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Colorado Governor Jared Polis on May 14, 2024 signed Senate Bill 24-228 (SB 24-228), which temporarily reduces Colorado's income tax rate for individuals, estates, trusts and corporations from 4.4% to 4.25% for tax years beginning on or after January 1, 2024.

SB 24-228 also allows for the annual reactivation of the temporary income tax rate reduction in years 2025-35 if certain revenue triggers are met, as well as a mechanism to temporarily reduced the state sales and use tax rate if certain revenue triggers are met.

Background - Refund of excess state revenues

The existing Colorado Taxpayer Bill of Rights law requires the State to refund revenues that exceed the spending limit for the constitutional fiscal year. These refunds, known as TABOR refunds, can be returned to taxpayers via three ways, which apply in the following order:

• A reimbursement paid to counties, for allocation to local governments, to offset the reduction in property taxes resulting from property tax exemptions for qualifying seniors, veterans with disabilities and spouses of veterans who died in the line of duty or because of a service-related injury or disease
• A sales tax refund for individual taxpayers, the amount of which is either an identical flat refund amount or based on six tiers of income.
• A temporary reduction in the income tax rate from 4.63% to 4.5%

Because the current state income tax rate is 4.4%, however, a temporary rate reduction was not an active mechanism for refunding excess state revenues.

Temporary income tax rate reductions

SB 24-228 amends and reactivates the temporary income tax rate reduction as the second TABOR refund mechanism for tax years 2024 through 2034.

The amount of the income tax rate reduction depends on the amount of the revenue surplus. For 2024, the income tax rate decreases from 4.40% to 4.25%. For tax years 2025-35, the reductions depend on how much of TABOR surplus funds remain after applying the first category of TABOR refunds. The rate can drop as low as 4.25% for those years but will revert to 4.4% if those triggers are not met for a tax year. Specifically, the amount of the reduction is as follows:

If the state revenue surplus in years 2025-35 is $2b or greater, the rate can be further reduced to the extent necessary to refund all excess revenue that would not otherwise be refunded by an alternative refund method.

Temporary state sales and use tax rate reductions

For fiscal year 2024-25 through fiscal year 2034-35, SB 24-228, provides for a fourth TABOR refund mechanism via a temporary 0.13% reduction in the state's sales and use tax rate during the following fiscal year. The reduction is activated when the estimated amount of revenue surplus exceeds $1.5b and sufficient surplus exists to fund the other TABOR refund mechanisms.

Implications

EY will provide updates on the rate reductions when the information becomes available.