Colorado policymakers recently rediscovered what some of us have long known: more money in people’s pockets reduces poverty.
A recent Denver Post article by Nick Coltrain discusses the apparent success of Colorado’s Family Affordability Tax Credit (FATC) and Earned Income Tax Credit (EITC) in reducing childhood poverty by nearly 41 percent.
Unfortunately, gold dome policymakers are taking the wrong lessons from these developments.
Broad-based tax relief versus special interests
The FATC and EITC are refundable tax credits for low-income Coloradans, meaning that if the credit exceeds someone’s income tax liability, they can receive the excess as a refund from the state.
However, these credits are funded out of tax dollars collected in excess of the revenue limitations in Colorado’s Taxpayer’s Bill of Rights (otherwise known as the TABOR surplus). That’s money that would otherwise be refunded back to taxpayers.
As I previously explained, the meteoric increase in targeted tax breaks over the past few years drains the TABOR surplus by redirecting the revenue towards narrower and narrower interests.
These tax breaks obviously work, but only for the people specifically singled out as beneficiaries.
But what if I told you there was a more efficient and equitable way to improve the economic prosperity of all Coloradans, rather than a chosen few?
According to research from Independence Institute, TABOR surpluses could instead be used to “buy down” the state income tax rate by several basis points for all Colorado taxpayers, while remaining revenue neutral for the state’s budget.
In 2024, the legislature attempted to implement such a policy by passing Senate Bill-228.
However, that effort was immediately undermined by new and increased tax expenditures, including the FATC and EITC.
Wrong Lessons
Unfortunately, because tax credits are effective, legislators believe that government intervention is the proper solution to fighting poverty, and that TABOR threatens their ability to do so.
In reality, tax breaks are effective simply because they put more money in Coloradans’ pockets. More money means more economic freedom and opportunity.
Lowering the state’s income tax rate, coupled with reducing (and ideally eliminating) targeted tax breaks, all Coloradans would experience a surge in economic freedom and less government intervention in their lives.
Coloradans could keep their money from the beginning, without being forced to give it to the government first–money that is eaten away by inflation while in the government’s coffers.
Defending the status quo
Such a beneficial policy change faces a couple of major obstacles.
First, targeted tax breaks are a great way to ensure lifelong voters. At the mere mention of broad-based tax relief for everyone, opponents drum up fear and class resentment to defeat such policy pushes, even though everyone would benefit.
Second, progressives want to keep whittling away at TABOR, because they hate that Coloradans have a direct say in their own taxation.
Now that the state’s budget is colliding with the reality of overspending, legislators are strategically framing TABOR as the big bad guy that threatens these successful tax credits, rather than the government intervention that drained the TABOR surplus in the first place.
