Amendment 87: Graduated Income Tax

What does Amendment 87 do?

The measure replaces the state's current flat income tax rate for individuals and businesses with a graduated income tax that lowers taxes for taxable income below $500,000 and raises taxes for taxable income above $500,000. It requires that the additional money collected from this change be spent on K-12 education, health care, and early childhood care and education, and exempts this money from the state's constitutional revenue limit, also known as the Taxpayer's Bill of Rights (TABOR) limit. The state must produce an audited annual report on how much additional revenue was collected and how it was spent.

What is the state's current income tax structure?

Since 1987, Colorado has had a flat income tax rate, in which all taxpayers, including individuals and businesses, pay the same income tax rate on their income. The state's current flat income tax rate is 4.4 percent. The majority of state income tax revenue is used for general state programs and services. The TABOR amendment in the state constitution requires that income be taxed at a flat rate.

Income tax is paid on a portion of a household's or business's income, which is called taxable income. For example, a married couple earning $42,000 in income per year may have about $10,000 in taxable income and owe $440 in taxes annually. A married couple earning $130,000 in income per year may have about $100,000 in taxable income and owe $4,400 in taxes annually.

What is the graduated income tax structure proposed in Amendment 87?

Amendment 87 removes the constitutional requirement that income be taxed at a flat rate and creates a graduated income tax starting in 2027. In this graduated tax system, an individual's or business's income is split into six ranges-called brackets-with the lowest income tax bracket taxed at the lowest rate and each higher bracket taxed at increasing rates, as shown in Table 1.

This is similar to how the federal income tax works. Unlike the federal income tax, the new state income tax brackets are not adjusted for inflation, so more of taxpayers' incomes will fall into the higher brackets over time. Each tax rate is only applied to the portion of taxable income that falls into that bracket.

For example, as shown in Figure 1 below, an individual or business earning $125,000 a year in taxable income is taxed at a rate of 3.7 percent for the first $25,000. The next portion of taxable income between $25,000 and $100,000 is taxed at a rate of 4.2 percent. The remaining $25,000 is taxed at the rate of 4.4 percent. The total tax owed under the measure would be $5,175, or $325 less than the $5,500 they would owe under current law.

How does Amendment 87 change the amount of taxes owed?

For individuals and businesses with taxable incomes of less than $500,000, the measure decreases the amount of income taxes owed, up to a maximum reduction of $325 per taxpayer. For taxpayers with incomes of about $500,000 and above, the measure increases the amount of income taxes owed.

How does Amendment 87 change state revenue?

By changing tax rates for individuals and businesses, Amendment 87 is expected to increase state income tax revenue by an estimated $2 billion in the first full year and more in later years. However, actual revenue collections may be more or less than this estimate depending on economic conditions and other factors.

The change in state revenue under the measure is calculated as the difference between the actual income tax revenue collected under the measure's graduated income tax rates and the income tax revenue that would have been collected under the state's current rate of 4.4 percent. See the Fiscal Impact section below for additional detail.

Does Amendment 87 impact TABOR refunds?

The measure has no impact on current TABOR refunds or TABOR refund mechanisms. Under current law, the state is expected to collect $15 billion in income tax revenue in 2028. Under this measure, it is expected to collect $2 billion more in income tax revenue, for a total of $17 billion. The additional $2 billion is exempt from the TABOR limit. The TABOR limit and the amount of revenue subject to the limit remain the same, and estimated TABOR refunds will not change. For additional information, see the LCS memorandum titled, "A Brief Overview of the TABOR Revenue Limit."1

How will the additional revenue be spent?

The increased revenue collected under Amendment 87 must be spent on K-12 education, health care, and early childhood care and education. It must add to, and not replace, spending on those services. The state legislature will decide what specific programs will receive additional funding and how much.

What happens if Amendment 87 and Proposition 136 both pass?

Proposition 136 limits the state income tax rate at the current law rate of 4.4 percent. If both Amendment 87 and Proposition 136 are approved by voters, the proposed tax rates for income over $500,000 in Amendment 87 would be higher than the 4.4 percent limit in Proposition 136.

Generally, when parts of voter-approved measures conflict, the policy outcome is determined by the measure that received more votes. However, if both measures are approved by voters, the exact outcome is unclear. The state legislature or a court will need to determine how to resolve any conflicts.