Colorado State And Local Taxation Reform Revisited

In my previous post, I noted that Colorado should:

1. Finance PK-12 education entirely from state revenue with the increased state revenue demand financed with an income tax increase. This would require an increase from a 4.5% state income tax to a 6.53% state income tax.

2. Eliminate all property tax and car tax funding of schools. This would reduce real property taxes, business personal property taxes, and motor vehicle property taxes by an average of approximately 60% across the board statewide, although the reduction would vary by school district and by locality within school districts. Districts will low property tax rates due to large property tax bases per student would receive the least benefit.

N.B. In the City and County of Denver, the current property tax rate on residential real estate is 0.53049425%. So, for example, the property  tax on a house with an actual value of $600,000 is $3,182.97. The tax rate on non-residential property is much higher. A typical rent on a property with that value would be about $28,800 a year ($2,400 a month).

Ideally, it should also make some other state and local tax reforms from the 2019-2020 status quo:

Colorado should eliminate its 2.9% state sales and use tax, and its state liquor tax and should replace those taxes with an increase in its state income tax. This would reduce sales taxes in the state on average by 39% and would require a 1.78 percentage point increase in the state income tax.

Combined with the increase that I proposed in the state income tax to pay for PK-12 education by replacing property tax and car tax revenues, this would increase the state income tax from 4.5% to 8.31% (an 85% increase).

As I have noted previously:

Colorado's state sales tax rate is 2.9%. Local sales taxes from multiple levels of local government range from 0% to 8.3% and averages 4.6%, for a combined sales tax rate, on average, of 7.5%. The sales subject to sales tax are not exactly identical between state and local sales taxes, but they are very similar.

It is also likely that if this was done, some local governments would reduce property taxes by increasing sales taxes that were reduced by the end of the state sales and use tax. So, the "dynamic" net sales tax reduction consider local government reactions would probably be somewhat less than 39% on average, and would probably reduce property taxes by more than 60% on average.

For a typical family making $50,000 to $79,999 a year, the change would cut sales and use taxes by $599 each year, would cut alcohol taxes by $8, would cut car taxes by  $21, and would cut residential real property taxes by $983. So combined, those taxes would fall by $1,611. This family's state income bill would increase from $1,599 per year to $2,953 per year, an increase of $1,354 per year in state income taxes. This family's net savings would be $257 per year (about 0.4% of the family's income on average).

For a typical family making $30,000 to $39,999 a year, the change would cut sales and use taxes by $447 each year, would cut alcohol taxes by $5, would cut car taxes by $16, and would cut residential real property taxes by $764. So combined, those taxes would fall by $1,232. This family's state income bill would increase from $741 per year to $1,368 per year, an increase of $627 per year in state income taxes. This family's net savings would be $605 per year (about 1.7% of the family's income on average).

The reduced sales, use, alcohol and car taxes would provide a meaningful net improvement for lower income Coloradoans. The reduced property tax rates would make housing more affordable in the state at a time when affordable housing is a real crisis.