As Election Day approaches, Colorado voters find themselves at a critical crossroads regarding the state’s fiscal future. On the ballot are two competing tax measures that present diametrically opposed visions for the Centennial State’s economy. The outcome will determine whether Colorado maintains its commitment to a predictable, flat-rate tax environment or pivots toward a progressive, graduated income tax system—a move that critics warn could jeopardize the state’s long-standing competitive edge.
The two measures, Amendment 87 and Proposition 136, offer fundamentally different approaches to how the state collects revenue from its residents and businesses. While one seeks to constitutionalize a progressive rate structure, the other attempts to cement the current status quo.
Main Facts: A Tale of Two Tax Strategies
The debate centers on a battle between structural stability and potential revenue growth.
Amendment 87 proposes a constitutional amendment that would authorize a graduated-rate individual and corporate income tax. Under this plan, the state would abandon its current flat-tax model in favor of a progressive schedule. Initially, this would set the rate at 7.4 percent for income exceeding $500,000, 7.9 percent for income over $750,000, and 8.4 percent for income surpassing $1 million. Crucially, the measure would embed this authority into the state constitution, allowing the legislature to adjust brackets and rates at its discretion thereafter.
Conversely, Proposition 136 acts as a defensive measure. It is an initiated statute designed to cap both individual and corporate income tax rates at the current 4.4 percent level. While it serves as a check against the proposed increases in Amendment 87, it remains a statutory change rather than a constitutional one, making it inherently more vulnerable to future legislative adjustment or voter repeal.
The legal mechanics behind Amendment 87 are particularly noteworthy. Typically, amending the Colorado Constitution requires a 55 percent supermajority. However, the drafters of Amendment 87 have employed a strategic, if unorthodox, construction: they are stripping away existing language that mandates a single tax rate rather than adding new language. By framing the change as a subtraction of a restriction, proponents are seeking to pass the measure with a simple majority, bypassing the higher threshold usually required for constitutional modifications.
A Chronological Perspective: From Graduation to Flatness
To understand the weight of this decision, one must look at Colorado’s historical trajectory. For decades, Colorado utilized a graduated-rate income tax system. However, in 1987, the state made a landmark pivot, becoming the first in the nation to transition from a progressive system to a single-rate income tax.
Before this 1987 shift, Colorado had maintained a top marginal rate of 8 percent on income above $10,000 for 24 years. The transition was a defining moment in state tax policy, as it replaced the complex, graduated system with a uniform 5 percent rate—a figure that was, at the time, equivalent to the previous middle-bracket rate.
In the decades since, Colorado has consistently trended toward lower, flatter rates. Through various legislative efforts and voter-approved measures, the flat rate has been incrementally reduced to its current level of 4.4 percent. This historical shift reflects a long-standing economic philosophy in the state: that a broad-based, low, and uniform tax rate is not only easier to administer but also acts as a safeguard against the political temptation to constantly raise rates on specific segments of the population.
Supporting Data: The Impact on Small Business and Economic Growth
The proposed shift to an 8.4 percent top rate carries significant implications for Colorado’s small business sector. With roughly 731,000 small businesses employing nearly half of the state’s workforce, the tax environment is a primary driver of operational decisions.
The vast majority of these enterprises are "pass-through" entities, such as S corporations, partnerships, and LLCs. This means that business profits are not taxed at the entity level; instead, they are reported on the owners’ individual income tax returns. Consequently, an increase in the top marginal individual income tax rate functions, in practice, as a direct tax increase on the majority of Colorado’s small business income.
IRS data underscores the potential impact: of the 53,640 Colorado tax filers reporting adjusted gross income (AGI) above $500,000—those who would be hit by the new higher rates—the overwhelming majority are business owners. Specifically, 30,850 of these filers receive partnership or S corporation income, and another 14,310 report other business or professional income.
The Danger of the "Marriage Penalty"
A technical but critical flaw in Amendment 87 is the inclusion of an extreme marriage penalty. Because the bracket widths remain identical for single filers and married couples filing jointly, couples face a disproportionate tax burden. For example, a couple where each spouse earns $500,000 would face a marriage penalty of $16,575 compared to two single filers with the same combined income. This structure effectively discourages joint filing and imposes a significant tax premium on marriage for high-earning households.
Implications: Lessons from Other States
The debate over high-rate income taxes is not occurring in a vacuum. Similar experiments in other states have yielded cautionary results.
- California: Following the approval of top-rate increases in 2012, the state experienced a significant erosion of the projected tax revenue. Economic analysts attribute this to a combination of capital flight, reduced in-state investment, and sophisticated tax avoidance, which collectively wiped out an estimated 61 percent of the anticipated revenue gains.
- New Jersey: The 2004 adoption of a top rate of 8.97 percent for income over $500,000 was followed by an assessment from the state’s Department of the Treasury that identified an increase in out-migration by 20,000 individuals over the subsequent five years.
- New York: A study by the Citizens Budget Commission revealed that New York’s share of the nation’s millionaires dropped from 12.7 percent in 2010 to 8.7 percent in 2022. Had that share remained constant, the state likely would have collected an additional $10.7 billion in income tax revenue in 2022 alone.
These cases illustrate the "marginal" nature of economic decision-making. When tax rates rise on the next dollar of income, business owners tend to respond by delaying capital investments, scaling back hiring plans, or passing the cost burden to consumers through higher prices.
Official Responses and Judicial Uncertainty
The state’s "Blue Book"—the official ballot information guide—acknowledges the chaotic legal landscape that would emerge if both measures were to pass. Because the measures are competing, the one receiving the highest number of votes would technically prevail in any conflict.
However, the legal interaction between the two is a potential minefield. If Proposition 136 passes with more votes, it would cap rates at 4.4 percent, but it would not necessarily repeal the constitutional authority for a graduated system granted by Amendment 87. This could result in a scenario where the constitution permits a graduated tax, but the statute forbids any rate above 4.4 percent—effectively creating a "flat tax" at a lower rate than the current system, while leaving the question of how to handle income brackets entirely to the courts.
State officials have noted that the ambiguity of this interaction would almost certainly lead to prolonged litigation, leaving businesses and taxpayers in a state of uncertainty regarding their tax liabilities for the upcoming fiscal years.
Conclusion: A Defining Moment
As Colorado voters head to the polls, the choice is clear: the state is deciding whether to continue its trajectory as a competitive, low-tax environment or to adopt a progressive model that has, in other jurisdictions, historically led to economic out-migration and reduced business investment.
For the proponents of Amendment 87, the tax increase is a necessary tool to fund education, healthcare, and childcare initiatives. For the supporters of Proposition 136, the cap is a vital protection against the volatility of legislative tax adjustments. The result will settle, for the foreseeable future, which side of the national tax divide Colorado occupies.
