Commentary

Triggering Tax Rebates

This article originally appeared in the Washington Times on April 2, 2002.

As April 15 approaches, many taxpayers are feeling pessimistic. The tax code remains complex, the tax burden remains persistently high, and the prospects for tax relief look dim. Last summs $300 tax rebate seems like a distant memory and many of the tax reductions included in last year’s budget will not take effect for years. Even worse, the ongoing war on terrorism and the slowing economy have depleted much of the projected surplus. As a result, a tax rebate in 2002 remains an unlikely proposition at best.

However, the story is much different for the residents of Colorado. In fact, 2002 will mark the sixth consecutive year that Colorado taxpayers will receive a tax rebate from their state government. This is because of Colorado’s Taxpayer Bill of Rights (TABOR) passed by a citizen initiative in 1992.

Colorado’s TABOR limits increases in per capita state expenditures to the inflation rate and mandates that all additional revenues be immediately refunded to the taxpayers. As a result, when the state collects revenues above the limit set by TABOR, Colorado taxpayers are entitled to a refund. Overall, between 1997 and 2002 the state of Colorado has had to issue annual rebates totaling more than $3.2 billion to its residents.

Colorado’s TABOR is an example of a statewide Tax and Expenditure Limitation (TEL). TELs have enjoyed some popularity over the years as a mechanism to control state spending. In 1976, New Jersey became the first state to pass a TEL and currently over 26 states have some kind of TEL on the books.

Much of the academic literature that has examined TELs concludes that TELs are ineffective at slowing the growth of government. However, a comprehensive study recently released by the Cato Institute refutes that claim. The Cato study shows that well-designed TELs can effectively limit state spending. A regression analysis on state budgetary data indicates that TELs enacted by citizen initiatives result in a $16 decline in state and local per capita spending every year. The TELs, which mandate immediate refunds to taxpayers during times of surplus, are even more effective. They result in per capita spending reductions of over $39 every year.

Finally, TELs that limit per capita expenditures to the inflation rate have been the most successful. They cause per capita state and local spending to decline by an impressive $114 a year. The TELs that fall into this final category include Initiative 601 passed by Washington State in 1993 and Colorado’s Taxpayer Bill of Rights.

Indeed Colorado’s TABOR was controversial when it appeared on the ballot in 1992. Colorado’s governor at the time, Democrat Roy Romer, repeatedly denounced TABOR, saying that defeating TABOR was the moral equivalent of defeating the Nazis at the Battle of the Bulge. He warned of an economic Armageddon with the passage of TABOR and said the Colorado border would soon have to be posted with signs reading “Colorado is closed for business.”

However, nothing of the sort has happened. In fact, Colorado’s economy has been exceptionally strong. Between 1995 and 2000 total state personal income grew more than 51 percent in Colorado, ranking it second in the United States in state personal income growth during that time span.

In addition to placing a meaningful constraint on state spending and taxing, TABOR has forced Colorado residents to see the costs inherent in government programs. In other states, residents often support higher government spending because they can see the proposed benefits of a particular program, but remain unaware of the costs that they and other taxpayers are forced to bear.

However, in Colorado the annual tax rebates brings these tradeoffs clearly into focus. In every year from 1993 to 1999 there was a proposal on the ballot to either raise taxes or increase spending in excess of the TABOR limit. Knowing these initiatives would markedly reduce the size of their annual tax rebate, voters soundly defeated each of these measures. Now, in 2001 an initiative to increase spending for Colorado schools did pass. However, Colorado taxpayers will still receive tax rebates totaling more than $900 million from fiscal 2001 revenues.

Overall Colorado’s TABOR is the most effective statewide Tax and Expenditure Limitation in America. It has both granted relief to taxpayers and reduced the size of state and local government. Activists who are interested in limiting taxes and spending in other states would do well to follow Colorado’s example.

Michael New is a research assistant and a data analyst with the Cato Institute’s Center for Representative Government.