For the third year in a row, Colorado congressmen from both parties are calling on the IRS not to tax the state’s lump-sum refund payments to state residents under the Taxpayer’s Bill of Rights.
Colorado’s congressional delegation wrote in a letter to IRS Commissioner Danny Werfel this week that the question of whether TABOR refunds are treated as taxable income by the agency “should be resolved in a timely manner to avoid further confusion for our state’s taxpayers.”
“As you know, the IRS has never considered TABOR refund payments as taxable income since Colorado voters ratified the state’s constitutional amendment in 1992 – over thirty years ago,” the letter states. “Such a significant change would cost the state significant time and resources to ensure regulatory stability and adequately inform the public about how these changes might affect them. It would also have a significant impact on taxpayers – particularly low-income taxpayers – who may face new, unexpected tax obligations as a result of this policy interpretation.”
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The letter was signed by Democratic U.S. Senators Michael Bennet and John Hickenlooper, Democratic U.S. Representatives Yadira Caraveo, Jason Crow, Diana DeGette, Joe Neguse and Brittany Pettersen, and Republican U.S. Representatives Lauren Boebert, Greg Lopez and Doug Lamborn.
The uncertainty on the matter began with the 2022 tax year, when the IRS, in response to a wave of special tax refunds issued by states in the wake of the COVID-19 pandemic, considered the possibility of treating such payments as taxable income. Colorado gave all single taxpayers a flat refund of $750 in 2022 and all joint taxpayers payments of $1,500, rather than using a tiered system based on income level, as the state had done in the past.
The IRS has already backed away from its plans twice, announcing that it will not tax TABOR refunds in tax years 2022 and 2023. Last year, the agency released guidelines that revived the possibility of taxing the payments in the future, but a new state law set to be passed in the 2024 legislative session should address the issue going forward, lawmakers say.
“I am grateful to the Colorado delegation for their support in ensuring that Colorado residents’ TABOR refunds are not taxed, leaving more money in the pockets of hard-working Colorado residents,” Gov. Jared Polis said in a statement. “I urge the federal government to maintain the decades-long priority of not taxing tax refunds.”
TABOR limits the revenue that the government can retain and spend. The limit increases with inflation and population growth, and revenues that exceed this limit must be returned to taxpayers.
