Amendment 69 will raise $25 billion in new tax revenue-nearly doubling the size of the current state budget – to support a government-run health care system. There are many important questions that Amendment 69 leaves unanswered, but here’s how the taxes will work…as best as we can tell.
Payroll Taxes: Employers will pay 6.67 percent on all payroll. Employees will pay 3.33 percent on all payroll income. This totals a new 10 percent tax on all wages and earnings.
Example 1: Jack earns $1,000 a week. Jack’s employer must pay $66.70, and Jack must pay $33.30 each week in ColoradoCare taxes. If the employer so chooses, it may elect to pay Jack’s share of the taxes.
Non-Payroll Taxes: In addition to the payroll taxes just described, a 10 percent ColoradoCare tax will be assessed on all non-payroll income. This includes:
- Interest income collected on savings: savings in savings accounts, money market accounts, and certificates of deposits (CDs).
- Dividend income from stock: dividend income generated from stock ownership in either public or private companies.
Example 2: Jack receives interest income of $100 on his savings account and some dividend income of $200 on stock he inherited from his grandfather. Tim will have to pay ColoradoCare tax of $30 ($10 on the interest income and $20 on the dividend income) on his earnings.
- All capital gains income: not only capital gains from the sale of stock, but also capital gains on the sale of equipment or assets, which would most likely accrue to small businesses.
Example 3: Jack has a gain of $18,000 on stock he purchased 10 years ago and sold this year. He must pay Colorado Care tax of $1,800 on the sales of the stock.
Example 4: Jill is an individual proprietor with a small print shop. She sells some antiquated equipment at auction for a $12,000 gain. Jill must pay $1,200 in ColoradoCare tax on the gain.
- State income tax refunds: if required to report this income, it would be subject to the new 10 percent tax.
Example 5: Jack and Jill purchased their first home last year and, as a consequence, were able to itemize their deductions. Doing so generated a state income tax refund of $900 they have to include in income this year. They must also pay ColoradoCare tax of $90 on that refund income.
- Some retirement income: while some portion of retirement income from social security, pensions, annuities and IRA income is exempt, any income taxable in the state of Colorado will be subject to the new 10 percent tax. Coloradans with retirement income in excess of $24,000 could be taxed on the incremental revenue above that amount.
Example 6: Paul finally retired this year at age 68 and received a $96,000 lump-sum distribution from his retirement fund. Paul will have to pay ColoradoCare tax of 10%, or $7,200, on $72,000 of the distribution ($96,000 – $24,000 = $72,000 times 10% is $7,200).
- Business income to entrepreneurs and family owned-businesses: This new tax will disproportionately hurt businesses who have structured their businesses for tax purposes as “pass through” entities. This includes sole proprietors, partnerships, S corporations, LLCs, LLPs, many trusts, and income from farms and rental property. In fact, anyone receiving income on a schedule K-1, rental income, or income from a farm will have to pay the full 10 percent tax on all their business profits, whether or not those profits are ever withdrawn from the business and realized to the individual. In contrast, businesses that pay corporate taxes will not be subject to this 10 percent tax on their business profits. This tax is in addition to the payroll tax that all businesses – regardless of tax structure – will pay to employees that work for them. Since most entrepreneurs, small and family businesses use pass-through entities, for structuring their business activities, the ColoradoCare tax will disproportionately fall on them. For example, in 2015, Colorado had 52,032 corporate filers and 235,733 pass-through filers (partnerships, LLCs, and S corporations).
Example 7: Jack and Jill are starting a new business and incorporate as a regular “C” corporation. Including themselves, the Corporation has ten employees with total salaries of $480,000 and makes a profit in the first year of $80,000. They re-invest the profit in additional equipment.
The corporation’s total ColoradCare tax on salaries will be 10% of the $480,000 or $48,000 (6.67%, or $32,016 will have to be paid by the Corporation and 3.33%, or $15,984 will be withheld from the employee’s wages). There is no ColoradoCare tax on the profits earned by the Corporation.
Example 8: Jack and Jill are starting a new business and decide to establish a partnership rather than a corporation. Including themselves, the Partnership has ten employees with total salaries of $480,000 and makes a profit in the first year of $80,000. They re-invest the profit in additional equipment.
The Partnership’s total ColoradoCare tax on salaries will be 10% of the $480,000 or $48,000 (6.67%, or $32,016, will have to be paid by the Partnership and 3.33%, or $15,984, will be withheld from the employee’s wages). However, Jack and Jill will also have to pay 10% or $8,000 ColoradoCare tax on the Partnership’s profits and will only have $72,000 in reinvest. In short, starting out as a pass-through entity (partnership, LLC, LLP, or S corporation) will cost Jack and Jill an additional $8,000 in ColoradoCare taxes.
- Other income: this catch-all category could include any “Form 1099” income, including anything from jury duty pay to gaming winnings.
The only income excluded from this 10 percent non-payroll income tax is alimony, unemployment income and the exempted portion of retirement income, which typically is an amount less than $24,000.