Phil's Thoughts

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“Right Sizing” Taxes for Economic Growth

Recently, Forbes magazine ranked Metro Denver No. 1 in its annual “Best Places for Businesses and Careers” list. Four other cities landed in the top 40. Fort Collins ranked 10th along with Boulder, Greeley, and Colorado Springs at 26, 33, and 37 respectively. 

We often call Colorado “a place where California quirkiness meets Midwest sensibility.” Our openness to new ideas (a California trait) is balanced by a Midwest cultural tenant of frugality and temperance. It’s a nice mix. 

For companies looking to expand or locate, this “purple state” mix is attractive. So is Colorado’s tax climate – it’s frugal. Under the TABOR Amendment —unless authorized by voters —any increase in taxes requires a vote of citizens. California requires a supermajority to pass its budget but does not require votes of the electorate to raise taxes. Illinois does not require voter approval. In the last five years, both California and Illinois have raised corporate income taxes by about 35 percent each. Both states have had repercussions. First, one-term Illinois Governor Pat Quinn was unseated by Republican Governor Bruce Rauner. In California, companies such as Charles Schwab have stated publicly its intentions to reduce future employment in the Golden State. Colorado is one of the beneficiaries of Schwab’s decision, now building a substantial campus in Lone Tree that will ultimately employ several thousand Coloradans. Illinois lost 209,000 jobs from 2008-2013. California lost double that amount. Colorado saw a net gain of 30,800 during the same period. It’s not just that taxes matter, but the type of taxes do.

While there is a great debate around public votes for tax increases in Colorado, we would argue that this portion of TABOR has more points in its favor than not. Requiring a vote of the public improves the quality of debate and, ultimately, the quality of proposed tax increases. In 1997, “Guide the Ride,” a region-wide transit proposal was solidly trounced at the polls. In the minds of many, the proposal was vague and difficult to understand in terms of exactly what would be built. Voters were correct in their decision; a much better, understandable FasTracks proposal sailed through a 2004 election. 

Coloradans have sometimes voted for issues that reduce their own personal taxes at the expense of other things they also want from government. The Gallagher Amendment is an example. Today, taxes on the average Coloradan’s house pay less than one percent of the house’s value in property taxes – compared to 2.5 percent to3 percent nationally. Since its adoption in 1982, the Gallagher Amendment has reduced local property taxes by $24 billion. While the reduction in local efforts have reduced tax bills for home owners, it comes at the expense of roads and higher education – and other government programs that citizens desire. Subsequently, the State of Colorado has been forced to pick up the lost revenue that previously came from local taxpayers. 

Gallagher also increases the share that businesses pay in local property taxes. Every time a property tax increase passes at the local level, a commercial property’s tax bill goes up almost four times more than an equally valued residential property. Most election campaigns that seek property tax increases focus on the small amount of property tax that a homeowner will pay. There is never a mention of the impact on businesses — or the possibility of job losses — such as those incurred in California.

In the next year, we will see a host of efforts to rationalize Colorado’s tax burden. Some will propose to pay for healthcare for the disadvantaged, slow down the increasing burden Colorado’s General Fund must carry for K-12, and increase our declining transportation funds. Our ranking, as among the lowest residential property tax states, may take a small hit (we ranked 3rd-lowest in 2011). But our ratings will improve from the “ninth-least productive” roads.

This balancing act is a challenge. States that place burdensome property taxes on the aging and the poor end up paying more for subsidized housing after driving those with reduced incomes out of the housing market; New Jersey is a good example. Failure to fund infrastructure such as roads reduces productivity as mobility declines. High income taxes discourage investment while overall tax burdens on consumers reduce spending. Colorado’s flat income tax is among the nation’s lowest.

The debate on these issues will be robust. Colorado is facing a series of choices that will change its future. If we don’t act soon, funding for K-12 education will crowd out virtually all other government programs contained within the General Fund. If we don’t find acceptable answers we might be saying that Colorado is “a place where California craziness meets Midwestern foolishness.” Maybe the courts will be forced to step in. Now that’s really crazy!

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About Phil Kalin

Phil Kalin joined Pinnacol Assurance as CEO in 2013. He has served as the chief executive of both public and privately-backed companies, including large hospital systems, as well as organizations focused on health care data, technology and education. He has been active nationally on health care topics related to insurance, data analytics, technology innovation, cost improvement and risk mitigation. Phil is providing an informed opinion on what we see in the Monthly Economic Indicators.

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About Pinnacol

Pinnacol Assurance is the Metro Denver EDC's Research Sponsor. Pinnacol is Colorado’s leading provider of workers’ compensation insurance. Pinnacol provides comprehensive, competitively priced coverage; immediate attention to claims; a highly qualified network of medical providers; and proactive safety programs to more than 55,000 Colorado businesses. Annually, Pinnacol supports nearly $500 million of Colorado’s economic activity, spends over 35,000 hours keeping Colorado worksites safe and provides compassionate care to over 40,000 Coloradans injured on the job.

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