Commentary

Reforming TABOR in Colorado

During the 1990s, Colorado’s Taxpayer’s Bill of Rights (TABOR) was America’s most successful spending limit. However, recent fiscal shortfalls have put pressure on the limit. In fact, legislators are currently trying to weaken the limit by employing a strategy that was used to undermine California’s own spending limit during the early 1990s. Colorado residents should take notice, because California’s subsequent fiscal nightmare reveals the perils of weakening effective fiscal limits.

When Colorado residents first enacted TABOR in 1992, it was different from other fiscal limitations. TABOR established both a low limit for state expenditure growth and mandated immediate refunds to taxpayers of all surplus revenues. Starting in 1997, revenues began to exceed the limit and over the next five years taxpayers received annual tax rebates totaling $3.2 billion. Colorado easily led the nation in tax relief during this time.

Now, most legislators dislike tight fiscal limits. Colorado legislators have proven to be no exception. They have repeatedly tried to enact initiatives that would allow them to spend in excess of the TABOR limit. While some efforts to relax the TABOR limits at the local level have been successful, TABOR opponents have enjoyed little success in statewide elections.

In 2000, all of this changed when the education lobby succeeded in passing Amendment 23. This law established a constitutional mandate for education spending: It required that education spending increase faster than TABOR’s expenditure limit. This means that, over time, a progressively larger share of Colorado’s budget would have to be devoted to education.

Shortly after Amendment 23 was enacted, Colorado, like many other states, encountered a budgetary shortfall. During the budget crunch, these education spending mandates resulted in some unpopular spending reductions elsewhere. This has sparked intensive efforts to reform TABOR. In fact, Colorado lawmakers are trying to craft a bipartisan reform proposal before the legislature adjourns on May 5.

Now, it should be noted that some of these proposed reforms are reasonable. A larger reserve fund would make it easier for the state to weather economic downturns. Furthermore, TABOR mandates that the current year’s budget serve as a baseline for the next fiscal year. This creates a “ratchet back” effect and gives the state the incentive to spend right up to the limit every year. This could be reformed as well.

However, many reform proposals would gut the limit, and make it virtually powerless to stop future spending increases. Republican State Representative Brad Young has proposed raising the spending limit from inflation plus population growth to personal income growth. While this appears innocuous, his proposal would substantially increase the limit, rendering it ineffective. In fact, over 10 other states have similar limits and numerous academic studies indicate that these “restrictions” have virtually no effect on state fiscal outcomes.

Interestingly, the strategies being used by opponents of TABOR bear a striking resemblance to the strategies used in the early 1990s to weaken California’s spending limit. In 1979, California residents enacted a spending limit known as the Gann Limit, which placed a tight limit on appropriations of tax revenues. During the 1980s, the Gann Limit effectively kept budgetary growth in check. In fact, in 1987 the Gann limit required the state government to issue tax rebates totaling over $1.1 billion.

This tax rebate angered education interests who wanted more spending on schools. As a result, California’s education lobby devised a clever strategy to weaken the Gann Limit. First, in 1988 the education lobby enacted Proposition 98, which required that public schools receive a share of any revenues that exceeded the Gann Limit. Perhaps more importantly, Proposition 98 required the state to compensate for any decreases in education spending that occurred when revenues declined.

These increases in education spending came at the expense of other state programs. As a result, in 1990 the transportation lobby was able to enact, Proposition 111, which exempted gasoline taxes from the Gann limit. More importantly, Proposition 111 raised the spending limit. The formula, instead of inflation plus population growth, was tied to per capita personal income growth and population growth. This set a considerably higher limit.

Ever since the passage of Proposition 111, the Gann Limit has ceased to be a meaningful constraint on the size of state government in California. The Gann limit could not even prevent the 48 percent increase in spending that occurred during Gray Davis’s first three years in office. With a record setting deficit last year and a large deficit projected for the current fiscal year, California taxpayers are still paying the price for weakening Gann Limit.

Indeed, Colorado residents would do well to take note of California’s fiscal condition, before deciding to tamper with TABOR.

Michael J. New, a post-doctoral fellow at the Harvard-MIT Data Center, is an adjunct scholar at the Cato Institute.