In 1992, Colorado voters decided state government should stop growing. But that didn’t stop them from demanding more public services and spending from their elected officials.
That’s the tension at the heart of Proposition CC, this November’s ballot measure to eliminate the state’s revenue caps. It’s the single biggest test to the Taxpayer’s Bill of Rights since it was added to the state constitution.
The history of how the state government has operated in the TABOR era is critical to understanding the choice voters face at the ballot this fall and whether they will give the state permission to potentially keep more revenue.
In the 27 years since, TABOR has indeed acted as a constraint on taxes, leading lawmakers to enact multiple tax cuts to stay within the state’s spending limits. But the constitutional provision’s cap on spending has not completely prevented government from growing, as many conservatives hoped. Nor has it allowed the state to maintain the same level of public services that it provided in 1992, as its backers promised.
There are a number of reasons the revenue cap hasn’t kept up with the growth in demand. Critics point to its faulty reliance on consumer inflation as a measure of state government costs, as well as budgetary cycles that force the government to absorb deep cuts during economic lows while preventing comparable spending surges during economic highs.
But one of the biggest reasons the revenue cap hasn’t worked as advertised is this: The state has simply taken on more responsibilities than it had 27 years ago, a review of government spending data since 1992 shows. And core public services such as K-12 schools, transportation and higher education have suffered as a result.
To make ends meet, policymakers have turned to fees, disproportionately shifting costs onto the poor and middle class, while putting more of Colorado state spending under the purview of unelected bureaucrats.
Thanks in large part to those fees, Colorado government today is setting spending records — evidence to the political right that TABOR hasn’t had the detrimental effect on public services that its staunchest critics believe.
And yet supporters of Prop. CC argue that the additional revenue still hasn’t been enough to reverse the damage done by the Great Recession. And with economists warning that the next downturn could be right around the corner, Democrats are thinking they’d better invest now or lose their chance for years to come.
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Why TABOR’s population plus inflation hasn’t worked
To supporters of Prop. CC, there are a few fundamental problems with the TABOR cap, which allows government revenue to grow by the combined rate of population growth and consumer inflation.
First, “the fact that 1992 becomes the starting point for how your budget can grow is somewhat arbitrary, to be honest,” says House Speaker KC Becker, the Boulder Democrat who sponsored the referred measure.
State government today has different responsibilities than it did 27 years ago — and population growth plus inflation doesn’t account for the changes.
While it only goes back to 2001, a recent Colorado Legislative Council analysis illustrates the challenge well. In that period, inflation plus population would have allowed spending under the TABOR cap to grow by 74%. But the caseload for the state’s Medicaid program, which provides health coverage for the poor, tripled in the same period, increasing 222%. And that doesn’t even include those who received health care through the Medicaid expansion, which is funded through a state hospital fee.
The other major change since 1992 involves how the state pays for education. At the time, most of the money Colorado spent on K-12 schools came from local property taxes, while state taxpayers were the primary funders of public colleges and universities.
But over the ensuing decades, local property tax collections plummeted due to another tax-limiting constitutional provision, the Gallagher Amendment. The state stepped in, backfilling school districts as their local funding shrank.
Today, the state provides 63% of K-12 funding, up from 43% before TABOR took effect. But without new taxes to pay for it, policymakers had to cut spending elsewhere to make ends meet. And school districts ultimately didn’t escape unscathed. When the Great Recession hit, lawmakers said they had run out of other things to cut, and the state began to fall behind a separate constitutional requirement to increase education spending each year to keep pace with inflation and enrollment. That has contributed to a rural teacher shortage, but the biggest loser was the other end of the education pipeline.
Before TABOR, taxpayers covered the majority of the cost of higher education, with students chipping in the remainder through tuition and fees. Today, that ratio has flipped, with students now on the hook for 64% of the cost, as the state has shifted more of its own resources to K-12 schools.
In theory, TABOR would suggest that lawmakers should ask for a tax hike before taking on new responsibilities. But policymakers had less control over some of the Medicaid growth, which increased as part of the Affordable Care Act, or the school finance shift, which was caused by a drop in local tax levies.
The second problem, Becker says, is the fact that the costs of what the government spends money on, such as health care and asphalt, grow faster than the consumer price index, which tracks household spending. That increasing governmental expenses more rapidly than the TABOR limit allows its revenues to grow.
To put it another way, Becker says, if a teacher can never get a pay raise that outpaces inflation, “who’s going to ever be attracted to teaching?”
The third major challenge is the cap sets an upper limit of spending — not an average.
Imagine being given an allowance that fluctuates with the economy, but you can only spend $100 a day. If you receive more than that, you have to give the money back. On one day, you might get $110, and have to give back $10. If you get only $90 on the next, you can only spend $90. If you take the average of those two days, you should have been able to spend $200 total. But because you went over the limit on the good day, you could only spend $190.
Over time, that’s what’s happened to the state government. More often than not, the state has been below the TABOR spending cap, meaning it is pulling in less revenue than it takes to cover the growth of inflation plus population. But in years where it could make up for past cuts, it can’t — because it has to give the money over the cap back through refunds.
“In years where the economy is good, what we’re asking is: ‘Can we make the investments in our communities and in our state that will lead to better outcomes over time?’” said Tyler Jaeckel, the director of policy and research at the Bell Policy Center, a liberal group that’s supporting Prop. CC.
“On an individual level, (a $15 refund) might get you a movie ticket, but collectively coming together, we can really start to fix some of the cracks that might be in our education system, in our roads, in our higher education system,” he said.
Why conservatives think TABOR works, even as fees replaced taxes
Conservatives acknowledge the challenges posed by school finance and Medicaid. But they argue that just because there are pressures on the state budget doesn’t mean spending should grow unabated.
Senate Minority Leader Chris Holbert said he opposed Congress’ decision to pass the Affordable Care Act in part because it heaped additional Medicaid costs on a state budget that could ill afford it.
“For people who want new programs, want new spending, I know it (TABOR) is a frustration,” said Holbert, a Republican from Parker. But, he added, “I don’t consider (the state’s budget challenges) a sufficient reason to abandon TABOR. TABOR’s in the constitution because the voters put it there.”
And, Prop. CC opponents point out, it’s not as though the spending cap has prevented government from growing. Though income and sales taxes have been cut, fee-based enterprise funds, which aren’t subject to the spending growth limit, have exploded since TABOR took effect.
“The amount of fee revenue is rivaling the amount of tax revenue,” Holbert said. “I think that there’s a need among our electorate to understand these things and probably not condemn the Taxpayer’s Bill of Rights as somehow outdated.”
Michael Fields, a conservative activist, says that instead of ditching the spending limit, policymakers should instead be looking to rein in health care costs and change the way the state pays for schools.
“This (the TABOR cap) is the last area where we can actually partially stop that growth,” said Fields, the executive director of Colorado Rising Action, a group that’s campaigning against Prop. CC.
“There’s a trust issue there,” Fields added. “They have found ways to go and grow (government) anyway.”
To the left, the explosion of fees isn’t a reason to keep the TABOR limits — it’s a reason to remove them. Lawmakers, they argue, have only turned to fees because the state has been forced to either cut taxes or refund them periodically.
Between 1999 and 2001, with revenue routinely exceeding what the state was allowed to spend, lawmakers cut the income tax rate to 4.63% from 5%, and reduced the sales tax rate to 2.9% from 3%. Yet even with those cuts designed to limit the amount of refunds to taxpayers, the state is still collecting more revenue than it’s allowed to spend. And even with the increased fees, the state hasn’t been able to keep up with growing demands.
“I think it (TABOR) was a value statement saying we do not believe in governmental services, not a value statement saying we believe in a proper limitation on government and growth,” Jaeckel said. “When you’re decreasing tax rates but the revenue limit is still being triggered is another fact of showing that this was intended to shrink government.”
TABOR’s defenders point out that it offers lawmakers another option — ask voters for permission to retain excess revenue or raise taxes. But it’s not easy. Colorado voters have only approved a statewide tax hike twice, raising tobacco taxes once and creating a new tax when marijuana was legalized.
One consequence of the state’s increasing reliance on fees versus taxes has been to shift more costs onto the poor and middle class. Colorado’s latest tax profile study found that in 2015, the state’s poorest households were paying 1.6 times the effective state tax rate (measured as the percentage of overall income) compared to the richest households. That was up from 1.3 times in 2010.
Add in local taxes and fees, and the disparities are even worse. The poorest households paid 2.7 times the effective tax rate of the wealthiest in the latest report, up from 2.3 times in 2010.
Why the stakes for the November ballot are high
No one knows for sure how much money Prop. CC will allow the state to spend in the future, but recent history and economic forecasts provide some clues.
In the first two years that Prop. CC would be in effect, the state is expected to exceed the TABOR cap by between $652 million to $1 billion, money that otherwise would go back to taxpayers in the form of small refunds. (Taxpayers will get refunds they’re owed in 2020 based on 2019 tax collections regardless of the Prop. CC vote.)
Over time, the gains to the state could be even larger. In 2005, voters approved a “time-out” known as Referendum C, which allowed the TABOR cap to increase without issuing refunds until a five-year period was over. Through the initial five-year timeout period, the state retained about $3.6 billion in additional revenue, according to a Colorado Legislative Council analysis. But in the ensuing years, those gains multiplied, allowing the state to retain and spend an additional $19.2 billion cumulatively over 15 fiscal years since the higher TABOR cap took effect.
Prop. CC would require the state to send the excess revenue to three areas: K-12, higher education and transportation. Still, even supporters don’t view it as a cure-all.
After a decade of economic growth, the state is still $572 million short of its voter-approved constitutional K-12 funding requirements each year, and faces more than $9 billion in transportation needs without a dedicated funding source. As for higher education, a $121 million tuition buy-down in this year’s state budget still wasn’t enough to prevent a tuition increase at every school.
But after 27 years of TABOR, the real question for voters might be whether they’re OK with the current limitations of Colorado’s government.