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Colorado could use $700 million of TABOR surplus on a new child tax credit

The proposal, also known as the Family Affordability Tax Credit, is similar to the federal child tax credit, and it revives a state credit that was previously offered in 2022.

Starting Spring 2025, Colorado’s lower-income families could receive an average of $2,500 per year under a state-level child tax credit. The proposal, which is moving forward at the statehouse, would pay out an estimated $700 million annually to nearly 300,000 families.

“When we expand and distribute the child tax credit, we will create healthier, happier futures for our kids, and set them on a path towards economic success and economic prosperity,” said Rep. Jenny Willford, a Democratic sponsor of HB24-1311.

The proposal, also known as the Family Affordability Tax Credit, is similar to the federal child tax credit, and it revives a state credit that was previously offered in 2022.

The money would come from Colorado’s budget surpluses, a pool of money that must be refunded to taxpayers. In essence, the $700 million would be redirected away from the tiered TABOR refund checks that are paid to Colorado taxpayers.

The idea of reducing overall taxpayer refunds to send money to qualifying families has drawn criticism.

“It shows somewhat of a deep contempt for the voters,” said Rep. Bob Marshall, a Democrat. “We're trying to find a way around [TABOR requirements] because we don't like the fact that we have to give $2 billion back to the taxpayers.”

Democratic Rep. Chris deGruy Kennedy, a sponsor, said that tax credits are a legitimate use of TABOR surplus dollars. The state already issues billions of dollars of other credits, each of which lowers the pool of money for general refunds.

The refundable tax credit – which backers call the Family Affordability Tax Credit – would be larger than many others. Its impact could grow even larger than $700 million, since that estimate is based on an assumption that only three-quarters of eligible households would actually get the credit, at least in the initial years. There is no expiration date on the credit.

“We know that this is an incredibly expensive tax credit … And we know that Colorado is not going to be in a TABOR surplus environment forever,” deGruy Kennedy said. “But while we are, we believe that this is one of the best things we can be doing, to try to help pull kids out of poverty and make a real difference in their lives not just for the short term, but in terms of their brain development and how it impacts their overall life trajectory.”

The change would lift thousands of families above the poverty line, resulting in Colorado having the lowest child poverty rate in the nation, according to the nonprofit Gary Advocacy, which supports the bill.

The credits would be worth the most for the youngest children, paying:

  • Up to $3,200 per child under age 6.
  • Up to $2,400 per child for ages 6 to 16.

The largest credits would be paid to the lowest income groups. Only those households making $15,000 or less as a single filer – or $25,000 as a joint filer – could get the maximum amount.

Above those thresholds, the credit would be gradually reduced with income. deGruy Kennedy argued that design would avoid creating “benefits cliffs” that discourage families from growing their income.

“There's no real cliff. It's just, you taper down until your income exceeds the eligibility threshold,” he said. The credit could potentially be paid in monthly installments.

Because it’s a refundable credit, it could be paid out as cash, even for families that don’t have end-of-year tax obligations.

Sen. Barbara Kirkmeyer, a Republican, said the state shouldn’t be directing so much surplus money to people who may not pay much in income taxes.

“I’m not even sure they're paying income taxes, and now they're going to get a tax credit on top of it all,” she said.

The tax credit also faces plenty of competition from other lawmakers’ proposals. Democrats and Republicans alike have proposed dozens of tax breaks this year. All of them are angling for a slice of the state’s budget surplus, but the child tax credit is by far the largest.

The surplus is a limited supply of money. It’s equal to whatever revenues the state collects beyond the spending limits set by TABOR. And while the surplus has been historically large in recent years, it could quickly shrink to zero in a recession.

deGruy Kennedy and his cosponsors have tried to prepare for that possibility. If the surplus isn’t large enough to fund the full child tax credit, the credit would be downsized for all income tiers. If there’s no surplus, there would be no child credit, ensuring that the new credit doesn’t pull money away from other priorities like schools and prisons in a tough year.

However, that same design also would have effects on TABOR refunds. In years when the surplus is less than $600 million, the child tax credit would take up much of the available money, leaving little or nothing for the general TABOR refund.

Democrats also have pursued another big change to tax refunds. Because of a law passed last year, TABOR refunds in 2024 will be paid on a “flat” basis, awarding all households about $800 – instead of following the usual system, which awards larger refunds to higher-income households that paid more taxes. But there has not been a similar bill introduced this year for future refunds.

HB24-1311 passed its first important test on Monday, passing the House Finance Committee on a 6-5 vote, with Rep. Marshall joining Republicans in opposition.

The bill still has a long way to go. It heads next to the House Appropriations Committee. If passed by the House, it would also have to get through the Senate.

To read more stories from Colorado Public Radio, visit www.cpr.org.