A new tax proposal on the ballot in Colorado designed to increase P-12 education funding could have wide ranging effects on both individual taxpayers and businesses in that state. The tax reform package, known as Amendment 66 is an income tax increase comprising of two tiers with higher income earners paying a higher rate. For the first tier, comprising of taxpayers with state-taxable income of $75,000 or less, the state income tax rate would increase from the current flat rate of 4.63 percent to 5 percent. Taxpayers with state-taxable income more than $75,000 would be charged at a higher rate, 5.9 percent.
In addition, the Amendment 66 tax reforms would require that 43 percent of the state’s budget be spent on education and not on other projects or programs. According to the Summit Daily News, Colorado’s state and school districts currently spend about $5.5 billion per year on school operating costs. The supporters of the plan contend the Amendment should raise about $950 million for Colorado schools while costing the average household around $133 per year.
ColoradoCommitstoKids.com, an organization supporting Amendment 66, argues that the additional revenue raised by the increased tax will dramatically improve school performance and allow for new teachers to be hired and new programs to be offered. Coupled with earlier reforms from Senate Bill 213, the increased tax would allow for more funds to be move toward disadvantaged districts, while funding full-day kindergarten. These plans will not be fully funded if the Amendment does not pass. The Colorado Legislative Council questions these numbers, contending that the plans will really cost $1.12 billion with lawmakers needing to fill the funding gap next year.
Critics of the Amendment argue that the tax increase, portrayed by proponents as a tax on the wealthy, actually has a wider effect on all taxpayers. According to Americans for Tax Reform, Amendment 66 represents a 27 percent increase in the top income tax rate. They argue that the tax will not only raise tax on all workers, but the increase will also be imposed on thousands of Colorado small businesses.
While conventional wisdom would lead most to believe that the corporate income tax is the primary means of taxation for small business, in many instances these businesses actually pay through the personal income tax. Liz Malm, an economist at the Tax Foundation explains:
“A majority of firms within Colorado are what we call “pass-throughs” because their business income tax is ‘passed through’ to individual owner, rather than paid by the actual business entity itself. According to a 2011 Ernst and Young study, 95 percent of firms in Colorado are pass-throughs. Amendment 66 would raise taxes on all of them.”
Examining IRS date, ATR found that 417,698 small businesses in Colorado filed under the individual income tax system in 2011 and that when S-Corps & partnerships that pay the individual income tax are included, upwards of approximately 550,000 Colorado small businesses bear the tax increase. The Tax Foundation also points to a 2011 report from Ernst & Young LLC that found that 57 percent of private sector employment in Colorado was created by pass-through entities.
The tax reforms proposed in Amendment 66 would have wide ranging effects that could slow job creation and hinder economic development. The increased tax would hit small businesses at a time when additional taxes would hit the hardest. Small businesses remain the engines of any economy and it is not wise to place a new tax burden on them. This proposal is highly unpopular with Colorado small businesses, a September 2013 poll from the National Federation of Independent Business found that 96 percent of Colorado’s small business sector was opposed to Amendment 66.
Instead of increasing taxes to fund education, Colorado should consider tax reform that lowers tax rates for both businesses and individuals that stimulates the economy and creates additional tax revenue for schools. Increasing funding for education does not always create positive results. Fundamental reforms that encourage competition while empower parents and children are also needed. School vouchers and education tax credits allow funding to follow the child and give parents additional choice over their child’s education, all while reducing costs over the current system.
