How it Works

Path to Zero allows Colorado to phase out its income tax with incremental rate reductions over time using only state surpluses. This approach means income tax cuts will put more money in taxpayers’ pockets with each paycheck, but it will not reduce state spending. The Taxpayer’s Bill of Rights in Colorado’s constitution makes this possible. (Learn more about TABOR at www.taboryes.com.)

Independence Institute, a non-profit public policy think tank based in Colorado, laid out a Path to Zero plan in a 2021 editorial for Complete Colorado:

HOW IT WORKS: TABOR

WHAT IS TABOR?

The people of Colorado adopted The Taxpayer’s Bill of Rights (TABOR) into the state constitution in 1992 to ensure voters have control over how much of their money the government can keep and spend each year. In addition to requiring voter approval for state tax increases, the constitutional amendment limits the annual growth in state spending each year. Under TABOR, state spending may grow each year from the previous year’s spending limit, increasing at the rate of inflation plus population growth. The state government can grow faster if voters agree. If the state collects more in tax revenue than TABOR permits it to keep and spend, it must refund the excess to taxpayers. (Learn more about TABOR at www.taboryes.com.)

TABOR REFUNDS

While TABOR limits government spending, it does not limit how much revenue the state can collect each year. The state tax code determines revenue collections; TABOR determines how much of that revenue the state can keep and spend and how much the state must return to the people. For several consecutive years, Colorado’s tax code has caused the state to over-collect taxes. Any year in which the tax code results in an over-collection of taxes, the state legislature must determine how to refund the excess to taxpayers.

The constitution grants lawmakers broad discretion over how to refund these excess tax collections—known as TABOR surpluses—to taxpayers as so-called “TABOR refunds.” Because a TABOR refund means the state over-collected taxes, refunds ought to be issued in a manner that returns money back to the taxpayers who over paid. But that’s not what happens.

Coloradans have learned in recent years that when the states over-collect taxes, politicians try to take our refunds or redistribute them to their special interest friends. Taking away TABOR refunds—an effective tax increase—was the purpose of Proposition HH in 2023; yet our politicians dubiously marketed it as a tax cut. (Learn more at www.hhsucks.com and under “De-TABORing” on the “Threats to Zero” tab on this website.) Path to Zero will put an end to the politicians’ tricks by lowering the income tax rate and ensuring the state does not over-collect taxes to begin with.

TABOR SURPLUSES

As a state’s economy grows over time, state revenues increase. More economic activity and economic growth means more tax revenue from businesses, workers, and consumers. The growth limit TABOR places on state spending ensures the state government can always keep up with inflation and the revenue necessary to expand state services to keep up with population growth. But healthy economies grow faster than inflation and population growth over time. Growth above these two metrics is what economists call real economic growth. 

By limiting the growth in state government, TABOR causes recurring surpluses to occur as Colorado’s economy experiences real economic growth. Without TABOR, lawmakers would set the state budget each year based on total revenue collections. This taxpayer protection ensures Colorado residents see the benefit of real economic growth by preventing the state from siphoning off the excess created by a healthy and growing economy. The excess is what state budgeters call the “TABOR surplus.”

Ph.D. economist Dr. Vance Ginn explained in an editorial for National Review how Colorado can use its surpluses to phase out Colorado’s income tax:

TABOR AND PATH TO ZERO

The Path to Zero plan would eliminate state surpluses by reducing the income tax rate for everyone. Rather than maintaining an income tax rate that causes the state to over-collect taxes, Path to Zero would lower the income tax rate by the amount necessary to prevent the over-collection. Once Colorado’s economy has grown enough in real terms to cause another surplus, Path to Zero would ratchet down the income tax rate again. If the state does not experience enough growth to create another surplus, the income tax rate would remain the same that year. This would allow the state to phase down its income tax over time in a sustainable manner that does not impact state spending.

This video explains how TABOR can help Colorado phase out its income tax:

HOW IT WORKS: SUSTAINABLE COLORADO BUDGET

Unfortunately, policymakers and courts in Colorado have weakened TABOR over time. When TABOR became law, about 72% of the state budget was subject to the constitution’s spending limit. Today, only 46% is subject to the limit. As the state pulls a larger portion of its budget from Colorado’s households and the private economy beyond the TABOR limit, the cost burden of government on them becomes larger in real terms. This hurts economic growth, employment, and income for everyone.

To honor the will and intent of voters in adopting TABOR, Colorado could subject more of its budget to the spending limit as when Coloradans fist adopted TABOR. This would increase the state surplus and allow the state to phase out its income tax more quickly. To this end, the Colorado-based think tank, Independence Institute, has proposed the Sustainable Colorado Budget.

Read this report to learn more:

HOW IT WORKS: TAX EXPENDITURES

PATH TO ZERO VS. SPECIAL INTEREST TAX BREAKS

After years of TABOR surpluses, lawmakers refuse to reduce the income tax rate to prevent the state from over-collecting taxes. The reason is incredibly cynical and motivated by the political self-interest of our state lawmakers rather than by the interests of hardworking Colorado taxpayers. Surpluses leave more for politicians to hand out to politically favored special interests that they otherwise could not spend in their annual budget. In effect, those handout come directly from the TABOR refunds of Colorado taxpayers—and diminish the state’s ability to lower income tax rates for everybody.

During years in which the state experiences a TABOR surplus, special interest tax benefits—or what state budgeters call “tax expenditures”—reduce TABOR refunds. That’s because any change to the tax code that reduces revenue also reduces the TABOR surplus and thus TABOR refunds. Just as the state can prevent the over-collection of taxes in an even-handed way by cutting the income tax rate for all, lawmakers can also reduce surplus tax collections by lowering taxes for certain special interests only. This video explains more: