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Monday, October 31, 2005

 

TABOR Revisited

With an intense debate concerning Referandems C and D, the Colorado Taxpayers’ Bill of Rights (TABOR) has re-emerged as a prominent talking point. A review of TABOR should be re-examined. TABOR possesses two features, which have generated a great deal of tax relief for Colorado residents during the past decade. First, TABOR places a tight cap on all state expenditures, limiting increases in per capita state expenditures to the inflation rate. Second, it mandates immediate refunds of all surplus revenues. As a result, when the state collects revenues above the limit set by TABOR, Colorado taxpayers are entitled to a rebate. Overall, between 1997 and 2002, Colorado has reduced taxes more than any other state, issuing annual tax rebates that have totalled more than $3.2 billion.

Even before it was enacted, Colorado Democrats sensed and feared TABOR's potency. In fact, during the 1992 campaign Governor Roy Romer repeatedly denounced TABOR, saying that defeating TABOR was the "moral equivalent of defeating the Nazis at the Battle of the Bulge." He personally attacked TABOR's author Douglas Bruce, calling him "a terrorist who would lob a hand grenade into a schoolyard full of children." Finally, Romer predicted that TABOR would result in an economic Armageddon and warned that the Colorado border would have to be posted with signs reading, "Colorado is closed for business."

However, since 1992, nothing of the sort has happened. In fact, Colorado's economy has been exceptionally strong. Between 1995 and 2000, Colorado ranks first among all states in gross state product growth and second in personal income growth. Furthermore, according to the National Association of State Budget Officers, Colorado was one of only five states that did not run a deficit during fiscal 2002. In addition to providing tax relief and fostering economic growth, TABOR has also 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 benefits of a particular program, but remain blissfully unaware of the costs that they and other taxpayers will be 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. In 2001, for the record, an initiative to increase spending for Colorado schools did pass. However, Colorado taxpayers still received tax rebates totalling more than $900 million from fiscal 2001 revenues.

Because of this long-term success, Colorado's TABOR may well surpass California's Proposition 13 in terms of effectiveness. In 1978, Proposition 13 did an excellent job of providing taxpayers and homeowners with some much needed short-term tax relief. However, since it failed to restrain expenditures, the California state legislature eventually increased other taxes to compensate for the loss in property-tax revenue. For instance, in the years following the passage of Proposition 13, California raised the income tax, the sales tax, and taxes on beer, wine, and cigarettes. During the early 1990s, former Governor Pete Wilson even proposed increasing taxes on snack foods. This vicious cycle of spending and taxing is the root cause of California's current fiscal mess.

Overall, Colorado's Taxpayer Bill of Rights has quietly become America's most effective limitation on government. It has kept spending in check, provided tax relief to Colorado residents, and deserves a great deal of credit for Colorado's strong fiscal position.

Comments:
TABOR limits increase by the rate of inflation + the rate of population increase.

I noted in another comment that I think it is fair to describe TABOR as saying the real per capita size of government should not increase.

You make an interesting observation about Colorado's rate of growth post-TABOR. There are economists who have empirically examined state growth with the size of government, and they think the data suggest that smaller government, OTC, tend to have greater economic growth. Your observation is consistent with these findings. However, I wouldn't want to say the empirical relationship has been established or "proven." My sense is the empirical relationship is only suggestive.
 
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