Whew. That was close.
The Internal Revenue Service (IRS) announced on Friday that it would not require Coloradans to pay federal income tax on the expedited tax refunds they received last year to help provide immediate relief, returned under Colorado’s unusual, 30-year-old TABOR law.
The early refunds last year were overwhelmingly approved by the legislature in a bipartisan manner and signed by Governor Jared Polis. That put a $750 or $1,500 TABOR refund of excess tax revenue that the state expedited to taxpayers in the pockets of single and joint filer Coloradans.
Colorado U.S. Senator Michael Bennet, the new chair of the U.S. Senate Finance Committee’s Subcommittee on Taxation and IRS Oversight, called acting IRS Commissioner Douglas O’Donnell Friday morning, urging him to avoid further confusion in the middle of tax filing season and to continue the thirty-year precedent of treating TABOR payments as non-taxable.
Bennet also joined the Colorado Congressional Delegation in a letter urging the acting Commissioner to treat TABOR revenue payments as non-taxable.
“The last thing Colorado families need right now is a $400 million tax increase. I’m relieved that the IRS heeded our call and won’t tax Coloradans’ TABOR payments this year,” Bennet said in a statement.
“The week-long uncertainty about whether the IRS was going to tax state refunds was a disaster,” read the statement. “As chair of the Senate’s subcommittee on IRS oversight, I will demand answers for why the IRS explored this radical change, and why this took place in the middle of filing season. And as the IRS looks to the 2023 tax year, I will continue to fight to keep TABOR tax-free.”
The Polis administration says it was pleased with the IRS’s decision to uphold the 30-year precedent of not taxing these refunds and will continue to advocate that they not be taxed in future years.
“We, like millions of Coloradans, are breathing a sigh of relief that the IRS and federal government have stepped away from taxing our refunds this year. This ultimately is the best outcome for families and individuals and we will continue seeking out more ways to save people money,” said Governor Polis. “I will continue fighting to maintain this precedent that refunds under TABOR should never be taxed.”
For the record, the State of Colorado has been doing some form of TABOR refund mechanism for the past 30 years — but only in those years when the state’s revenues exceed the revenue cap. Approved by voters in 1992, the TABOR Amendment mandated the State of Colorado to refund excess revenue generated by the state to Coloradans. These refunds have never been taxed.
“We appreciate the outcome of this decision and will continue to advocate that TABOR refunds are not taxable for the hardworking people of Colorado,” said Colorado Department of Revenue Executive Director Mark Ferrandino.
The decision is good news for any Coloradans who have already filed their tax returns as it requires no additional action on the part of the filer. The full statement from the IRS can be found here.
The taxability of the refunds was called into question on February 3, 2023, when the IRS released a statement telling Americans to delay filing until they determined whether the stimulus checks sent out by more than 19 different states last year were subject to federal income tax, including Colorado. Governor Polis and the state’s congressional delegation advocated strongly to ensure TABOR refunds would not be taxed, especially given how close we are to the tax filing deadline.