When we think about how to tax, we should think about how a particular kind of tax will affect economic behavior. There’s an adage in government: “If you want less of something, tax it.” This is one of the main political motivations for taxing things like cigarettes. “If we tax cigarettes, then we’ll get less smoking,” the logic goes. The same goes for every type of tax, and every type of tax has drawbacks. Sales taxes, for example, make it more expensive for people to consume goods and services. But by discouraging consumption, you also encourage people to save and invest more of their money—That’s a good thing. To evaluate a zero-income-tax policy, we should ask, “What type of activity does taxing income discourage?”
People generate income by investing, working, and being productive. The downside to generating state revenues through income taxes is that the approach will yield less of the very activity required to grow our economy, create jobs, and make everyone better off.
That’s why in an interview in 2021, Colorado’s Democratic governor, Jared Polis, argued that taxing income discourages productivity and growth and eliminating the income tax “would be a very pro-growth policy.” He went on to explain that taxing income discourages productivity and growth. He’s right. Eliminating the state income tax is a bipartisan idea that has received notable support from Democrat Governor Jared Polis and Republicans.
Based on current estimates from state economists, eliminating the state income tax entirely would put an average of nearly $4,000 back in the pocket of each Colorado taxpayer annually.