Colorado Includes Temporary Income Tax and Sales/Use Tax Rate Reductions in Revised TABOR Refund Mechanisms

By Margaret Eisler

On May 14, 2024, Colorado Governor Jared Polis approved legislation that revises Taxpayer’s Bill of Rights (TABOR) refund mechanisms, including reactivating the temporary income tax rate reduction for income tax years 2025 through 2035 and establishing a fourth refund mechanism that temporarily reduces state sales and use tax rates for fiscal years commencing on or after July 1, 2024, but before July 1, 2034. (L. 2024, S228, effective 05/14/2024 and as stated; Fiscal Note to SB 24-228 TABOR Refund Mechanisms, 05/02/2024.)

Triggering TABOR refund mechanisms.

The TABOR refund mechanisms are triggered when state revenues exceed the constitutional limitation on state fiscal year spending. The legislation changes how TABOR refunds are distributed from fiscal year 2024-25 to fiscal year 2034-35. Whether, and which, refund mechanisms are triggered depends on the amount of excess state revenues.

Reimbursement to counties for allocation to local governments to offset both the reduction in property taxes resulting from homestead exemptions and the newly-enacted reduced valuation for assessment of qualified-senior primary residence real property (see State Tax Update, 05/17/2024) is first in refund priority. The legislation provides the order that the remaining TABOR mechanisms after the homestead exemption/reduced valuation for assessment of qualified-senior primary residence real property reimbursements will be triggered: if the remaining TABOR surplus is $300 million or less, only the sales tax refund mechanism is triggered; if the remaining TABOR surplus is above $300 million but less than $1.5 billion, refunds are distributed first through the income tax rate reduction, then through the sales tax refund mechanism; and if the remaining TABOR surplus is above $1.5 billion, refunds are distributed first through the income tax rate reduction, then through the sales and use tax rate reduction, and lastly through the sales tax refund mechanism.

Temporary income tax reduction reactivated.

For state fiscal years beginning on or after July 1, 2024, but before July 1, 2034, if the amount of excess state revenues exceeds the projected total amount of TABOR refunds issued to counties for the homestead exemptions/reduced valuation for assessment of qualified-senior primary residence real property reimbursements, the Executive Director will temporarily reduce the state income tax rate from the current percentage.

For the income tax year beginning January 1, 2024, the income tax rate is temporarily reduced to 4.25%.

In subsequent years the income tax rate is reduced by the following percentages:

• if the amount of the excess is greater than $300 million but less than or equal to $500 million, the income tax rate is reduced by 0.04%;
• if the amount of the excess is greater than but less than or equal to $600 million, the income tax rate is reduced by 0.07%;
• if the amount of the excess is greater than $600 million but less than or equal to $700 million, the income tax rate is reduced by 0.09%;
• if the amount of the excess is greater than $700 million but less than or equal to $800 million, the income tax rate is reduced by 0.11%;
• if the amount of the excess is greater than $800 million but less than or equal to $1 billion, the income tax rate is reduced by 0.12%;
• if the amount of the excess is greater than $1 billion but less than or equal to $1.5 billion, the income tax rate is reduced by 0.13%; and
• if the amount of the excess is greater than $1.5 billion, the income tax rate is reduced by 0.15%.

For any state fiscal year beginning on or after July 1, 2025, if the permanent state income tax rate in effect is 4.25% or less, the temporary income tax rate reduction does not take effect, unless the amount of excess state revenues required to be refunded for the state fiscal year is equal to or greater than $2 billion. In that case, the Executive Director will temporarily reduce the state income tax rate to the extent necessary to refund all excess state revenues that would not otherwise be refunded by another method.

Temporary reduction of state sales and use tax rates.

For any state fiscal year beginning on or after July 1, 2024, but before July 1, 2034, if the estimated amount of excess state revenues for a state fiscal is greater than $1.5 billion, and exceeds the projected total amount of TABOR refunds issued as to counties for the homestead exemption/reduced valuation for assessment of qualified-senior primary residence real property reimbursements and through the temporary income tax rate reduction, the state sales and use tax rates will be reduced by 0.13%. The calculation of the estimated amount of excess state revenues for a state fiscal year is based on the March economic and revenue forecast that is selected by the Joint Budget Committee as the basis for the state’s budget for the following state fiscal year.

Sales tax refund mechanism.

The amount of the identical refund threshold for the sales tax refund mechanism is increased from $15 to one-half of the lowest amount listed for married, filing jointly, for Colorado in the most recent table published in the IRS instructions for Schedule A on itemized deductions. However, if, by September 1 of any calendar year, the Executive Director has not received advice from the IRS that such an identical refund is regarded as a refund of sales tax and not as an accession to wealth, the identical refund threshold is $15.