Research

TABOR laws: Discipline or disaster for state spending?

The Taxpayer Bill of Rights, also known as TABOR, is shaping up as a powerful movement in the continuing battle to control government spending. But whether it is a grassroots phenomenon or a grass fire depends on your point of view. Designed to limit state spending by pegging taxes to the cost of living and population growth, TABOR is viewed as the holy grail by fiscal conservatives, but a debilitating affliction by moderates. Colorado's version, passed in 1992, is being used by both sides to argue their case.

2005-08-17

Grover Norquist, president of Americans for Tax Reform, has been quoted as saying he'd like to "shrink government down to the size where we can drown it in the bathtub." Some political thinkers believe that the Taxpayers' Bill of Rights — or TABOR Amendment — in Colorado's constitution is a step in that direction.

Lately, TABOR laws have been gaining popularity. During the past year, more than 20 states have seen such legislation arise. But one politico's Bill of Rights is another's bill of goods. As TABOR laws multiply, they inspire conflicting but very fervent views.

The TABOR formula

What exactly is a TABOR law? It's a form of Tax and Expenditure Limitation — what policy analysts call a TEL. The acronym, TABOR, plays on the name of Horace Tabor, a Colorado miner who struck it rich in the 19th century.

According to the Center on Budget and Policy Priorities, 29 states currently have some kind of TEL limiting spending, revenue collections or both. But conservatives and liberals agree: Colorado's TABOR is the strictest TEL in all 50 states. The Wall Street Journal has called Colorado's TABOR the "gold standard" of tax and spending limitations. Norquist referred to it as the "holy grail" of state fiscal policy.

Passed by voter referendum in 1992, TABOR limits the amount of money that Colorado legislators can spend to the sum of inflation plus population growth, with inflation being measured by the consumer price index in the Denver metropolitan area. TABOR's growth limit applies to the previous year's allowed spending or tax revenue collections, whichever is less. Any revenues collected that exceed the TABOR limit must be refunded to taxpayers. State lawmakers can't raise tax rates or add new taxes without voter approval, either.

"The logic is that if inflation goes up by 3 percent, the state needs 3 percent more dollars to have the same amount of buying power it had the previous year," notes Fred Holden, public policy specialist for the Independence Institute. "If population increased by 2 percent, the government will need 2 percent more money to service the additional people."

"The devil is in the definition of 'inflation,'" says Wade Buchanan, president of the Bell Policy Center. Buchanan explains that the CPI measures a basket of goods consumers buy. "It doesn't measure what government purchases on our behalf: salaries for teachers and prison guards, health care for the poor, asphalt for roads."

Buchanan argues that cost increases for items such as health care and salaries typically outpace the rate of inflation as measured by the CPI. And they should, he says. "Wages for teachers and firefighters should be growing faster than inflation. That's how we as a society become richer over time."

Holden maintains that government could make up the gap by becoming more productive, doing more work with less money. Until now, he says, "There never has been an incentive for government to be more productive." Increased productivity in government means ... what, though? More kids per classroom? Buchanan sees that as a possible outcome of the TABOR squeeze.

He's not alone. David Bradley, policy analyst for the Center on Budget and Policy Priorities, points to an example of a California school that was built for 1,500 students, but in the post-Proposition 13 world, the school now has 3,300 kids enrolled. "No new high school has been built in the area for 30 years," he says. "Now you have a massively overcrowded school with some kids eating lunch at 9:30 a.m."

Opponents of TABOR laws maintain that these TELs mandate the shrinking of state government. Proponents agree, and that's exactly what they like about TABOR.

Cutting or killing state spending?

Barry Poulson, a scholar with the Americans for Prosperity Foundation, traces the origin of TELs to the 1970s and '80s when states rapidly increased spending to match rising revenues. He also maintains that many of the revenue increases were born from inflation, "from people bumping up into higher tax brackets." And, Poulson said, when non-government employment growth staggered, state government employment rose, setting the stage for voter tax revolts that led to TELs and TABOR.

The stated goal of TABOR is to slow down the growth of state government, and it certainly has in Colorado.

Holden summarizes Colorado's experience in an issue paper titled, "A Decade of TABOR." According to him, between 1983 and 1992 — the pre-TABOR decade — overall job growth in Colorado rose 18.1 percent, with government employment up 21.1 percent and non-government employment up 17.5 percent. That is, government employment growth slightly outpaced private sector employment gains.

In the decade following TABOR, Colorado's overall job growth jumped 34.6 percent: Government employment was up 20.0 percent and non-government employment rose 37.7 percent. This time, non-government employment saw nearly double the growth rate of employment in the government sector.

The beauty of those statistics is in the eye of the beholder, but one thing seems clear. "According to research undertaken at W. P. Carey School, TABOR limits government growth, and over time, the public sector's share of the overall economy declines sharply," says Dennis Hoffman, economics professor and associate dean of research at the W. P. Carey School of Business.

Hoffman explains that this is because "all economies grow faster than the sum of population growth plus inflation," which is the TABOR formula used to calculate allowable growth in government spending. For example, "Arizona's economy grows about 2 percent faster than the rate of population plus inflation," he says.

Hoffman demonstrates the effect of compounding interest on states with TABOR laws by using a simplified budget example in which the overall economy starts at a total value of $1 and government spending makes up 20 percent of that economy, or 20 cents. "After 10 years, the economy would double," Hoffman says. "It would be worth about $2. But the government would only have about 33 cents to spend. The 20 percent share of government would fall to about 17 percent in just 10 years.

"In 50 years, the economy would be $43, but government spending would be $3.47 — down to 8 percent of the economy," Hoffman continues. "In 100 years the economy would be $2,037, but government spending would only be 64 dollars, or 3 percent of the economy."

While shrinking government's share of the economy may be the goal of some, others see this trend as problematic. "We still ask government to do all the stuff it did before," Buchanan says, but we're asking it to accomplish this mission "with less and less of the resources." The part of state government that TABOR affected constituted about 7.3 percent of the state economy in 1992, Buchanan adds. He points out that this governmental share of the Colorado economy has dropped by about 30 percent since TABOR went into effect.

The Independence Institute's Holden and others who support TABOR maintain that the decline in state government is one reason Colorado enjoyed remarkable economic development during the 1990s. Hoffman disagrees. "The nonpartisan Colorado Legislative Council reports that there is no evidence that TABOR played any role in the expansion or contraction of business activity in Colorado over the last decade," he says. "Colorado's economy went the same was as many Western states," he says, noting that Arizona, Utah, Idaho and Nevada also were fast-growing states during the 1990s.

Power — and money — to the people

Regardless of TABOR's effect on the economy, it has had an impact on taxpayers' wallets. Recall that tax revenues collected in excess of TABOR limits must go back to the people. "The TABOR surplus rebate mechanism returned to taxpayers some $3.25 billion over five years, fiscal 1997 to 2001," Holden notes. "The mistake TABOR made is that it required money to be returned to taxpayers," Poulson says. Although he supports TABOR initiatives, he also refines them.

Poulson designed a model TEL for the American Legislative Exchange Council, and in it, he includes a budget stabilization measure to be used in the event of recession, when an economic slump ratchets down revenue collections. "In periods of prosperity like the 1990s, when you're generating surplus revenue, you return some to taxpayers and retain some for a rainy-day fund," he says.

Some feel that lacking a budget stabilizer, Colorado suffered greatly from the recession of 2001. "The combination of the dot-com crash, the national recession and the impact of Sept. 11 hit the state hard," says Hoffman. "Personal income growth fell from second fastest in the nation in 2000 to 49th in 2002. State revenues subjected to TABOR limits declined by 12.6 percent in fiscal 2002 and an additional 1.1 percent in fiscal year 2003."

At that point, Colorado met "the ratchet," an effect that results from the TABOR Amendment's requirement that the previous year's budget be used to determine the next year's spending limits.

The Bell Policy Center's Buchanan explains the ratchet this way: Imagine a state with $100 to spend in year one of its TABOR reform. The next year, growth and population combined equal 5 percent, so the state has $105 to spend in year two. Recession hits, so the state only has $90 to spend in year three. That's all it collected in revenue. Come year four, the economy recovers and the state collects $110, has a 5 percent budget growth limit to work with, but it has to apply that growth limit to the $90 it spent the year before.

What did that mean for beleaguered Colorado? "Because of the ratchet-down effect, the TABOR base for fiscal year 2004 was $950 million below the fiscal year 2002 base," Hoffman explains. "Even if revenues rebound, the base to which the state applies the formula is permanently shifted down by nearly $1 billion."

The result in Colorado has been budget cuts, many of which affected health and education. "The percentage of low-income children lacking health insurance in Colorado rose from 15 percent in 1991-92 to 27 percent in 2002," says an issue paper from the Center on Budget and Policy Priorities.

The report also notes that Colorado's ranking for on-time vaccination of children fell from 20th in 1995 to 50th in 2003. And Colorado's ranking for average teacher pay dropped from 30th in 1992 to 50th in 2001. "Funding for higher education in Colorado declined from a total of 19 percent of the state budget in 1992 to a total of 10 percent in 2004," says an issue paper by The Bell Policy Center.

Colorado's cuts were most dramatic after the recession ratcheted down allowable spending levels. Bradley notes that along with adding the rainy-day fund, many of the newer TABOR initiatives try to fix the ratchet by freezing the revenue-base figure so that once the economy recovers, the state can use the higher, pre-recession base as its base for spending growth. But that doesn't really offer much of a solution, he maintains.

"Population and inflation will continue to grow regardless of revenue," Bradley says, and this can be problematic if a recession lasts multiple years. "You need to account for all the growth that occurred during the downturn," he says. A TABOR law only applies one year's inflation and population growth to the spending formula.

Catching up and catching on

To deal with its budgetary shortfalls, Colorado legislators hammered out two referenda that will go before voters in November. Even Colorado's Gov. Bill Owens, a Republican and staunch supporter of TABOR, crossed the isle to join the state's Democratic leaders of the House and Senate in support of these initiatives.

Despite Colorado's woes, TABOR laws came under consideration in the legislatures of 23 states during the past year. According to the Center on Budget and Policy Priorities, 16 of those measures died in committee and six are still under review. In three states — Maine, Ohio and Oregon — backers are collecting signatures to get measures on the ballots so that voters may decide the fate of the TELs.

TABOR proponents champion the measures as smart policy designed to make governments live within their means. Poulson maintains that TABOR kept Colorado from "getting into the fiscal pickle" that states such as California experienced after gearing up spending and debt in the go-go '90s. Hoffman offers a simpler route to state budgetary stability: "Elect fiscally conservative legislators," he says, "and hold them accountable for prudent fiscal decisions."

Economics Faculty