Senator Michael Bennet, the chair of the U.S. Senate Finance Committee’s Subcommittee on Taxation and IRS Oversight, is asking IRS Commissioner Daniel Werfel not to tax future Colorado Taxpayer’s Bill of Rights (TABOR) revenue payments.
“TABOR payments are tax refunds, and the IRS should continue to treat them that way, wrote Bennet in a letter dated April 18. “I strongly urge the IRS to continue its 30-year precedent of not treating Colorado’s TABOR rebates as taxable income.”
Last year, to help Coloradans cope with rising costs, Colorado accelerated the TABOR refund through the Colorado Cash Back initiative. “While Colorado changed the timing of the TABOR payment, it still remained a refund and should not be taxed,” stated Bennet.
Colorado voters passed TABOR, a law establishing a strict formula to limit state revenue based on population growth and inflation. Under TABOR, the state withholds statutory income, property, gas, and sales taxes, as well as fees that taxpayers pay during the year. If the state collects revenue in excess of what the formula allows, it refunds the balance to taxpayers—first as property tax exemptions for seniors, then as income tax rate reductions and rebates.
The rebate mechanism simplifies Colorado’s tax administration, noted Bennet. The IRS has adopted a similar approach, for example, by allowing businesses to write off gas and vehicle wear and tear expenses using a standard mileage formula.
In February, after the IRS asked Coloradans to stop filing their taxes until they determined how to handle TABOR payments, Bennet called then-acting IRS Commissioner Douglas O’Donnell and urged him to continue the thirty-year precedent of treating TABOR payments as nontaxable. Following Bennet’s call, the IRS announced its decision to not tax 2022 TABOR payments.
“Even though Colorado’s TABOR refunds are, by definition, state tax refunds, the IRS inexplicably designated them as general welfare and disaster relief payments and opened the door to taxing these refunds in the future,” wrote Bennet in the letter. “The IRS’s misclassification is deeply concerning and demonstrates a poor understanding of how Colorado’s TABOR system works.”
Approved by voters in 1992, the TABOR Amendment mandated the State of Colorado to refund excess state revenue–collected through property, gas, and sales taxes as well as fees–back to Coloradans. To help families meet rising costs, last year, Colorado changed when the TABOR payments were administered, which might have led the IRS to miscategorize them. In his letter, Bennet clarifies the change in timing and urges the agency to uphold its precedent of not taxing TABOR payments.
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