New Colorado tax credit could lift 50,000 children out of poverty, is latest to tap TABOR surplus
Boasting that child poverty in Colorado would soon be cut nearly in half, Gov. Jared Polis on Friday signed a large new tax credit for low-income families into law.The ceremony put an underline on a legislative session that featured state policymakers lo…
Boasting that child poverty in Colorado would soon be cut nearly in half, Gov. Jared Polis on Friday signed a large new tax credit for low-income families into law.
The ceremony put an underline on a legislative session that featured state policymakers looking again and again to the state surplus to flatten inequalities. Lawmakers passed dozens of new tax credits this year that tapped into massive revenues the state couldn't keep and otherwise would have to return through refund checks.
The new family affordability tax credit that received Polis' signature is by far the largest individual tax credit in terms of cost. It is also, advocates say, among the most impactful.
They expect it to lift more than 50,000 children out of poverty.
The new law, passed as House Bill 1311, will use roughly $700 million per year that comes in over the state revenue growth limit set by the Taxpayer's Bill of Rights, or TABOR. It will send the poorest Colorado families $3,200 per child younger than 6. The amount of the credit will scale down as children grow older and family incomes increase, eventually zeroing out at $85,000 per year for joint filers and once children turn 17.
"Kids don't choose who their parents are or what their income level is — or how they grow up," Polis said during the bill signing ceremony at a Denver preschool. "Making sure kids everywhere have food on the table (and) have the support that they need to grow up is a big deal."
The child tax credit stacks atop others passed or expanded by the legislature this year, including an increase to the state's match of the Earned Income Tax Credit. In all, the new policies tap billions of dollars from projected TABOR surpluses in coming years that would have to be returned to taxpayers one way or another.
Democratic lawmakers, often over dissents from Republicans, opted mostly for directed credits rather than the general refunds that long have been typical in the state's boom years.
How the new tax credits work
The Colorado Fiscal Institute, a progressive think tank involved in crafting the legislation, predicts families will receive as much as $4,400 a year per child 5 and younger through an expanded child care tax credit and the new family affordability tax credit.
Throw in the Earned Income Tax Credit increase, which matches up to 50% of the federal EITC that sends money to low-income households, and Colorado families could see significant financial help. The state EITC match doubled this year, amounting to nearly $1,900 extra for very-low-income working families with three or more children.
The credits depend on consistent TABOR surpluses and will be scaled down in less robust economic times. Caroline Nutter, the legislative coordinator for the think tank, estimates the credit changes will reduce the number of children in poverty — about 133,000 kids — by 40% in years when the credits are fully funded.
"What we're really trying to do there is make sure families, even those making more than the median household income in Colorado, are receiving help," Nutter said. "Raising kids in this state is not cheap. Even if you're making $100,000 a year, it's still a big cost to bear."
The credits, while stacking together, work differently:
The EITC expansion is based on a federal tax credit worth between $600 (for individuals without children) and $7,430 (for families with three or more children). Qualification limits range from $17,640 per year in adjusted gross income for a single person up to $63,398 for joint filers. Colorado will match up to 50% of the federal credit if state growth is on a solid footing.
The child care tax credit covers a percentage of child care costs, depending on household income. At most, the federal credit covers about $1,050 for one dependent child and up to $2,100 for two or more. The Colorado credit matches up to 70% of that for households with incomes of $60,000 or less.
The new family tax credit scales down based on family income as well as the ages and number of children. Single filers making $15,000 or less per year in adjusted gross income — and joint filers making $25,000 or less — will receive up to $3,200 for each child younger than 6 and, for children ages 6 to 16, up to $2,400. The credit amounts decrease as incomes rise, with a cap of $75,000 for individual filers and $85,000 for joint filers.
Coloradans may benefit from other credits, too — notably a $1,500 credit for child care workers, home health care workers, personal care aides and certified nursing assistants making less than $75,000 per year that Polis also signed into law Friday. Earlier this week, he signed off on a new tax credit that covers two years of in-state college tuition for students whose families make $90,000 a year or less.
U.S. Senator Michael Bennet addresses graduating preschoolers at Denver KinderCare in Denver on Friday, May 31, 2024. (Photo by Zachary Spindler-Krage/The Denver Post)
On hand at Friday's ceremony was U.S. Sen. Michael Bennet, who has championed a short-lived federal child tax credit that he's hoping to revive in Congress next year by leveraging the looming expiration of tax cuts. He praised the state's new credit.
"The family affordability tax credit testifies to the idea that we don't have to accept those levels of childhood poverty as a permanent state of our economy, or our democracy, or our society," he said. "I think the national leadership you've shown here is something that we will carry back to Washington, D.C. — to be able to say that because of your leadership, governor, Colorado now has the best anti-poverty legislation of any state in America."
Do new credits undermine TABOR?
Together, Colorado's new tax credits represent a reimagining of how state officials handle TABOR surpluses — while trying to stay within the constraints of the constitutional amendment passed by voters more than 30 years ago.
Traditionally, state revenue that's over the cap would be returned to Coloradans largely through a six-tier system that gave higher-income households a bigger share under the idea they paid more in taxes. Nutter called that approach "wasteful" because it directs money to people who already have the most resources.
The Common Sense Institute, a nonpartisan, free enterprise-oriented think tank, noted that the money returned through tax credits still stays with Colorado taxpayers, versus going into government programs. But a CSI report on tax credits argues that the new approach "broadly undermines TABOR's intent" by divorcing refunds from taxes paid.
In coming years, upwards of $1 billion per year that would typically be refunded through the six-tier system will instead go to targeted tax credits, according to its report.
Lang Sias, a former state representative and now a research fellow at the think tank, said the legislature "has effectively substituted its judgment on how those tax dollars should be spent over that of taxpayers who would otherwise see the refunds."
"We're moving away from a TABOR refund and toward a TABOR redistribution," he said in an interview.
He didn't weigh in on the merits of the new policies but questioned lawmakers' decision to tie the new tax credits to the state's surplus and, in some cases, to give them sunsets. Assuming they're as beneficial as proponents say, both cases mean they may not be permanent policies.
The new tax credits also aren't the only way state officials responded to a foreseeable future of $1 billion-plus surpluses. Polis fought for a $450 million income tax cut, which predominantly will benefit wealthier Coloradans, and a decrease in the state sales tax rate during economic booms.
Taxpayers can also continue to expect flat TABOR refunds when they file their taxes — albeit closer to the $115 range than the $700-plus amounts of recent years.
Nutter argued that while the shift will affect income brackets differently compared to the prior system, people across the spectrum still will see more money in their pockets — from the credits or, for wealthier people, through the tax cuts.
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