Colorado voters choose between a 4.4% flat tax and an 8.4% top rate

On Election Day, Colorado voters will decide between an initiated statute that would cap the state's income tax at its current 4.4 percent and Amendment 87, a constitutional amendment that would authorize a graduated-rate individual and corporate income tax. The companion initiated statute sets new rates of 7.4 percent on income above $500,000, 7.9 percent above $750,000, and 8.4 percent above $1 million, and the distance between those two tax futures is where the client work sits.

For households with taxable income below $500,000, the graduated schedule on the table would change nothing because its higher rates begin above that line, leaving the measure to reach the clients advisors already treat as planning-heavy: owners of pass-through businesses, whose income is taxed under the individual code rather than the corporate one, and households whose year carries a single large event. The Tax Foundation's analysis folds the corporate side into the same amendment, putting pass-through income squarely inside the individual rate schedule.

Amendment 87 keeps identical bracket boundaries for single filers and for married couples filing jointly, so a two-earner household reaches the higher marginal rates at the same combined income a single filer would, and the Tax Foundation puts a number on the resulting marriage penalty: $125 for a couple earning $25,000 each, and $16,575 for a couple earning $500,000 each. The same bracket width means the penalty scales with income, and the households the graduated schedule is built to reach absorb the largest version of it.

Amendment 87 would write into the constitution the authority to levy a graduated rate and, through the companion initiated statute, set the rates themselves, which the legislature could change at any time. The initial schedule adds nothing to income below $500,000, but the authority behind the higher rates would be constitutional while the rates stay statutory, a split that suggests the graduated structure would outlast any single rate schedule a later legislature might pass. For a client with a multi-year horizon—a staged Roth-conversion plan, a business sale, a deferred-compensation schedule—that difference between a rate and a grant of authority is worth pricing before the vote rather than after it.

Colorado ran this experiment in reverse until 1987, when, according to the Tax Foundation, it became the first state to switch from a graduated to a single-rate income tax. Its top rate before the change had been 8 percent on income above $10,000 for 24 years, and the flat rate that replaced it began at 5 percent—the marginal rate Colorado had applied between $4,000 and $5,000 of income, or roughly $12,200 to $15,250 in today's dollars—and has been trimmed several times since, to 4.4 percent. A top rate of 8.4 percent under Amendment 87 would sit above the 8 percent the state charged before it moved to a single rate.

That history frames the amendment's trade-off: as the Tax Foundation puts it, a flat rate on all income is harder to raise and more attractive to cut, and the past near-four decades in Colorado appear to confirm that as the rate slid from 5 percent to 4.4 percent. Voters are being asked to exchange a schedule that has only ratcheted downward for one whose rates a legislature could move in either direction once the constitutional authority exists.

For the desk, the measure compresses the year's tax conversations onto a single date, because a Roth conversion concentrates income into one tax year and, under a graduated state schedule, the rate that income pays depends on how far the client's taxable income rises above $500,000—7.4, 7.9, or 8.4 percent. A conversion sized to stop just below a threshold is a different recommendation from one sized to fill a bracket, and whether to pull conversions forward into the current 4.4 percent regime or wait out the vote is a sequencing question that remains open. Tax planning is the last uncommoditized alpha for advisors, and a state rate that could move from 4.4 to 8.4 percent on the top slice of a client's income is the kind of change that tests that claim, because the investment answer barely moves while the bracket answer does.

Residency enters the same way, because a widening gap between a client's current state rate and a prospective one adds arithmetic to domicile reviews that are usually argued on facts, and while a single ballot measure does not settle a residency question, it changes the cost of getting one wrong. That is a conversation to have with clients before Election Day rather than in the filing season that follows.

Watch the vote count first, and then the legislature's early use of the authority if Amendment 87 passes: the initial brackets touch only income above $500,000, and it is the rate-setting freedom written into the structure that a five-year client plan has to absorb. The rate's level matters this year, but its durability is what every conversion, sale, and residency call after has to price.