Colorado Initiative 232: Income Tax Rate Cap

Competing Measures Outcome

Initiative 232 was proposed as a direct response to Initiative 195, and the two measures would move Colorado’s income tax system in opposite directions.[ii] Initiative 195 would remove Colorado’s constitutional requirement for a flat income tax and allow the state to adopt a graduated income tax system with different rates for different income levels. Initiative 232 is a statutory measure that would set a maximum state income tax rate of 4.4%, prohibiting higher tax rates like those proposed under Initiative 195.

Although the measures are different types, both require just a simple majority vote to pass. Initiative 195 includes both constitutional and statutory changes, but its constitutional amendment only removes existing language, so it does not require the 55% approval that applies to constitutional amendments that add language [iii]. Initiative 232 changes state law rather than the Colorado Constitution and therefore also requires a simple majority. If both initiatives pass, and 232 receives more votes, only the tax cuts from 195 are implemented, and tax rates remain capped at 4.4%. However, if both measures pass and 195 receives more votes, the progressive tax structure is implemented.[iv] This means the total number of yes votes, rather than the percentage of approval, determines which measure takes effect.

Note: Rates are marginal and apply only to income within each bracket. The scenario in which Initiative 232 receives more yes votes assumes its 4.4% cap supersedes only Initiative 195's rates above 4.4%, while Initiative 195's lower, nonconflicting rates remain in effect. This specific outcome has not been adjudicated and could face a legal challenge.

 

Debate Over Income Tax Structures

Supporters of Initiative 232 believe that maintaining a flat income tax system keeps Colorado economically competitive. Under a flat tax system, high-income individuals are more likely to move to the state than under a graduated tax system.[i] Likewise, a flat tax encourages higher-income earners to remain in Colorado rather than relocate.

A flat tax system is typically easier for taxpayers to understand and more straightforward to calculate. Supporters argue that it creates a more transparent and predictable tax structure.

In recent years, some states have moved toward flatter income tax systems. Supporters of Initiative 232 argue that shifting toward a progressive tax system would make Colorado less economically competitive and put the state at a disadvantage compared to others. States surrounding Colorado such as Utah and Arizona have flat-rate taxes, while Wyoming has no income tax at all. Nebraska, New Mexico, and Oklahoma have graduated income taxes, and Kansas has a planned transition toward a flat income tax. Eight states replaced their graduated income taxes with flat rates between 2021 and 2025. In earlier decades, only a few states transitioned to flat tax systems, but now states are moving toward flat rates at a much faster pace.[ii]

Colorado is already one of the most expensive states to live in. Higher taxes on businesses and high-income earners could drive away residents and make the state even less affordable. Colorado has the fourth-highest cost of living in the United States.[iii]

Initiative 195 would increase state taxes by approximately $2.7 billion annually, with revenue directed to fund healthcare, education, and childcare programs.

 

TABOR Implications

The purpose of the Taxpayer’s Bill of Rights (TABOR) is to limit the amount of revenue the state government can keep and spend.[iv] When the state collects more money than the TABOR limit allows, the excess amount is returned to the taxpayers unless voters approve its retention.

If Initiative 195 passes, TABOR will remain in Colorado's Constitution. However, the additional revenue received by the new tax system would not count toward the state's TABOR revenue cap. As a result, the state could collect and spend this additional revenue without it counting toward the amount that must be returned under TABOR.

 

Bottom Line

Initiative 232 would establish a maximum state income tax rate of 4.4%, preserving Colorado’s current flat income tax rate and preventing the adoption of higher rates. In contrast, Initiative 195 would create a graduated income tax system that lowers rates on income below $100,000 and raises rates on income above $500,000.

If both measures pass, the number of “yes” votes each receives will determine how their conflicting provisions take effect. If Initiative 232 receives more votes, the 4.4% cap would remain while Initiative 195’s lower, nonconflicting rates could still take effect, although that outcome could face a legal challenge. If Initiative 195 receives more votes, its graduated tax structure would take effect in full.

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