Colorado

Colorado’s Funding for Public Schools Initiative Hurts Small Businesses and Exacerbates Tax Inequality

Policy

If Colorado Initiative #22, unofficially titled the Funding for Public Schools Initiative, passes in November, Coloradans face a $950.1 million tax increase that will raise income taxes disproportionately for those making over $75,000 and eliminate Colorado’s flat-tax system. The Funding for Public Schools Initiative funds SB 213, the Public School Finance Act.

According to data supplied by the Colorado Department of Revenue, those making over $75,000 per year make up the top 26% of Colorado individual income tax payers, many of which are small businesses. These taxpayers already pay 74% of Colorado gross individual income tax revenues.

The graph below shows the decidedly unequal treatment of those in higher tax brackets. Tax revenue is listed in thousands of dollars.

Income Taxes

Currently, Coloradans at all income levels pay a 4.63% personal income tax. If the Funding for Public Schools Initiative passes, starting January 1, 2014 those making less than $75,000 annual income will pay a 5% income tax, and those making over $75,000 annual income will pay a 5.9% income tax. That’s only an 8% increase for those below $75,000 federal adjusted gross income, but a 27% increase for those above.

When income tax rates get too high, high-income taxpayers often have the ability to shift income to other states. One way to shift income is change residence to one of the seven states with no income tax.

Furthermore, this income tax increase would hurt small business.  A working paper published by the National Bureau of Economic Research by Robert Carroll et al. states that “raising income tax rates discourages the growth of small business.” Small businesses are often S corporations, corporations that “elect to pas corporate income, losses, deductions, and credit through to their shareholders for federal tax purposes.” Shareholders “report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.” Many of these corporations file in the $75,000 to $250,000+ range.

Despite claims that this tax increase would benefit Colorado’s children, there is limited evidence that this is the case. According to a paper by Stanford professor Eric A. Hanusheck entitled Spending on Schools“dramatic increases in resources for schools do not appear to translate into enhanced student performance.”

 

 

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