A serious effort is
underway in Colorado to bypass the effective tax and spending
controls imposed by the Taxpayer's Bill of Rights (TABOR) and
permanently increase the size of the state government. TABOR
limits how fast state tax revenues can grow by requiring that the
state refund taxes collected over the limit to the taxpayers.
Therefore, TABOR also, in effect, limits spending. This has kept
the burden of state government low and has led to a stronger state
But TABOR is under attack.
Elected officials have placed Referendum C on the ballot for this
fall, asking Colorado citizens to let the legislature keep (and
spend) $3 billion in surplus taxes over TABOR limits instead of
refunding those revenues to the taxpayers. As voters ponder this
referendum, it is helpful to examine why TABOR was necessary and
why it should be retained.
Colorado voters passed
TABOR in 1992 to end the undisciplined spending and tax increases
of the 1980s, which increased the effective state income tax rate
by 15 percent and the gasoline tax by 214 percent. Chart 1 shows how effective
TABOR has been in controlling spending. Before TABOR, state
spending increased dramatically in relation to taxpayers'
ability to pay, even briefly surpassing the national average. After
TABOR, the burden of government declined and Colorado's
competitiveness with the rest of the nation improved.
One of the fundamental
reasons to enact revenue and spending limits is to protect
taxpayers from constantly rising demands on their pocketbooks.
This in turn fosters a better environment for economic growth.
Government can still grow, but at a slow and predictable
rate. Elected officials must then make honest, conscious decisions
about where to direct resources across all state
This means putting an end
to the mentality of spending freely in the good years and
raising taxes to cover those expenditures in the bad
years-something that is as vital from a personal perspective for
families trying to provide for their needs as it is from an
economic perspective. TABOR has served that purpose well,
effectively protecting both Colorado families and the state
economy from the ill effects of increasing taxes and
Taxes and Government Spending Are Counterproductive
High taxes harm economic
performance. Evidence from countries around the world clearly
establishes that countries with lower government tax and
spending burdens fare better than countries with high government
burdens, and the experiences of U.S. states support this
In fact, just the act of
raising taxes harms economic performance and undermines the
relative competitiveness of a locality, state, or nation. The
businesses fleeing high-tax states such as California to
lower-tax states like Nevada are ample evidence that taxes are
an integral part of the decisions that entrepreneurs and CEOs make
when deciding where to locate or relocate a business. High or
increasing taxes retard new business formation and expansion,
thereby slowing job creation and wage growth.
Government spending can
also harm the economy because it crowds out productive
private-sector activity by taking away resources and
reallocating them based on political considerations rather
than economic decisions. Moreover, government spending encourages
unproductive choices, such as choosing welfare over work, and
discourages productive choices, such as relying on subsidized
programs like retirement and housing rather than saving for
such things. Finally, government spending inhibits innovation
because government is more centralized and bureaucratic than the
private sector, which is constantly seeking new opportunities
and improvements to maximize the bottom line.
C: A Permanent Tax Hike
Some have described
Referendum C, the Colorado Economic Recovery Act, as a
five-year time-out that would not change TABOR or raise taxes and
would allow state spending to catch up after the recession.
However, this logic unravels upon closer analysis.
A $3 Billion Tax
Increase. Referendum C is designed
to permanently increase Colorado's government and tax
base. It would authorize the legislature and governor to
ignore the TABOR limit and spend all of the tax revenues collected
by the state over the next five years. This may sound
innocuous, but it really means that approximately $3
billion will go to government
bureaucrats instead of to Colorado's families. This is a tax
increase, plain and simple.
Those who favor this "fix"
argue that it is really not a tax increase because tax rates will
not go up, but this ignores that any law that allows more tax
collections to remain in the state's coffers to finance government
programs takes money away from families and businesses. If passed,
Referendum C will take an average of $600 from every man, woman,
and child in Colorado, whether or not proponents choose
to call it a tax increase.
TABOR.This tax increase would be
permanent. Referendum C is being described as a five-year
"time-out" that will not change TABOR, but in fact it will
permanently and explicitly increase the TABOR limit because
it allows the state to retain significantly more revenue (and
therefore increases the base from which the TABOR limit is
calculated). Not only would this let elected officials take a
time-out from tough policy and fiscal decisions that families and
businesses must face every day, but it would also give them a
bonus for doing so.
This violates the very
spirit of TABOR, which demands that politicians practice fiscal
responsibility and protect the taxpayers from freewheeling
spending in the good years and tax increases in the bad years.
TABOR was passed after years of such misbehavior, and any steps to
weaken its strong limits will signal the end of its
Risks.Referendum C would also
set up a risky scenario for Colorado's financial future. Five years
of unlimited government spending would entrench the demand for more
spending by politicians, ever-growing government programs, and a
myriad of special interests. This is precisely what happened when
California undid the Gann Amendment, its version of TABOR.
Unbridled growth in state spending led to huge increases in debt
and taxes, which continue to drive jobs and businesses away from
California, and the state budget has still not recovered. If
Colorado revenues and spending are allowed to grow without limits
for the next five years, TABOR will be rendered irrelevant and more
"time-outs" will surely follow.
creates constituencies that exert powerful influence over elected
officials and policymakers to protect their interests, but the
taxpayers have no such advocates. Only TABOR can protect the
interests of Colorado's families and taxpayers from such
Protected Colorado's Families and Economy
In the 10 years after
TABOR was passed in 1992, the state government refunded over $3
billion to taxpayers-about $3,200 for a family of four. The state
also experienced a much stronger economy after TABOR. For example,
job growth in the 10 years after TABOR was nearly double that in
the 10 years before TABOR, and nearly all of this increase was in
the productive private sector. Colorado also saw higher per capita
personal income growth after TABOR.
The late 1990s was a
period of prosperity for most states, so it is important to realize
that Colorado's performance not only improved after TABOR, but also
was better than the national average. Chart 2 shows that, as TABOR
took effect, its impact on the state's economy was realized almost
immediately. Government spending in Colorado shrank as a share
of the economy, freeing vital resources for the private sector.
While the burden of government in other states also declined,
Colorado performed markedly better and improved its
competitive position vis-à-vis the rest of the
similar improvement in the state's economy and personal income
after TABOR, both in real terms and relative to the rest of the
nation. (See Charts 3 and 4.) Because a broad array of factors
influence state and national economies, it is impossible to say
with any certainty how much of this improvement is due to TABOR.
However, it is safe to say that lower taxes and spending result in
a better economy, and Colorado's experience before and after
passage of TABOR confirms this.
Real Budget Facts
The clamor raised by
supporters of Referendum C makes it seem as if the state budget was
slashed because of TABOR. However, total state spending has gone up
every year since TABOR passed. This year's budget increased 4.2
percent while the combined growth in population and inflation
was only 1.3 percent. State spending on K-12
education, corrections, and Medicaid increased the fastest,
although some programs such as public health, natural resources,
and agriculture are below their peak levels in fiscal year
This indicates that the
legislature is doing exactly what it should do: prioritizing
spending of taxpayer dollars just the way that Colorado
families prioritize spending their paychecks. When costs go up for
medical bills or gasoline, they tighten their belts on lower
priorities like Starbucks, the movies, or even an extra car for
their children. Legislators proposing Referendum C simply do not
want to be forced to make the tough belt-tightening decisions that
are politically difficult because of intense special-interest
Helped Colorado's Budget
Since its inception, TABOR
has been crucial in protecting the interests of individuals,
families, and the economy from the harm caused by higher taxes and
government spending. Because revenues cannot grow faster than
the common-sense combination of inflation plus population
growth, TABOR resulted in taxpayer refunds of $3.25 billion over 10
years and a reduction in the state
income tax rate from 5 percent to 4.63 percent. Because
Colorado has a balanced budget requirement, spending cannot
grow faster than revenues. This makes TABOR, in effect, also a
limit on spending.
Many are mistakenly
blaming the state's past budget woes on TABOR. The reverse is
actually true. Because the Colorado legislature was forced to
limit spending in the 1990s and return excess revenues to the
taxpayers, the state budget did not grow as extravagantly in
Colorado as it did in other states. California is the prime example
of lavish state spending during the 1990s, spending every dime of
additional tax revenue. As a result, when the recession hit,
California faced an unprecedented structural deficit from which it
has still not recovered. By contrast, Colorado faced a
relatively minor budget downturn brought on by declining
revenues, not by TABOR.
Thanks to TABOR,
Colorado's legislature was limited to spending $7.9 billion of the
$8.9 billion in revenues collected in 2001. The rest was
returned to the taxpayers. In 2002, revenues fell to $7.8 billion
because of the recession, leaving a budget deficit of $196
million. Without TABOR, Colorado would
likely have followed the example of most other states and spent the
entire $8.9 billion in revenues in 2001, leading to a budget
deficit of $1.1 billion in 2002. (See Chart 5.) TABOR not only
returned money to the taxpayers, but also shielded the budget from
periodic economic volatility.
The real culprit in the
state's continued budget woes is Amendment 23, which requires the
state to spend an ever-increasing share of the total budget on K-12
education and directly takes money from TABOR revenues.
TABOR protected the state budget from a structural deficit
during the recession by requiring fiscal discipline, but Amendment
23 put education directly at odds with other vital state
services like transportation and public health by
mandating increases in education spending. Hence, while TABOR
forces politicians to prioritize spending on the state budget
just as families and businesses must do, Amendment 23 gives
education a free spending pass and places a huge portion of the
budget off-limits from critical examination and assessment each
Every program, no matter
how valuable, can have inefficient, wasteful, and obsolete features
that should be ferreted out and eliminated. Education is no
exception. While increasing education spending seems like a worthy
goal to ensure academic success, the evidence overwhelmingly
shows that increasing education spending has no direct bearing
on improving student performance. In the past two
decades, states have funneled vast amounts of money into K-12
education, but this has not translated into increased achievement.
For example, according to the American Legislative Exchange
Council, none of the states with the biggest increases in per
pupil spending or the biggest decreases in pupil-teacher ratios
ranked in the top 10 in academic achievement.
Focusing on spending takes
attention away from reform of education policy itself. Competition
among programs jockeying for limited state funds would be more
likely to focus debate on whether the educational programs in
question achieve results or not. Amendment 23 rests on the false
premise that spending directly influences academic achievement. A
more significant question than how much money is spent is
how that funding is delivered, whether through a
monopolistic public school system or through a more competitive
system of parental choice.
Amendment 23, by
guaranteeing that education spending will grow faster than TABOR,
is putting tremendous pressure on other parts of the budget.
Prudent fiscal policy demands that lawmakers be able to make
conscious decisions in the context of the total budget and evaluate
all of the state's needs and priorities together. Otherwise, the
result will be fragmented and reactionary decisions. Limited
resources should be put where they are most needed, but walling off
a fourth of the state's budget and placing it on autopilot prevents
honest discussion and deliberate decision making.
Colorado should not
abandon TABOR's sensible budget controls because of
well-intentioned but misguided mandates that put other important
services on a collision course with education. Amendment
23 should be reformed so that policymakers can evaluate all
budgetary needs and make calculated decisions in the context
of limited resources. Rather than blame TABOR, Colorado citizens
should demand that the education establishment improve educational
outcomes by becoming more effective at what they do, not in
how much they spend.
The Ratchet Effect and Reforming Government
While TABOR protected
Colorado from huge structural budget deficits, it also permanently
ratcheted down the growth in spending after revenues dropped.
If revenues drop, as they did in 2003 and 2004, the TABOR limit is
calculated using this lower base (total revenue from the
previous year). (The TABOR limit actually grew
slightly and never declined during this period.)
However, when revenues recover, the TABOR base is not allowed to
jump back up to the previous level, but rather must grow
Colorado's TABOR has long
been viewed as the gold standard of tax and spending limits because
of its tough limits on spending, including this ratcheting
down effect. Other states that are considering a TABOR have not set
the bar as high as Colorado. Eliminating TABOR's ratchet effect
would be far preferable to giving spending and revenue growth a
free pass as Referendum C would do.
However, a better
alternative is to take advantage of the ratchet effect to
force state government to seek the same types of innovation that
the private sector relies on to achieve a competitive edge. In
the private sector, the constant competitive pressure to reduce
costs forces firms to embrace organizational change and
cost-reducing technologies. Firms change not only the way that
they do things, but also what they do. Few such pressures exist in
government, which is one reason why the public sector is inherently
more inefficient than the private sector.
One of TABOR's strengths
is that it brings just such outside pressure to bear on
policymakers, and the ratchet effect magnifies this pressure. Under
Referendum C, the legislature will have no incentive to
streamline government operations, and government bureaucracies
will be under little or no pressure to control wasteful
Elected officials will
always face hard choices when looking out for the taxpayer, and
this was certainly the case for Colorado this year. "Priority
Colorado," a blueprint for streamlining
Colorado's government, was compiled specifically to help the
governor and legislature balance the budget without a tax
increase. Among the proposal's key recommendations are:
Reducing overhead costs and increasing
efficiency across all agencies by consolidating administrative
functions such as accounting and human resources;
Eliminating wasteful program duplication and overlap
by consolidating similar agencies and departments;
Making state services more cost-effective by
requiring competitive bidding for work that can be done by the
private sector, following the successes of other states such as
Reforming the Medicaid program, one of the biggest
budget pressures in Colorado (and most other states);
Improving purchasing programs by using methods
adopted successfully in other states.
legislative leadership dismissed this report. Rather than seizing
the opportunity to restructure the government and achieve long-term
savings for Colorado's taxpayers, the legislature actually
increased state spending by 4.2 percent this year and then asked
for a permanent tax and spending increase under Referendum
Contrary to what TABOR's
opponents predicted, TABOR has not wrecked the state's
economy or budget. Colorado's citizens were pro-tected from
huge structural deficits and paid less in taxes thanks to TABOR's
refunds and permanent tax cuts. Moreover, the state's economy
grew faster than the national average after TABOR. Regrettably,
Amendment 23 put K-12 education spending on autopilot and walled it
off from the rest of the budget, putting other vital programs at
odds with education.
Rather than take the
necessary steps to reform Amendment 23, lawmakers ignored the
budget-balancing options outlined in "Priority Colorado" and chose
the easy path of a $3 billion permanent tax hike. Referendum C is a
serious effort to undo TABOR. Those who say that this is just a
minor fix are mistaken. In reality, it violates TABOR's basic tenet
of forcing the state's leaders to live within modest means. The
proposed five-year "time-out" would render TABOR irrelevant by
ratcheting up demand for bigger government. Breaching TABOR's limit
will not sate the appetites of big spenders and entrenched
government programs for taxpayer money, but instead will make it
only too easy for them to ask for another time-out.
The true spirit of TABOR
is to protect Colorado taxpayers from the freewheeling spending
practices of elected officials and the growing burden that
government places on their pocketbooks. TABOR should remain
Fraser is Director of the Thomas A. Roe Institute
for Economic Policy Studies at The Heri-tage Foundation. Keith
Miller, Research Assistant in the Roe Institute, contributed to
J. Mitchell, Ph.D., "The Impact of Government Spending on Economic
Growth," Heritage Foundation Backgrounder No. 1831, March
31, 2005, at www.heritage.org/Research/Budget/bg1831.cfm,
and Steve Moore, "States Can't Tax Their Way Back to Prosperity:
Lessons Learned from the 1990-91 Recession," American Legislative
Exchange Council, The State Factor, October 2002, at www.alec.org/meSWFiles/pdf/0229.pdf (July 21,
"The Impact of Government Spending on Economic Growth."
vary between $2.9 billion and $3.6 billion. See Andrew T. LeFevre
and Rea S. Hederman, Jr., "Report Card on American Education: A
State-by-State Analysis 1976-2001," American Legislative Exchange
Council, October 2002, at www.alec.org/meSWFiles/pdf/Education_Report_card.pdf
(July 21, 2005).
billion divided by estimated Colorado population of 4.8 million in
2010. See U.S. Bureau of the Census, Population Division, "Interim
State Population Projections, 2005," Table 6, April 21, 2005, at
PressTab6.xls (July 21, 2005).
Holden, "A Decade of TABOR/Ten Years After: Analysis of the
Taxpayers' Bill of Rights," Independence Institute Issue
Paper No. 8-2003, June 2003.
Armstrong, "Colorado Budget Overview," Free Colorado Colorado
Freedom Report, July 7, 2005, at freecolorado.com/2005/07/budget.html (July 21,
2005). This number is somewhat controversial as Colorado
Legislative Council staff revised the number down to eliminate new
double-counting of appropriations in higher education. Significant
additional double-counting is included elsewhere in the budget but
was not excluded since it has occurred for years. Their original
growth calculation was 7.7 percent.
"A Decade of TABOR."
Hanushek, "The Economics of Schooling: Production and Efficiency in
Public Schools," Journal of Economic Literature, Vol. 24
(September 1986), pp. 1141-1177. See also John Chubb and Terry Moe,
Politics, Markets and America's Schools (Washington, D.C.:
Brookings Institution Press, 1990), p. 336.
and Hederman, "Report Card on American Education."
TABOR limit is calculated in two steps. First, the TABOR
base is identified. The base is either the previous year's
TABOR limit or actual tax revenues, whichever is lower.
Second, the TABOR limit is calculated by increasing the base
by the previous year's inflation rate and state population growth