Congress reconvenes to tackle tax reform after Labor Day, but the Colorado Senate has been hard at work on tax cuts all August.
Our state’s small businesses are currently overburdened by high taxes and unnecessary filing costs. According to a 2017 Tax Foundation report, Colorado’s state business tax climate ranks 16th in the country — behind neighboring Utah and Wyoming. While our state is still light years ahead of high-tax states like California and Connecticut — thanks to many of our free-market legislators — our neighbor to the north ranks first overall. Wyoming’s mix of low corporate and individual income taxes translates to a favorable business climate, where job creators can survive and thrive.
While Colorado’s young, educated labor supply and high quality of life set our state apart, more work can be done. A separate Forbes ranking places the Centennial State’s business costs at 40th in the country. This turns off entrepreneurs and shifts start-ups to other states.
One reason is the business personal property tax, which inundates small business owners with needless filing costs. The tax requires businesses to file an annual inventory of “business personal property” — a broad category including manufacturing equipment, computers, and bookshelves — along with the year it was acquired. Each piece of equipment is then assessed a tax, which adds up to millions of dollars every year.
Keeping track of inventory is difficult enough, let alone paying for it. In Gov. Hickenlooper’s words, the business personal property tax is a “headache for small businesses.”
Cutting the tax would free up more money for business expansion and job creation, a potential boon for Colorado’s economy. There are more than 572,000 small businesses in Colorado, employing one million employees — roughly half of the state workforce. These small businesses are responsible for nearly 33,000 new jobs per year.
This helps all of the state’s diverse communities. Of the roughly 572,000 small businesses in Colorado, 45 percent are minority-owned, bringing resources and career opportunities to urban and rural areas. A healthier business environment leads to new locations, increased wages, and more jobs for all Coloradoans.
Federal tax cuts can only speed up the process. Congress has not substantially updated the tax system since the Tax Reform Act of 1986, which reduced and simplified rates. More than three decades later, our tax code runs more than 70,000 pages long — turning headaches into migraines.
As it stands now, the overwhelming majority of Colorado’s small businesses (95 percent) are federally taxed as pass-through entities, which means their income is “passed through” to their owner to be taxed at his or her highest marginal individual tax rate. More than half of all business income is earned by pass-through entities.
However, depending on the business, pass-through taxes can reach 40 percent. Combined with state and local taxes, Colorado’s small business owners often pay up to 50 percent of their income in taxes. This is money not being reinvested into the state economy and our workforce.
President Trump has proposed a 15 percent pass-through tax rate, which could save small business owners countless money and time. A pass-through tax cut would end up helping employees, who depend on job creators for financial security.
While the Trump administration and Congress hammer out the details, Colorado lawmakers focus on making our state taxes more competitive. When Colorado opens its doors to business, hardworking Coloradoans reap the benefits.