Legislative Council Staff’s fiscal review of Amendment 87 omits pass-through filers

DENVER — Colorado voters will decide a graduated income tax measure on November 3, after the Secretary of State’s office found its petition sufficient on Tuesday, September 1 and listed it as Amendment 87. Of the 53,640 Colorado returns reporting more than $500,000 in adjusted gross income, 30,850 report partnership or S corporation income. The measure, which circulated through the petition stage as Initiative 195, would replace the state’s 4.4 percent flat income tax with six graduated brackets beginning in tax year 2027, and the legislature’s nonpartisan Legislative Council Staff estimated it would raise $1.98 billion a year in fiscal year 2027-28. The ballot title set by the state Title Board asks voters whether state taxes should be increased $2.7 billion annually, the highest figure those analysts estimated after allowing for forecast error.

The Secretary of State’s office found 130,938 valid signatures against a requirement of 124,238, and the measure cleared the 2 percent threshold in each of Colorado’s 35 state Senate districts, according to Colorado Newsline. The ballot number itself is not yet settled. The Secretary of State’s page carries the Amendment 87 designation while describing itself as “an unofficial list” whose Amendment and Proposition ballot numbers “will become finalized on September 4 when the state ballot content is certified.” Colorado Newsline reports that the measure would repeal rather than amend a portion of the state constitution while enacting the graduated tax through statute, so it needs only a simple majority rather than the 55 percent that article V of the state constitution requires to amend it. The language it would repeal is part of the Taxpayer’s Bill of Rights.

The state’s nonpartisan analysts produced their revenue estimate without examining the filers who report business income on a personal return. Legislative Council Staff has published two fiscal documents on the measure, the fiscal summary of January 20, 2026 and the initial fiscal impact statement of March 9, 2026. Legislative Council Staff also joined the Office of Legislative Legal Services on a January 2, 2026 review and comment memorandum, the drafting review required by C.R.S. 1-40-105(1), which covered initiatives #189 through #196. Across all three, the words pass-through, S corporation, LLC, partnership, sole proprietor, small business and Schedule C appear zero times. The fiscal impact statement never says how many filers the measure would affect.

That silence matters because the certified rates are marginal and they apply to federal taxable income as Colorado modifies it. The figure a business reports as revenue and the figure its owner reports as taxable income are separated by cost of goods sold, by business expenses and by deductions, and the size of that gap decides who the new brackets actually reach.

Amendment 87’s certified text imposes the tax on federal taxable income under section 63

The certified final text filed with the Colorado Secretary of State states that “a graduated tax is imposed on federal taxable income, as determined by section 63 of the Internal Revenue Code, of every individual, estate, and trust.” The same sentence carries the phrase “subject to subsection (2) of this section,” and subsection (2), which the measure amends and keeps, requires federal taxable income to be modified by Colorado additions and subtractions before any rate applies, producing what the state calls Colorado taxable income. The certified ballot title uses the same measure, “establishing various income tax rates based on the amount of taxable income earned by individuals, estates, trusts, and corporations,” and it keeps “the current 4.4% tax on income from the sale of a principal residence,” which the measure taxes at 4.40 percent rather than at the graduated rates, on whatever gain exceeds the federal exclusion. The Colorado Department of Revenue describes that step in its Individual Income Tax Guide: “Colorado income tax is based on federal taxable income. However, Colorado law provides for a number of modifications to federal taxable income that apply in the calculation of Colorado tax.”

For taxable years commencing on or after January 1, 2027, the schedule runs 3.70 percent on income up to $25,000, 4.20 percent above $25,000 to $100,000, 4.40 percent above $100,000 to $500,000, 7.40 percent above $500,000 to $750,000, 7.90 percent above $750,000 to $1 million, and 8.40 percent above $1 million. Each rate applies only to the income inside its own tier. Legislative Council Staff illustrated that with a worked example: “a taxpayer with taxable income of $600,000 would pay a tax of 3.7 percent on the taxpayer’s first $25,000 in taxable income, 4.2 percent on the next $75,000, 4.4 percent on the next $400,000, and 7.4 percent on the last $100,000.”

IRS Publication 334 puts a $400,000 retail business at $96,920 in gross profit

The Internal Revenue Service publishes its own worked example of the distance between revenue and profit. In Publication 334, the Tax Guide for Small Business, the agency illustrates a retail operation with $400,000 in gross receipts, subtracts $14,940 in returns and allowances and $288,140 in cost of goods sold, and arrives at gross profit of $96,920. Business expenses have not yet entered the calculation at that point, because, as the guide puts it, “You must determine gross profit before you can deduct any business expenses.” A sole proprietor carries the net profit from Schedule C onto Schedule 1 of Form 1040.

S corporation income reaches the personal return the same way. Shareholders, the IRS says, “report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.” A business with $1 million in gross revenue therefore reports a far smaller figure on its owner’s return, and the brackets apply to that smaller number.

Legislative Council Staff’s table shows a $325 average cut at $500,001 to $1 million

The state’s taxpayer-impact table, reprinted in the ballot title, sorts filers on a third measure. Its footnote says so: “Income categories use adjusted gross income reported to the federal Internal Revenue Service.” Filers with adjusted gross income of $500,001 to $1,000,000 average a tax cut of $325 under the measure, the identical average cut Legislative Council Staff estimates for the $200,001 to $500,000 group. The first category that pays more on average is $1,000,001 to $2,000,000, at an increase of $4,764. The table stops at $5,000,000 and says nothing about filers above that.

Colorado Department of Revenue data for tax year 2023 shows why the two measures diverge. Returns reporting $500,000 or more in federal adjusted gross income reported $74.18 billion of it, and $67.56 billion of federal taxable income. Taxable income sits below adjusted gross income, which sits below gross receipts, so a filer whose adjusted gross income lands in the high six figures can still have taxable income under the $500,000 threshold.

Kim Monson Newsroom arithmetic on the certified schedule puts the crossover at $510,833

The $500,000 bracket threshold and the point at which a filer first owes more under the measure sit about $10,833 apart. At exactly $500,000 of taxable income the certified schedule produces a tax of $21,675, made of $925 on the first $25,000, $3,150 on the next $75,000 and $17,600 on the next $400,000. The current flat rate on the same $500,000 is $22,000, so a filer at the threshold owes $325 less.

Above that line the 7.40 percent rate costs 3.0 cents more on each dollar than the 4.40 percent flat rate does, so erasing that $325 advantage takes about $10,833 of income above $500,000. The crossover falls at $510,833.33 of taxable income, where both systems produce a bill of $22,476.67. A filer at $505,000 still owes $175 less and one at $510,000 still owes $25 less, while a filer at $515,000 owes $125 more and one at $600,000 owes $2,675 more. At $1,000,000 of taxable income the bill is $59,925 against $44,000 under current law. That is $15,925 more, an effective rate of 5.99 percent. These figures are a Kim Monson Newsroom calculation from the certified bracket schedule. None of the state’s published analyses of the measure gives a crossover point.

The largest saving available anywhere under the new schedule is exactly $325, reached at $100,000 of taxable income and held flat from there to the crossover, and $325 is precisely what Legislative Council Staff reports as the average change for both the $200,001 to $500,000 and the $500,001 to $1,000,000 categories. That average is the largest saving the lower brackets allow, and the state reports it for a category whose upper half sits well past the crossover, where the schedule puts filers on the paying side.

45,609 Colorado returns cleared $500,000 of Colorado taxable income in tax year 2023

Federal and state statistics size the pass-through population near the thresholds. IRS Statistics of Income counted 38,030 Colorado returns with adjusted gross income of $500,000 under $1 million for tax year 2023 and 15,610 at $1 million or more, which sums to 53,640. Of the returns in the $500,000 to $1 million band, 19,320 reported partnership or S corporation net income and 9,950 reported sole proprietor income. In the $1 million and over band the figures are 11,530 and 4,360, for totals of 30,850 and 14,310. Statewide, 241,730 Colorado returns reported partnership or S corporation income and 586,590 reported sole proprietor income.

The Department of Revenue’s Table 8 sorts returns by Colorado taxable income, which is federal taxable income after the state additions and subtractions the measure leaves in place, and so is the closest published proxy for the measure’s base. It records 45,609 returns at $500,000 and over for tax year 2023, out of 2,981,429 returns filed, or 1.53 percent. The department’s adjusted gross income tables, covering the same year and the same population of full-year residents, record 36,315 returns at $500,000 under $1 million and 15,047 at $1 million and over, a published combined figure of 51,362. The high-income group is 5,753 returns smaller counted on Colorado taxable income than on adjusted gross income, about one in nine. That is a net difference between two sortings of the same Department of Revenue population, and the department does not publish how many individual returns cross the threshold in each direction. The same table records 558,015 returns reporting negative Colorado taxable income, the result of losses and subtractions exceeding income and additions.

The entity mix behind those returns is heavily pass-through. The IRS Data Book for fiscal year 2025 records 148,240 S corporation returns and 118,283 partnership returns processed from Colorado, against 37,914 C or other corporation returns. Teddy Collins, co-owner of Spartan Defense in Colorado Springs, made the same point on The Kim Monson Show. “The majority of small businesses in the state of Colorado file as LLCs or S corporations with tax through or with pass through taxation,” Collins said. He also said he has heard directly from industry leaders weighing whether to stay. “I’ve already talked to some very prominent industry leaders that say if this passes, they’re done in Colorado,” Collins said on the show. Spartan Defense is a sponsor of The Kim Monson Show, and Collins is a candidate for Colorado Senate District 4.

Three limits apply to these counts. Every published cross-tabulation of pass-through income against income size uses adjusted gross income, so 30,850 describes returns above $500,000 of adjusted gross income rather than returns above the bracket itself. Neither the Department of Revenue nor the IRS publishes a $750,000 breakpoint on either base, so the number of Coloradans who would land in the 7.90 percent tier cannot be sourced from either agency. And the two agencies count different populations, which is why the IRS counts 53,640 returns above $500,000 of adjusted gross income where the department counts 51,362. The IRS counts every return filed from Colorado, 3,086,830 of them, while the department counts full-year residents only, 2,981,429.

Denver Metro Chamber of Commerce argues owners owe tax on profit they never receive

In announcing its 2026 ballot positions, the Denver Metro Chamber of Commerce, which voted to oppose the measure, wrote that it “taxes more than just wage income at the new rates, so small businesses who frequently report business income on their personal tax returns (pass-through income) will also see substantially higher tax burdens, even if they do not actually receive the income from their business.” Profit allocated to a partner or shareholder is taxable to that person whether or not the business distributes the cash. The Chamber also wrote that a “$2+ billion annual tax increase would essentially double Colorado’s top tax rate and would put us among the top 10 highest income tax states in the nation.” The top marginal rate moves from 4.40 percent to 8.40 percent under the certified schedule. The Chamber’s further objection is that the measure “does not index the proposed brackets to inflation.” It supports the competing rate cap, which appears on the same ballot as Proposition 136.

All three proponent organizations describe the threshold the same way. The proponent committee Protect Colorado’s Future instructs owners on its own calculator that “the Colorado taxable income calculation should include total annual take-home pay (salary plus share of profit) minus allowable deductions.” The Bell Policy Center, part of that coalition, says in its graduated income tax FAQ that “no co-owner of a passthrough business will pay more until their take-home pay, including their share of the company’s profit, exceeds $500,000 per year.” The Colorado Fiscal Institute compresses the point to a sentence: “Small business is not a tax bracket.” Across the two fiscal documents and the drafting review published so far, the state has not counted the Coloradans standing on either side of that line.

The state’s fiscal analysis is not finished. The initial fiscal impact statement carries a disclaimer that Legislative Council Staff “may revise this estimate for the ballot information booklet (Blue Book) if new information becomes available,” and the Blue Book analysis for the November ballot has not been published.