Why the newly passed federal tax cut will mean higher state taxes for some in Colorado
The counter-intuitive result could generate between $215 million and $340 million next fiscal year
December 20, 2017
The $1.5 trillion federal tax cut bill awaiting President Donald Trump's signature will cause a de facto state tax hike for some Coloradans, state budget forecasters said Wednesday, news that could be viewed as an unexpected Christmas gift for state budget writers, or as a lump of coal for those who will foot the bill.
The counterintuitive result could generate between $218 million and $340 million next fiscal year under separate quarterly revenue forecasts released Wednesday, an unexpected windfall that immediately raised hopes for more transportation funding in the 2018-19 state budget.
The explanation comes down to how the state calculates its income taxes:
State income taxes are a flat 4.63 percent of federal taxable income. And while the Republican tax bill would cut federal income taxes, it also eliminates or caps a number of deductions, resulting in a broader tax base. The net result at a federal level is lower taxes for most individuals, because a drop in tax rates will more than offset the lost deductions in most cases.
But in Colorado, state income tax collections would grow, because the tax rate of 4.63 won't change, while the base — the amount of income that is considered taxable — grows because of fewer deductions.