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Annual Privatization Report 2005 - Tax and Spending Limitations

January 1, 2005

Tax and Spending Limitations


There's a slightly funny-sounding new word increasingly at the center of state budgetary politics: "TABOR," which is an acronym for Taxpayer's Bill of Rights. For both supporters of expanded government and proponents of limited government, TABOR has become a lightning rod in the fight over public policy.

The TABOR story starts in Colorado. After having been defeated twice, TABOR was once again on the ballot in 1992. Recognizing the potency of TABOR, pro-government forces left no stone unturned in their scare campaign. Leading the opposition was Gov. Roy Romer, who said that stopping TABOR was the "moral equivalent of defeating the Nazis at the Battle of the Bulge." Lead TABOR proponent Douglas Bruce was vilified and labeled by Romer as "a terrorist who would lob a hand grenade into a schoolyard full of children." Despite this demagoguery, TABOR was approved by voters. As a footnote to this bitter campaign, Romer was later appointed Chairman of the DNC by Bill Clinton at about the time the Democratic Party was making a push to civilize political discourse.

Colorado's TABOR contains the most comprehensive fiscal limits in the nation, including requirements for voter approval before higher state or local taxes or debts may be enacted, a ban on local income taxes and state property taxes, a flat-rate income tax, emergency reserves and comprehensive state and local spending limits tied to inflation increases and population growth. Any surplus revenues must be returned to taxpayers.

The greatest fear of opponents is that TABOR would do exactly what it promised: create some reasonable restraints on the growth of government. TABOR has indeed done this. Dr. Michael New, an academic who has studied state tax limits, summarizes, "Colorado's Taxpayer Bill of Rights has quietly become America's most effective limitation on government. It has kept spending in check, provided tax relief to Colorado residents, and deserves a great deal of credit for Colorado's strong fiscal position."1

The most repeated substantive claim of TABOR opponents has been about economics. Supposedly, TABOR was going to destroy Colorado's economy. Romer and others claimed that TABOR would lead to the posting of signs on Colorado's borders that "Colorado is closed for business." Here, the results have been exactly opposite of these claims:

There have been non-economic benefits too. Accountability is one. Dee Hodges of the Maryland Taxpayers Association offers this summary of the fiscal benefits of Colorado's TABOR: "TABOR works because it forces state and local governments to live within a budget, to set public priorities, to make wiser choices, and to find ways to meet state goals—not by spending more—but by spending smarter."3

Citizen involvement is another. As the new Democratic Speaker of the Colorado House of Representatives Andrew Romanoff has bluntly stated, "Voter approval of tax increases is extremely popular, and politically untouchable."4 Opponents rarely criticize this aspect of TABOR, instead focusing on how it limits the growth of government.

And ultimately, TABOR has proven popular with voters (if not special interests seeking more government funding). A recent survey showed that over 70 percent of Coloradans back TABOR—that's greater support than when it was enacted 13 years ago.5


Reaction in Colorado

TABOR's strong impact on Colorado fiscal policy (and economy) has earned it admirers and detractors. The former camp has sought to spread the TABOR concept across America. The latter group has sought not just to stop TABOR elsewhere but to gut it in Colorado.

In Colorado, because TABOR is now forcing some tough budgetary choices, Gov. Bill Owens (formerly a TABOR champion) has teamed with the Democrat-controlled legislature to put Referendum C on this fall's ballot. The measure would suspend TABOR for five years. The effects would be two-fold: first, it would mean Coloradoans would have $3.1 billion less than they otherwise would have. And second, it probably would mean the end of TABOR. If TABOR gets waived for five years, the political class would certainly seek sometime during that time period to finish it off entirely. The aforementioned popularity of TABOR makes a head-on repeal effort impossible. So opponents are trying to slay Colorado's TABOR in a way that they can claim they are "reforming" and "preserving" it.

Not unexpectedly, public employee unions and others who benefit from government largesse are funding a multi-million dollar campaign in support of Referendum C. As Jon Caldara of the Independence Institute has observed, "The tax-and-spending lobby wants to have a victory against TABOR so they can run around the country and scare other states about the 'Colorado Experience.'"6

Supporters of Referendum C include others who, like Owens, probably used to count themselves among supporters of limited government. One such person is Bruce Benson, a Republican "Super Ranger" (big dollar fundraiser), who will be spearheading the drive for Referendum C. Despite his advocacy of this $3.1 billion tax hike, Benson nonetheless professes, "I like smaller government and lean government."7 The added $3.1 billion for government coffers led House Republican leader Joe Stengel to observe that Referendum C will be "a five-year spending spree."8


Reaction Elsewhere

Colorado's limitation may be the best in the nation, but many other states have limitation provisions of some sort. Twenty-six states have enacted some variant of a Tax and Expenditure Limitation (TEL).9 More than a dozen states incorporate voter approval or legislative "supermajority" mechanisms in their tax policies. And roughly two dozen states limit all or part of their budget increases to economic measurements such as inflation or personal income growth.

In 2005, a large number of states have begun the process of taking a look at the benefits of enacting the full array of protections embodied in TABOR. Efforts for enacting a Taxpayer's Bill of Rights have begun across the nation. Table 2 provides a listing of states where proposals either have been introduced or will likely soon be introduced.

Table 2: 2005 TABOR Proposals: States Where TABOR Proposals Have Been Introduced or are Expected to be Introduced

  • Alaska

  • Arizona

  • California

  • Florida

  • Idaho

  • Illinois

  • Indiana

  • Kansas

  • Maine

  • Maryland

  • Minnesota

  • Mississippi

  • Missouri

  • New Hampshire

  • New Mexico

  • North Carolina

  • Ohio

  • Oklahoma

  • Oregon

  • South Carolina

  • Tennessee

  • Texas

  • Vermont

  • Virginia

  • Wisconsin

Sources: National Taxpayers Union, American Legislative Exchange Council, Dr. Barry Poulson, and Reason Foundation.

A typical TABOR bill is that of Maryland Delegate Herb McMillan. McMillan's measure (HB 1206) would require voter approval of any state or local tax increase. Under the bill, state and local spending could not rise by more than the growth of inflation and population (adjusted for approved revenue changes). The measure would create a rainy day fund and also stipulate that if general fund revenues exceed projected revenues by at least 2 percent, the total amount of the excess (minus administrative costs) must be returned to taxpayers.

There are several key themes driving the move for TABOR around the country:

TABOR has even gone to Washington, D.C. The Heritage Foundation, the Tax Foundation, and other groups are now actively promoting the idea of a federal version of TABOR to rein in Washington's excesses.13 The federal government is in need of spending restraint as much as any state government. The President's Office of Management and Budget is projecting that total FY 2005 outlays will be a stunning 33 percent higher than outlays in FY 2001.14 The biggest obstacle facing this effort is the inability of voters to act directly to affect federal policy. Research by the National Taxpayers Union Foundation has shown that citizen-driven tax and spending limits are far more effective than those emerging from the legislative process.15

Prospects

The battle in Colorado this fall will be herculean. While opponents recognize that well-heeled supporters of Referendum C will handily outspend them, each side will bring substantial resources to the fight. At stake is whether Colorado citizens can put a limit on the size and scope of government. And ultimately, what happens in Colorado this November could have far-reaching consequences in state capitals around the nation.

By: John Berthoud, President, National Taxpayers Union (http://www.ntu.org/main/).


Dispelling the Myths of TABOR

TABOR has not only slowed the growth of taxes and spending in Colorado, but it has succeeded in softening the blow of the last recession. While other states were struggling with massive amounts of red ink during 2002, TABOR allowed Colorado to manage the recent downturn with comparatively mild deficits and no tax increases. Lawmakers in other states should learn from Colorado's success with TABOR, and not believe everything they hear about its perceived failures.


TABOR Reduced Colorado's Revenue Deficit During the Recession

A popular criticism of TABOR is that it magnified the effect of the recession on the Colorado budget, forcing more than $1 billion in cuts.16 In actuality, TABOR reduced the impact of the recession on Colorado's budget by requiring lawmakers to refund, and not spend, over $3.1 billion in taxpayers' money during the economic boom of the 1990s. Ironically, Governor Owens and others now want to ask the voters to give up over $3 billion in surpluses in the next five years, which would wipe out the benefit of the tax cuts enacted in the late 1990s.

TABOR allows Colorado revenues to grow at the same rate as population plus inflation, requiring excess revenues to be returned to the taxpayers. When revenue growth dips below the allowed rate, the budget must "ratchet-down" its spending to the level of revenues, unless tax increases are approved. The ratchet-down is not unique to Colorado or TABOR. In fact, a ratchet-down happens in every state where revenues decline, since all states except Vermont are constitutionally restricted from spending in excess of revenues.

What makes Colorado different then? TABOR requires voter approval of tax increases so that lawmakers find it harder to raise taxes in Colorado than in other states. Colorado voters have, on occasion, approved tax increases under TABOR, particularly at the local level.

But an even more important distinction of Colorado's state finances was the impact of TABOR during the years of the boom and bubble from 1997 through 2001 (see Figure 2). Many states had large surpluses that they spent expanding government programs at an unsustainable rate. Meanwhile, TABOR forced Colorado to return surplus revenues to the taxpayers. Thus the 2002 revenue decline caused worse deficit problems in other states than it caused in Colorado where TABOR had moderated the growth of government spending. Had Colorado spent its surplus revenues from 1997 to 2001, its 2002 and 2003 deficits would have been much worse.

In 2001, Colorado received $8.9 billion in revenues, but had to return over $1 billion because TABOR only allowed the state to keep and spend $7.9 billion.17 Thus, when revenues dropped to $7.8 billion in 2002, the state's revenue deficit was actually $196.4 million (the difference between actual revenues in 2002 and the TABOR limit in FY 2001) instead of $1.124 billion (the difference between actual revenues in 2002 and 2001) (see Figure 3). This is an 83 percent decline in the state's revenue deficit for FY 2002.

States without tax and spending limits would have spent almost the entire $8.9 billion the previous year, making the revenue decline much more painful by forcing the state to cut spending even more. TABOR saved Colorado from a more severe revenue shortfall and smoothed Colorado's spending over the business cycle. States like California that do not have a strong TABOR limitation were much more severely impacted by their steep revenue decline.

The alternative to TABOR's ratchet-down is what happened in many other states: the ratchet-up. States that raise taxes during a recession to cover revenue shortfalls will generate even larger revenues during the ensuing recovery. The state will usually keep and spend this new money, then have to raise taxes again to cover a new shortfall during the next recession. Thus, taxes are continually ratcheted up over the long-term business cycle. TABOR is a check on this fiscal spiral, requiring lawmakers to return surpluses in the good years and limiting the ability of lawmakers to raise taxes during the bad years. TABOR maintains the status quo for taxpayers, unless they give their explicit approval of faster tax and spending growth.

The charge that the Taxpayer Bill of Rights magnified the effect of the budget crisis also overlooks the role that mandated spending increases played in worsening Colorado's deficit. Amendment 23, passed by voters in 2000, requires the state to increase education spending by the rate of population growth plus 1 percent every year from 2001-2011—regardless of whether the state's revenues increase or decrease. It carves out a special source of funds for education—7.2 percent of personal income tax revenues—and places those funds in a special education trust.18 Amendment 23 puts a major squeeze on other parts of Colorado's budget, like higher education, which are funded from the part of the budget still subject to the limits of the Taxpayer Bill of Rights.

Even if we grant the claim that the Taxpayer Bill of Rights depressed revenue at an inopportune moment—the remarkable revenue drop in 2002—TABOR allows state lawmakers to spend above and beyond its limits if the voters approve. All lawmakers have to do is ask permission to raise taxes.

Amendment 23, by contrast, contains no such provision. Short of a constitutional amendment, education spending must rise even during a period of recession and revenue decline.

Another popular criticism of TABOR is that the large tax refunds in the boom years kept the state from putting money into a rainy day fund or making other investments that could have eased the crisis when it arrived.19 This is simply false.

Colorado already has several reserve funds at its disposal, including a statutory reserve equal to 4 percent of appropriations, to be used in case of revenue shortfalls (though the money has to be replaced in the future).20 Lawmakers spent a large portion of this reserve on capital construction, an unsustainable course during a revenue shortfall.21 The Taxpayer Bill of Rights also requires the state to set aside an emergency reserve fund, to be used in case of natural disasters. Finally, the Taxpayer Bill of Rights allows Colorado lawmakers to ask the voters to keep surplus revenues to use in a rainy day fund.

This fall, Governor Owens and other like-minded lawmakers in Colorado will ask the voters to allow them to keep TABOR surpluses over the next five years in order to spend "sufficient" amounts of money on public services. TABOR allows this sort of referendum, but they could just as easily ask the voters to allow them to set aside the money in reserve, to use in case of a future shortfall. This could have been done in the 1990s as well, but apparently lawmakers then (including Governor Owens) were content to allow the voters to keep surplus tax collections.


Conclusion

Lawmakers who want to exercise good fiscal stewardship should seriously consider adopting TABOR in their states. Of course, TABOR does slow the growth in government spending, but that's exactly the point. It imposes much more strict spending discipline on lawmakers and requires them to prioritize government programs and eliminate those programs that do not work effectively. In this way, TABOR is more than a limit on government growth; it's also a tool for more effective management and oversight of government spending. Those criticizing TABOR are criticizing it because it works exactly the way it's supposed to. How many other laws can we say that about?

By: Chris Atkins, Staff Attorney, Tax Foundation (http://www.taxfoundation.org/)


Americans for Prosperity Grades Nation's Tax and Expenditure Limits

In 1973, Ronald Reagan launched the tax and expenditure limit movement by supporting Proposition 1, the nation's first tax limit proposal. While Proposition 1 failed, it ignited a national tax limit movement that, over the last three decades, has seen 28 states enact various forms of tax and expenditure limits (TELs). These TELs have had varied success in their actual ability to limit the growth of state taxes and spending.

In a new report for Americans for Prosperity Foundation, Dr. Barry Poulson of Colorado University graded the effectiveness of each state's TELs. Poulson evaluated each TEL based on five different criteria.  Colorado's Taxpayer's Bill of Rights amendment scored the highest of the nation's TELs—scoring 24 out of 25—earning an A-. The median grade was a D-. Not surprisingly, the great majority of the states faired poorly, with 36 states earning D's and F's.

This study highlights the need for states to enact real tax and expenditure limits that actually constrain the growth of state government spending," Dr. Poulson explained. "Fortunately, we have seen renewed interest in the national tax and expenditure limit movement.  This year, more than a dozen states will be considering well-designed TELs, and states such as Ohio and Maine are expected to have a TEL measure on the ballot in 2005 or 2006."

The study, "A Fiscal Discipline Report Card: Grading the States' Tax and Expenditure Limits," is available on the Americans for Prosperity Foundation Website at www.AmericansForProsperity.org.

Table 3: State Tax and Expenditure Limits: Ranking and Report Card 2005

State

Total

Grade

Colorado

24

A-

Florida

21

B

Missouri

21

B

Louisiana

20

B-

Michigan

20

B-

Washington

20

B-

California

18

C+

Hawaii

18

C+

Oregon

17

C

Oklahoma

16

C

Alaska

15

C-

Connecticut

15

C-

South Carolina

15

C-

Massachusetts

14

C-

Montana

13

D+

Nevada

13

D+

New Jersey

13

D+

North Carolina

12

D+

Delaware

11

D

Tennessee

11

D

Rhode Island

10

D

Texas

10

D

Utah

10

D

Arizona

9

D-

Idaho

9

D-

Mississippi

9

D-

Iowa

8

D-

Kentucky

8

D-

South Dakota

8

D-

Arkansas

7

D-

Alabama

0

F

Georgia

0

F

Illinois

0

F

Indiana

0

F

Kansas

0

F

Maine

0

F

Maryland

0

F

Minnesota

0

F

Nebraska

0

F

New Hampshire

0

F

New Mexico

0

F

New York

0

F

North Dakota

0

F

Ohio

0

F

Pennsylvania

0

F

Vermont

0

F

Virginia

0

F

West Virginia

0

F

Wisconsin

0

F

Wyoming

0

F


Endnotes

1 Michael New, "Fiscal Trail Blazer: Colorado's Taxpayer Bill of Rights is leading the way," National Review Online, November 4, 2002, http://www.nationalreview.com/nrof_comment/comment-new110402.asp.

2 Fred Holden, A Decade of TABOR, Issue Paper 8-2003 (Golden, Colorado: The Independence Institute, June 1, 2003), http://www.i2i.org/article.aspx?ID=559.

3 Dee Hodges, Maryland Taxpayers Association Urges Passage of SB 601/HB 1130, the Taxpayers Bill of Rights (TABOR) (Baltimore, Maryland: Maryland Taxpayers Association, March 25, 2004), http://www.mdtaxes.org/archives/testimony&confs/2003%20testimony/dee.hodges.testimony.TABOR.3.25.04.htm.

4 Representative Frank Lasee, "Voters Like Having a Say," Wisopinion.com, January 6, 2005, http://wisopinion.com/index.iml?mdl=article.mdl&article=1263.

5 Barry Poulson, The Taxpayer's Bill of Rights Movement in the States (Washington D.C.: Americans for Prosperity Foundation, April 4, 2005), http://www.americansforprosperity.org/news/tabor_0050404a.html.

6 Jim Tankersley, "National TABOR campaign hinging on Colorado," The Rocky Mountain News, May 18, 2005, http://rockymountainnews.com/drmn/election/article/0,1299,DRMN_36_3786593,00.html.

7 Jim Tankersley, "Budget proposal headed to voters," The Rocky Mountain News, April 19, 2005, http://rockymountainnews.com/drmn/legislature/article/0,1299,DRMN_37_3711187,00.html.

8 Ibid.

9 David Hoffman, ed., Facts and Figures on Government Finance (Washington D.C.: The Tax Foundation, November 2004), pp. 191-271.

10 Fabrizio, McLaughlin & Associates, Virginia Taxes and Budget Baseline Survey (Alexandria, Virginia: National Taxpayers Union, February 9, 2004), http://www.ntu.org/downloads/VA-TABORQuestions.pdf.

11 John Berthoud et al., Coalition letter to Wisconsin State Leaders (Alexandria, Virginia: National Taxpayers Union, April 27, 2004), http://www.ntu.org/main/letters_detail.php?letter_id=179.

12 Barry Poulson, The Truth About TABOR in Kansas . . . and Colorado (Washington D.C.: Americans for Prosperity Foundation, February 10, 2005), http://www.americansforprosperity.org/kstabor/kst_0050210a.html.

13 See, for instance, Brian Riedl, Restrain Runaway Spending with a Federal Taxpayers' Bill of Rights, Backgrounder # 1793 (Washington D.C.: The Heritage Foundation, August 27, 2004), http://www.heritage.org/Research/Budget/bg1793.cfm.

14 Historical Tables, Fiscal Year 2006 Budget of the U.S. Government, Table 1.1.

15 See Peter J. Sepp, By Popular Demand: How Citizen-Driven Ballot Measures Have Shaped Tax Policy for the Better, NTUF Policy Paper 114 (Alexandria, Virginia: National Taxpayers Union Foundation, May 21, 1999), http://www.ntu.org/main/press.php?PressID=323&org_name=NTUF.

16 See Nicholas Johnson and David Bradley, Public Services and TABOR in Colorado (Washington D.C.: Center on Budget and Policy Priorities, January 2005), http://www.cbpp.org/1-13-05sfp2.htm.

17 See The TABOR Surplus and TABOR Refund Mechanisms, Colorado Office of State Planning and Budget (September 2004), located at http://www.state.co.us/gov_dir/govnr_dir/ospb/specialreports/taborsurplus-sep2004.pdf.

18 See Mike Coffman, The Budget and the Constitution: Amendment 23, 4 Tresur E-Notes 16 (April 23, 2002), located at http://www.treasurer.state.co.us/news/enotes/2003/budget__the_constitution_Amendment23.htm.

19 See Nicholas Johnson and Karen Lyons, Is Colorado's TABOR Creating Jobs? (Washington D.C.: Center on Budget and Policy Priorities, January 13, 2005), http://www.cbpp.org/1-13-05sfp.htm.

20 See Chris Ward, The Big Picture—An Overview of State Finances, Colorado Legislative Council Issue Brief Number 98-4 (1/30/1998), located at http://www.state.co.us/gov_dir/leg_dir/lcsstaff/research/issuebrf-bigpic.htm.

21 See TABOR Legislative Handbook (Golden, Colorado: Independence Institute, January 2000), http://i2i.org/articles/1-2000.PDF.




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