Friday, October 7, 2011

Colorado's tax code hinders people with lower incomes

Legislators and governors have several tools they can easily implement into state tax codes to help lift families out of poverty, new research from the Institute on Tax and Economic Policy shows.

Colorado's tax code includes many of the recommendations in some form: earned income tax credits, property tax “circuit breakers,” targeted low-income tax credits; and child-related tax credits. ITEP recommends redesigning those policies to improve the lives of Colorado’s lower-income constituents.

The federal Earned Income Tax Credit is widely recognized as an effective anti-poverty strategy, and 24 states have an EITC modeled after the federal policy. Colorado suspended its EITC in 2002 due to budget constraints. To help fight poverty, Colorado should re-enable and fully fund the state EITC, according to ITEP.

Property tax “circuit breakers” protect low-income residents from a property tax overload. Similar to an electrical circuit breaker, the tool rebates property taxes when a tax bill exceeds a certain percentage of a taxpayer’s income. Colorado has a quasi-circuit breaker for homeowners and renters who are age 65 and older or disabled. To provide a greater benefit to families and individuals with lower incomes, Colorado should consider raising the maximum benefits and expand the policy to include homeowners and renters of all ages, ITEP said.

Low- and middle-income working parents frequently spend a significant portion of their incomes
on child care. The federal government allows a nonrefundable income tax credit to help offset child care expenses. Colorado has a limited refundable child and dependant care credit available, and ITEP suggests it should increase the credit to help poorer families.

Additionally, Colorado should create a refundable low-income tax credit. Because the EITC is targeted to low-income working families with children, it is not always the best approach for reaching older adults and adults without children. Refundable low-income credits are a good complementary policy to state EITCs. The credits can also be used to mitigate the regressive nature of state sales taxes.

In 2010, the taxes as a share of income for Coloradans in the lowest 20 percent was more than double that of Coloradans in the top 1 percent. Implementing the recommendations would help ease the tax burden on the many Colorado families and individuals struggling with poverty.

“Lawmakers try to leverage the tax code to do all kinds of things – lure business, reduce health
costs,” said Matthew Gardner, ITEP’s executive director, “but too few use it to ease the effects of poverty.”

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