* reduce the state income tax rate from 4.63 percent to 4.5 percent in 2011, and to 3.5 percent gradually over time;
* reduce or eliminate taxes and fees on vehicle purchases, registrations, leases, and rentals over the next four years;
* eliminate all state and local taxes and fees on telecommunication services, except 911 fees; and
* require voter approval to create or increase fees on vehicles and telecommunication services.
Summary and Analysis
Proposition 101 reduces or eliminates various taxes and fees on income, vehicles, and telecommunication services. Table 1 (see summary link) shows the annual impact of Proposition 101 on three different households, and Table 2 (see summary link) shows the impact on government budgets.
Some of the reductions in Proposition 101 are phased in over time. The impact will be smaller in the first year and will grow in size over the next 15 to 20 years. Estimates of the impact in the first year, as well as the impact once the reductions are fully implemented, are based on today's dollars. The fully implemented impacts provide the best estimates of the measure's final effects. Although the actual dollar amounts will differ in the future as inflation and growth increase the size of the economy, the comparable budget impacts on taxpayers and governments are expected to remain consistent over time.
In the first year, the tax and fee reductions are expected to be $1.4 billion - $744 million in state reductions and $629 million in local government reductions. Once fully implemented, the impact is expected to be $2.9 billion in today's dollars - $1.9 billion in state reductions and $1.0 billion in local government reductions.
Impact on households and businesses. Table 1 (see summary link) shows the estimated change in tax and fee bills for three different households as a result of Proposition 101, in both the first full year the measure is in effect and when the measure is fully implemented, in today's dollars. Businesses will also experience reductions in taxes and fees. Households and businesses will be impacted differently depending on annual income, vehicles owned, vehicles purchased, and the amount paid for phone and cable service. Households and businesses will experience additional reductions during years in which vehicles are rented, leased, or purchased.
Impact on government budgets. Table 2 (see summary link) shows the estimated impact of Proposition 101 on tax and fee collections used for local government budgets, the state's general operating budget, and transportation budgets in the first year and once it is fully implemented. All of these impacts are shown in today's dollars. More information on the impact on each type of budget follows. As a result of the decrease in tax and fee collections, state and local governments will have to decrease spending and services, increase fees to pay for services, or some combination of both.
Impact on local government budgets. Local governments will collect less money from vehicle specific ownership taxes and sales taxes. Local governments affected by the measure include school districts, cities, counties, and special districts. Some examples of special districts include recreation, fire, water, sewer, and public transportation districts. The money collected in taxes and fees pays for different services depending on the local government. Most of the money is used for education, public safety, roads, trash service, and parks and recreation. State law requires that school districts be reimbursed by the state for most of their loss in tax collections.
Impact on the state government operating budget. The state government will collect less money from sales taxes, income taxes, and telecommunication fees. The state spends 96 percent of its general operating budget on: preschool through higher education; health care; prisons; the courts; and programs that help low-income, elderly, and disabled people. Proposition 101 will reduce the amount of money available to pay for the state's general operating budget by an estimated 6 percent in the first year and by an estimated 23 percent once fully implemented.
Current law requires the state to reimburse school districts for most of their loss of vehicle specific ownership taxes. This obligation increases the total impact on the state general operating budget during the first year from the $450 million shown in Table 2 to $497 million, and when fully implemented, from $1.6 billion to $1.8 billion.
Impact on state and local government transportation budgets. Proposition 101 reduces funding dedicated to transportation budgets. The state constitution requires that vehicle-related fees collected by the state be spent on road safety, construction, and maintenance. This money is shared between the state, cities, and counties. The state's transportation budget will decrease by an estimated 28 percent from these fee reductions. The impact on city and county government transportation budgets will vary by government. Because cuts affecting transportation budgets are immediate, the full impact shown in Table 2 will occur in 2011.
Households and businesses pay taxes on their income to both the state and federal governments. The state's income tax rate is a flat 4.63 percent and is the same for all income levels and for both households and businesses. The state income tax is the largest source of money the state receives to pay for its main programs.
Proposition 101 gradually lowers the state income tax rate from 4.63 percent to 3.5 percent over time. The rate is first lowered to 4.5 percent starting in 2011. This will reduce income tax collections to the state by an estimated $145 million, or 3 percent. The tax bill for a household with an annual income of $55,000 will be reduced by $40 in 2011. In the future, the rate is reduced by 0.1 percentage point each year in which state income tax collections grow by more than 6 percent. For example, if tax collections increase fast enough, the income tax rate will decrease from 4.5 percent to 4.4 percent in 2012. This will occur until the income tax rate decreases to 3.5 percent.
When the tax rate is fully reduced, income tax collections to the state will be an estimated 26 percent less, or $1.3 billion in today's dollars lower than what they would have been without Proposition 101. The tax bill for a household with an annual income of $55,000 will be reduced by $320 when the cut is fully phased in. Because income tax collections historically have not grown by more than 6 percent every year, it will likely take 15 to 20 years for the tax rate to decline to 3.5 percent.
Proposition 101 reduces several types of vehicle fees and taxes as shown in Table 3 (see summary link). The amounts in the table show the impact when the reductions are fully implemented - sales tax reductions on vehicle purchases and specific ownership tax reductions are phased in over a four-year period, while all other vehicle fee and tax changes occur in 2011. The total amount of the reduction in vehicle fees and taxes, when fully implemented, is estimated at $1.3 billion in today's dollars.
Vehicle owners. Upon purchase, vehicle buyers are required to pay sales tax. In addition, each year vehicle owners must register their vehicle(s) with the state and pay registration fees and a specific ownership tax. Proposition 101 reduces all three taxes and fees.
Vehicle sales tax. Sales taxes are paid on the purchase of a new or used vehicle. The tax is applied to the price of the vehicle, including any manufacturer's rebate. The total tax rate is a 2.9 percent state rate plus any applicable local government sales tax rates. Because different local governments have different tax rates, the sales tax a buyer pays differs depending on where the buyer lives. The average combined sales tax rate is close to 7 percent.
Proposition 101 reduces the sales taxes due on vehicle purchases by exempting the first $10,000 of the vehicle's price and any manufacturer's rebate from the sales tax. The $10,000 exemption is phased in over a four-year period beginning in 2011. When fully implemented, vehicles worth $10,000 or less will not have a sales tax bill. Vehicles with greater values will receive a $10,000 exemption. For example, a vehicle purchased for $18,000 will be taxed only on $8,000 of the value. This sales tax cut will reduce local government tax collections by an estimated $195 million, or 6 percent, and state government tax collections by an estimated $140 million, or 7 percent.
Vehicle registration and licensing fees. Vehicle owners pay registration fees each year. Most fees vary according to vehicle weight, age, and value. While most of the money pays for roads and bridges, some pays for services like emergency medical services, vehicle emissions reduction programs, the Colorado State Patrol, and snow plowing.
Beginning in 2011, Proposition 101 combines all registration, licensing, and titling fees into a single $10 annual fee, with the exception of vehicle inspection and new license plate fees. As shown in Table 3, the average registration and licensing fee for vehicle owners would fall from $81 to $10 and the amount collected by state and local governments would decrease by about $300 million, or 88 percent.
Vehicle specific ownership tax. Vehicle owners also pay a specific ownership tax each year when registering a vehicle. The specific ownership tax is a property tax on a vehicle. The tax ranges from 0.45 percent to 2.10 percent of the vehicle's taxable value, based on the vehicle's original recommended retail price. As a vehicle ages, the tax rate is reduced. The minimum specific ownership tax is either $3 or $5 per vehicle, depending on the type of vehicle. Counties collect specific ownership taxes and distribute them to schools, cities, counties, and special districts within their boundaries.
Proposition 101 phases in a cut to specific ownership taxes over four years, beginning in 2011. It also requires permission from voters to create or increase future registration and licensing fees. Table 3 shows the change in vehicle owners' bills and state and local government collections.
Vehicle lessees. Like vehicle owners, persons who lease vehicles must pay sales taxes, registration fees, and specific ownership taxes each year. Proposition 101 reduces or ends all three taxes and fees for vehicle leases.
Vehicle sales tax and specific ownership tax. Proposition 101 eliminates sales taxes and annual specific ownership taxes on leased vehicles beginning in 2011. This will reduce state and local sales tax collections by an estimated $65 million per year, or 1 percent. It will also eliminate all specific ownership taxes collected by local governments on leased vehicles.
Vehicle registration and licensing fees. Leased vehicles are also required to be registered with the state and lessees must pay annual registration fees. Beginning in 2011, Proposition 101 eliminates all registration fees and imposes a single $10 fee per vehicle, resulting in a reduction of $71 for vehicle lessees. The measure reduces state and local collections by approximately $75 million per year.
Vehicle renters. The state charges a fee of $2 per day for car rentals. The money is shared by the state, cities, and counties to build, repair, and maintain roads and bridges. Sales tax is also applied, with revenue going to the state and local governments. Proposition 101 eliminates the fee and all sales taxes beginning in 2011. As a result, state and local transportation budgets will have an estimated $19 million less per year in fee collections and $80 million less in sales tax collections.
Other vehicle fees. The state also charges use and permitting fees for large and overweight vehicles that use Colorado roads. A passenger mile tax is also charged for passenger bus or shuttle businesses. Proposition 101 eliminates these fees beginning in 2011, resulting in $56 million less in state funds, reducing charges to trucking and carrier companies by a like amount.
Proposition 101 eliminates state and local sales tax and other fees on customer bills for any kind of telecommunications service, except for existing 911 fees. The measure lists the following as telecommunication services, even though some of them are not currently taxed: phone, pager, cable, television, radio, Internet, computer, and satellite services. Currently, the state and some local governments charge sales tax on a portion of the cost of phone and pager services, and some local governments charge sales tax on cable services. State fees that are eliminated include fees that help telephone companies provide access to phone service in rural areas of the state, to the blind, deaf, or speech impaired, and to low-income people. How the elimination of these telephone fees will affect these services is unclear and would likely be determined by the state legislature. However, telephone services for the deaf or speech impaired are required by federal law. Thus, its likely that another funding source will have to be found to continue to provide these services. Local governments may have other fees, such as television franchise fees, that may be eliminated.
Proposition 101 freezes 911 fees at their 2009 level. These fees differ from county to county and ranged from 43 cents to $1.25 per month in 2009. The 911 fees are charged by local governments to help pay for 911 emergency services.
The reduction in a household or business's telecommunications bill depends on how much it spends on taxable phone and cable. Tax and fee collections by local governments would be reduced by at least $194 million each year. Tax and fee collections to the state government would be reduced by an estimated $183 million each year.
New voter approval requirements. Proposition 101 redefines all telecommunication fees and most vehicle fees as taxes. Because the state constitution requires a vote to increase taxes but not to increase fees, governments will need to ask voters for permission to create new or increase existing vehicle or telecommunication charges in the future. Proposition 101 excludes vehicle-related fines, parking fees, tolls, vehicle impound fees, vehicle identification and emission inspection fees, and new license plate fees from this requirement.
How does Proposition 101 interact with two other measures on the ballot? Proposition 101 along with Amendment 60 and Amendment 61 contain provisions that affect state and local government finances by decreasing taxes paid by households and businesses and restricting government borrowing. How these measures work together may require clarification from the state legislature or the courts.
Proposition 101 reduces state and local government taxes and fees. Amendment 60 reduces local property taxes, while requiring state expenditures for K-12 education to increase by an amount that offsets the property tax loss for school districts. Amendment 61 requires state and local governments to decrease tax rates when debt is repaid, which is assumed in this analysis to apply to the existing debt of state and local governments, and it prohibits any borrowing by state government.
Since portions of these measures are phased in over time, the actual impacts to taxpayers and governments will be less in the initial years of implementation and grow over time. Assuming that all three measures are approved by voters, the first-year impact will be to reduce state taxes and fees by $744 million and increase state spending for K-12 education by $385 million. Once fully implemented, the measures are estimated to reduce state
taxes and fees by $2.1 billion and increase state spending for K-12 education by $1.6 billion in today's dollars. This would commit almost all of the state's general operating budget to paying for the constitutional and statutory requirements of K-12 education, leaving little for other government services. In addition, the prohibition on borrowing will increase budget pressures for the state if it chooses to pay for capital projects from its general operating budget. This would further reduce the amount of money available for other government services.
Tax and fee collections for local governments are expected to fall by at least $966 million in the first year of implementation and by $3.4 billion when the measures are fully implemented. However, after the state reimburses school districts, the net impact on local government budgets would be at least $581 million in the first year and $1.8 billion when fully implemented.
Total taxes and fees paid by households and businesses are estimated to decrease by $1.7 billion in the first year and $5.5 billion per year in today's dollars when the measures are fully implemented. The measures reduce the taxes and fees owed by an average household making $55,000 per year that owns a $295,000 house by an estimated $400 in the first year and $1,360 per year when fully implemented.
Estimate of Fiscal Impact
State revenue. Proposition 101 contains several provisions that decrease revenue to the state government. Because some of the reductions are phased in over time, the reduction in revenue will be lower at first. The first-year reduction is estimated to be $744 million, which includes $295 million less in vehicle fees that are constitutionally required to be used for transportation-related spending. When fully implemented, state tax and fee collections would decrease by an estimated $1.9 billion in today's dollars.
State spending. The state will have less money available for spending on its operating programs and transportation budget. Though the reductions to the transportation budget will be immediate, the reductions to operating programs will occur over time as the cuts to the income and sales tax are phased in. The state will have $450 million, or 6 percent, less in the first year to spend on operating programs. Further, the state will have about $295 million, or 28 percent, less to spend on transportation. When fully implemented, the state would have $1.6 billion, or 23 percent, less in today's dollars to spend on operating programs. The impact on the state's operating programs depends on the future budgeting decisions of the state legislature.
Proposition 101 will also create some additional costs for the state. Current law requires the state to replace most of the loss of vehicle specific ownership taxes for school districts. This will cause the state to spend an additional $48 million in the first year and $121 million annually when the measure is fully implemented.
Also, Proposition 101 increases state administrative costs by up to about $460,000 in budget year 2010-11, $165,000 in budget year 2011-12, and $34,000 in the following two budget years to implement the reductions in taxes, fees, and charges, and to audit compliance with the measure's provisions. The state's administrative costs will decrease in subsequent years as the tax and fee reductions are fully implemented. It is estimated that the measure will require the addition of up to 3.7 new staff in budget year 2010-11, 1.9 new staff in budget year 2011-12, and 0.3 new staff in the following two budget years to administer the measure's provisions. The state administrative costs and new staff needed could be less in the first two budget years depending on how the state legislature decides to implement the measure.
Local revenue and spending. Because reductions in the local sales tax on vehicles are phased in over four years, revenue decreases in the first few years will be lower than when the measure is fully implemented. Local government revenue is estimated to be reduced by $629 million in the first year, with $99 million of this amount for transportation projects. When fully implemented, local government revenue would decrease by an estimated $1.0 billion in today's dollars. However, since current law requires the state to replace most of the loss of vehicle specific ownership taxes for school districts, the net impact on local government budgets would be $580 million in the first year and $880 million when fully implemented.
The extent to which each local government program will be affected will vary depending on what services the government provides and its budget decisions. Local governments may also have increased administrative costs to comply with the auditing requirements of Proposition 101.
Impact on taxpayers. Proposition 101 will reduce households' and businesses' tax and fee bills by different amounts depending on their income, the number and type of vehicles they have, the costs of their phone and cable bills, and whether they purchase, rent, or lease vehicles in a given year. In the first year, before all the tax and fee reductions are fully implemented, an average household with an annual income of $55,000 would
experience a reduction in their tax and fee bill of about $313. When fully implemented, the total tax and fee bill for this household would be reduced by about $708 annually in today's dollars. There would be additional reductions if the household purchases, rents, or leases a vehicle. Businesses will also experience reductions in taxes and fees.
Shall there be an amendment to the Colorado Revised Statutes concerning limits on government charges, and, in connection therewith, reducing vehicle ownership taxes over four years to nominal amounts; ending taxes on vehicle rentals and leases; phasing in over four years a $10,000 vehicle sale price tax exemption; setting total yearly registration, license, and title charges at $10 per vehicle; repealing other specific vehicle charges; lowering the state income tax rate to 4.5% and phasing in a further reduction in the rate to 3.5%; ending state and local taxes and charges, except 911 charges, on telecommunication service customer accounts; and stating that, with certain specified exceptions, any added charges on vehicles and telecommunication service customer accounts shall be tax increases?