A bipartisan quartet of state lawmakers is planning a revamp of the refund process under Colorado’s Taxpayer’s Bill of Rights that includes reducing both the income tax and sales tax rates when certain conditions are met.

The proposed bill, which is expected to be introduced Wednesday, brings together Republican lawmakers who have long advocated for income tax rate reductions and their Democratic colleagues who want the governor’s support for bills that use the TABOR surplus to pay for workforce and child poverty issues.

Indeed, Republicans have long pushed for the tax cuts, while Democrats have pursued using TABOR dollars for their spending priorities. The proposal allows for both, proponents said.  

Speaker pro tem Rep. Chris deGruy Kennedy, D-Lakewood, told Colorado Politics on Tuesday that the bill is a compromise with the governor. A bill draft shows the measure will start in the Senate, under the sponsorship of Sens. Kyle Mullica, D-Northglenn, and Senate Minority Leader Paul Lundeen, R-Monument. In the House, deGruy Kennedy and Minority Leader Rose Pugliese, R-Colorado Springs, will carry the bill. 

Currently, TABOR refunds are paid out in a number of ways, depending on how much is available. The first refund mechanism is a homestead property tax exemption available to seniors and disabled veterans who have owned their homes for a decade or more. The second is a temporary income tax rate reduction, although it’s never been applied, since it was under a 2005 law to reduce the income tax rate to 4.5%.

The state’s current income tax rate, the result of reductions approved by voters, is 4.4%.

The third is a six-tiered sales tax refund, based on income and applied to income tax returns.

The bill draft says that when there’s a TABOR surplus — when revenue exceeds the amount the state is allowed to spend — the state would reactivate the income tax rate reduction between 2025 and 2035, reducing it to 4.25%.

That’s projected to happen for the 2025 tax filing. 

After the 2025 tax year, if the remaining amount of the TABOR surplus is more than what’s paid out for the homestead exemptions, another income tax rate reduction would be applied, tied to the amount of revenue available, ranging from 0.04% to 0.15%.

The measure repeals July 1, 2035.

Meanwhile, a wholly new refund mechanism will be applied to the sales tax refund and would be in effect from July 1, 2024 to July 1, 2034. If the state holds at least $1.5 billion in its TABOR surplus, as certified each September, and the surplus exceeds both the amount paid out in the homestead exemption and the temporary income tax rate reduction, the state sales tax would be reduced, beginning with the following January, from 2.9% to 2.77% and for the entire year. 

The first year impact of the bill, according to deGruy Kennedy, would be about $450 million. 

That raises questions about just where the money would come from.

As of about two weeks ago, there were some 40 bills that would tap the TABOR surplus — to the tune of about $1.5 billion out of a total available of $2 billion.

DeGruy Kennedy pointed out not all of those bills will pass.

But the two largest are still in the process, including deGruy Kennedy’s tax credit bill in House Bill 1311, which has been through extensive revisions, including a rewrite when it went through House Appropriations Tuesday morning.

As a result, deGruy Kennedy said the bill would only need half of its projected $655 million in its first year, although its second year would take $695 million, according to its fiscal note. That bill would provide a tax credit for Coloradans with children of up to $75,000 per single filers or joint filers with an adjusted gross income of $85,000. It won preliminary approval from the House Tuesday.

DeGruy Kennedy told Colorado Politics that the governor saw the value in what HB 1311 is trying to do, which he said is to cut childhood poverty in half, but that the governor has his own priorities, one of which is an income tax rate cut.

That’s not an idea that gets any traction with Democratic lawmakers, but he said the TABOR refund bill is a compromise. 

The second bill that started with a big TABOR bite is House Bill 1312, which, as introduced, would have tapped $256 million from the TABOR surplus. It also has been substantially amended, with an impact in 2024-25 of $21.2 million from the TABOR surplus and $42.9 million in succeeding years.

The bill provides a tax credit for “care” workers, which could be daycare or early childhood education staffers, or for workers who provide direct care in a facility such as a nursing home.

Between the two, the impact on the TABOR surplus has been reduced by more than $500 million. 

Pugliese told Colorado Politics the piece that’s most appealing to Republicans in the TABOR refund bill is the income tax rate reduction, something Republicans have been advocating for for years.

“We’re run several bills and haven’t gotten any traction,” she said Tuesday. “We’ve always said we believe in not taking more money from taxpayers than we need.”