisms for TABOR surpluses collected in FY 2024-25 through FY 2033-34, reviving the temporary income tax rate reduction and adding a new temporary sales tax rate reduction mechanism.
House Bill 24-1311: Family Affordability Tax Credit (FATC). The bill allows a refundable tax credit for families with children under age 17, aimed at reducing child poverty and addressing the relatively high cost of living for Colorado families. Tax credit amounts are higher for families with younger children and are based on family income, where lower-income families receive higher amounts.
House Bill 24-1134: Earned Income Tax Credit (EITC) & Child and Dependent Care Credit. The bill Increases state EITC amounts and expands eligibility to Individual Taxpayer Identification Number (ITIN) holders. It also expands eligibility and increases the credit percentage for the Child and Dependent Care Credit, benefiting taxpayers with broader types of dependents.
Summary of Taxpayer Distributional Impacts
The tax credits in House Bill 24-1311 and House Bill 24-1134 collectively reduce income tax revenue and with it the TABOR surplus amount, thereby altering TABOR rebate distributions. The combination of the TABOR rebate mechanism changes and the new and expanded tax credits benefits middle- and lower-income households as shown in Table 1.
Summary of Impacts on Poverty Rates
The FATC under House Bill 24-1311 and EITC expansion under House Bill 24-1134 are expected to provide tax relief and supplemental income to low-income Colorado families, lifting many Colorado households above the poverty line. Table 2 provides an illustration of the impacts of these tax credits on a representative family with two children.
Families with children at or under Colorado’s median household income, especially those living below or near-poverty levels, will see a notable increase in financial support, which will reduce child poverty rates in the state.
Introduction
This report analyzes the taxpayer impacts of three bills enacted during the 2024 Colorado legislative session, including a bill that creates a new income tax credit (House Bill 24-1311), one that expands two existing income tax credits (House Bill 24-1134), and a bill that modifies the TABOR rebate mechanisms (Senate Bill 24-228).
Income tax credits offer a means to provide tax relief and in some instances an income supplement for eligible taxpayers. Income tax credits reduce the amount of revenue the state collects, which either reduces the amount available to spend or reduces the TABOR surplus amount. Colorado has approximately 40 state income tax credits under current law, including the three analyzed in what follows.
In addition to income tax credits, Colorado’s unique state fiscal structure includes certain limitations that restrict the amount of revenue the state can retain and spend. Under current law, revenue that exceeds the Referendum C cap is required to be refunded to taxpayers.[1] Excess revenue is commonly referred to as the “TABOR surplus”, while the refund amounts are commonly called “TABOR rebates” or “TABOR refunds”, TABOR referring to the Taxpayer’s Bill of Rights Amendment under the state constitution.[2] The Colorado General Assembly can determine the mechanisms used to refund the TABOR surplus.
During and following the COVID-19 pandemic, state revenue subject to TABOR grew at a rapid pace and revenue exceeded the Referendum C cap in fiscal years 2020-21 through 2022-23. Revenue forecasts published prior to and during Colorado’s 2024 legislative session projected that revenue would exceed the TABOR cap through the forecast years.
The bills discussed here impact both how much will be refunded to taxpayers through TABOR rebate mechanisms in years with TABOR surplus and who is receiving the benefits from those refunds and tax credits. The new and expanded tax credits will be distributed to taxpayers earning less than median household income in Colorado ($89,300 as of 2022 based on the most recent data available), while TABOR rebates will be distributed based on income and spending levels under the two additional TABOR rebate mechanisms.
This report will provide an overview of the three bills and estimate their impact on households by income quartiles. Estimates are based on LCS’s March 2024 forecast but estimates based on the Office of State Planning and Budgeting’s (OSPB) forecast can be found in Appendix II.
Senate Bill 24-228: TABOR Rebate Mechanisms
Senate Bill 24-228 adds two TABOR rebate mechanisms, a temporary income tax rate reduction and a temporary sales and use tax rate reduction, for TABOR surpluses collected in FY 2024-25 through FY 2033-34. The order in which the rebate mechanisms are refunded depend on the total amount of state revenue in excess of the TABOR cap after the Senior and Disabled Veteran Homestead Property Tax Exemption is refunded. Table 3 summarizes the ordering of TABOR rebate mechanisms contingent upon the projected amount of the TABOR surplus under Senate Bill 24-228.
The changes in this bill revive the temporary income tax rate reduction rebate mechanism, which became obsolete in tax year 2022 when voters approved Proposition 121 to reduce the income tax rate from 4.55% to 4.40%. Under Senate Bill 24-228, if the TABOR surplus exceeds $300 million, the income tax rate will be reduced from the current 4.40% rate to 4.25% in tax year 2024 and up to a 0.15 percentage point reduction in years thereafter depending on the size of the surplus, as shown in Table 4 below. Colorado’s income tax rate applies to both individuals and corporations based on their federal adjusted gross income and is a flat rate, meaning the refund paid under this measure is proportional to the amount of income taxes paid.
In addition, a temporary sales and use tax rate reduction takes effect if the TABOR surplus exceeds $1.5 billion beginning with the FY 2024-25 TABOR surplus, which will be refunded in tax year 2025. This mechanism temporarily reduces the state sales tax rate by 0.13 percentage points, from the current 2.90% rate to 2.77%.
Finally, the bill maintains the six-tier sales tax refund, but increases the flat amount paid from
$15 per single filer, or $30 for joint filers, to the lowest amount listed for Colorado in the most recent table published in the Internal Revenue Service instructions for Schedule A on itemized deductions.
Projected TABOR rebate amounts by mechanism are shown in Table 5. TABOR surplus and property tax exemption estimates are based on the Legislative Council Staff March 2024 forecast. Estimates for the rebate under the sales tax rate reduction are based on the average tax paid by income level for 2019 from the Colorado Department of Revenue (CDOR), while the income tax rate reduction calculations are based on adjusted gross income categories from 2019 CDOR statistics of income data. The six-tier sales tax rebate is based on Table A in Appendix 1, with an upward adjustment in the revenue tiers based on inflation each year.
Based on forecast projections, Senate Bill 24-228 will reduce the amount of rebates allocated under the six-tier sales tax mechanism and instead rebates will be allocated to taxpayers via the temporary income and sales tax rate reduction mechanisms. The six-tier sales tax rebate is allocated according to an estimate of how much taxpayers in six income tiers pay on average in state sales and use tax. The temporary income and sales and use tax rate reduction mechanisms under Senate Bill 24-228 distribute a higher share of the rebate to higher income earners because the rebate directly impacts tax liabilities based on taxable income and sales. By contrast, the six-tier mechanism allocates fixed amounts to taxpayers across the six income tiers.
House Bill 24-1311: Family Affordability Tax Credit
This bill creates a refundable income tax credit for families with children under the age of 17 and with adjusted gross incomes (AGI) of less than $85,000 per year for single filers and less than $95,000 per year for joint filers. For refundable tax credits, the amount of the credit that exceeds a taxpayer’s tax liability is refunded to the taxpayer serving as a new source of income for some taxpayers. According to the legislative declaration in the bill, the express purpose of this credit is to reduce child poverty and help families afford the increasing cost of living in the state and improve health, education, and adult earning potential for children. This credit is allowed in addition to the child tax credit, resulting in higher levels of income for Coloradans with children.
The tax credit takes effect starting in tax year 2024 and remains in effect through tax year 2033. The credits are based on the age of the child and the income of the filer(s), either single or joint, with the aim of providing the largest credit amounts to the lowest income families with the youngest children. The maximum credit of $3,200 per year for a child under six targets single filers with an income of $15,000 or joint filers with an income of under $25,000 per year. These credits ratchet down by 6.875 percent for every additional $5,000 in income with a maximum income threshold of $85,000 for single filers and $95,000 for joint filers, as shown in Figure 1 below.
Based on 2019 Colorado Department of Revenue Statistics of Income data, the most recent available, single filers are more heavily weighted to the lower income categories. This results in an average higher credit for single filers than joint filers, as seen in Table 6. While the tax year 2024
(FY 2024-25) credit is fixed, future credit amounts and adjusted gross income levels will be adjusted for inflation. Starting in tax year 2026, credit amounts will depend on projected revenue growth based on the December economic and revenue forecast, as well as whether Colorado’s unemployment rate is over 5 percent. The adjustment factor resulting from revenue growth rate and unemployment rate serves to lower or pause this tax credit in times of economic downturn that result in less tax and fee revenue to the state.
As with other income tax credits, when revenue exceeds the Referendum C cap, tax credits reduce the amount of the TABOR surplus. If revenue is below the TABOR limit for the fiscal year, the tax credits are paid with General Fund dollars thereby reducing the amount that can be appropriated by the General Assembly that year.
The Family Affordability Tax Credit is projected to reduce the TABOR surplus through the forecast period starting with tax year 2024, half of which is apportioned to FY 2023-24 and the other half to
FY 2024-25. This results in a $374.3 million TABOR surplus reduction in FY 2023-24 and a
$757.2 million reduction in FY 2024-25. TABOR surplus reductions are aggregated with HB 24-1134 to illustrate the combined impact on TABOR rebates in a subsequent section of this report.
House Bill 24-1134: Earned Income Tax Credit & Child and Dependent Care Tax Credit
This bill increases the allowable state EITC, expands the childcare tax credit to taxpayers with other types of dependents, and changes the corporate income tax reporting structure. The latter does not have a fiscal impact and will not be analyzed here.
Earned Income Tax Credit
The State of Colorado allows taxpayers who earn less than $63,398 that year, the federal income limit for the credit, to also file for a state EITC in the amounts indicated below.
Research Findings
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Conclusion
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Data and Methodology
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