by Barry Poulson
In November, Colorado citizens will vote on Prop 103 to increase taxes and earmark the revenue for education K-12. Prop 103 increases the personal income tax, the corporate income tax, and the statewide sales and use tax for the years 2012 through 2016.
The Fiscal Impact Statement prepared by the Colorado Legislative Staff estimates the cost of this tax increase at $2.9 billion. However, the cost of the tax increase for Colorado taxpayers will be significantly greater than estimated by legislative staff. That is because legislative staff uses static analysis, measuring only the direct impact of the higher taxes on state revenue. They ignore the negative impact the tax increase will have on economic growth and jobs in Colorado.
In a study for the Independence Institute, we used dynamic scoring to measure the impact the Prop 103 tax increase will have on the Colorado economy. Previous research has shown that for every one percent increase in a state’s tax rates, economic growth is reduced by 1/4 to 1/3 of a percent.
So we applied that finding to Colorado data for fiscal years 2007 to 2011, to see what would have happened if Proposition 103 had been in effect then.
The tax increase will significantly reduce personal income in Colorado. The cost of the tax is not just how much extra taxes that people will pay; another costs is the reduction in economic growth, which will reduce personal income. Thus, the total cost to Coloradans of Proposition 103 is estimated between $4.8 billion and $6.0 billion. The total cost per household is estimated between $2,169 and $2,711.
The higher tax and consequent reduction in economic growth will reduce job opportunities in Colorado. Proposition 103 will cost between 7,400 and 11,600 jobs.
By further slowing the economy, the higher tax will also reduce the tax base, and thereby reduce state tax revenues. So instead of raising $2.9 billion in tax revenue, Proposition 103 would actually raise about $2.8 billion.
The revenue generated by the tax increase is earmarked for education, but it is not clear what education programs would be funded. There is a high probability that most of the money will be used to cover operating costs of ongoing education programs. A basic rule in public finance is that one-time money should not be used to finance ongoing programs. “Annualizing” one-time money will exacerbate the structural deficit in the budget.
At the end of five years the Prop 103 tax increase will (supposedly) come to an end, but the ongoing education programs funded by that tax increase will remain. This structural deficit will put tremendous pressure on the state to extend the tax increase and make it permanent.
Because of Amendment 23, enacted in 2000, General Fund spending for K-12 education has already increased to 40 percent of the state budget; Prop 103 will result in an even greater share of the budget allocated to fund education K-12.
Colorado has created one of the best business tax climates in the country by reducing tax rates. As a result the state has experienced higher rates of economic growth than most states. The state has attracted new business investment and jobs at a higher rate than most states. People are attracted to Colorado by the rapid growth in incomes and jobs.
The tax increase in Prop 103 will reverse these trends. At a time when other states in the region, such as Oklahoma, are reducing tax rates, Colorado will be increasing those rates.
Some states, including Wyoming and Texas, impose no income tax. If Colorado tax burdens are rising relative to other states in the region, Colorado will become less competitive in attracting new business investment, and some Colorado businesses may emigrate to states with lower tax burdens.
Colorado has avoided a fiscal crisis such as that experienced in California and other states largely because of the fiscal discipline imposed by the Taxpayer’s Bill of Rights. Proposition 103 will move us toward a path similar to that in California with higher tax burdens, lower economic growth, and reduced job opportunities for Colorado citizens.
Article published in the Summit Daily News, October 9, 2011.
