Colorado Governor Wants to Loosen Tax Limits

Colorado Governor Wants to Loosen Tax Limits
February 1, 2005

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

Colorado Governor Bill Owens (R) has proposed changing his state’s Taxpayer Bill of Rights (TABOR) to allow lawmakers to keep another $500 million of taxes and immediately return spending to pre-recession levels after an economic slowdown.

In return, Owens proposes a slight cut in the personal income tax rate and cashing in the state’s future tobacco lawsuit settlement money.

The proposals are part of a five-point economic plan Owens announced December 20, three weeks before the state legislature’s scheduled return to business. The plan comes in response to budget problems lawmakers say will force about $260 million in spending cuts and the return of more than $460 million to Colorado taxpayers.

Legislative leaders said they like Owens’ proposal, but Jon Caldara, president of the Golden, Colorado-based Independence Institute, a free-market think tank, said, “It’s a letdown that the governor has capitulated to the new Democratic majority for a tax increase.”

Democrats control both chambers of the legislature for the first time since 1960.



Education, Medicaid Drive Spending

Owens said TABOR changes are needed partly because of Constitutional Amendment 23, which requires annual spending increases for K-12 education, and because of federally mandated increases for Medicaid. Education and Medicaid costs are rising sharply, absorbing more than two-thirds of the state’s general fund, according to Owens.

“Available revenue under TABOR will not keep pace with those demands and allow us to make the needed investments in transportation, higher education, public safety, and other essential services,” he said in announcing his plan.

The TABOR, also a part of the Colorado constitution, limits spending to the previous year’s level plus increases for population growth and inflation. It requires the state to return surplus funds to taxpayers.


Recession Forced Spending Cuts

State revenues dropped during the recession of 2001, forcing the state government to cut spending in response. The spending increase restrictions in TABOR prevent the state from rapidly expanding the budget when the economy is growing rapidly, which forces the state to make tax refunds even though state spending may not have returned to pre-recession levels.

“The framers of TABOR didn’t anticipate a time when state revenues would suffer a two-year, double-digit drop. When such a revenue drop occurs, it causes TABOR limits to ratchet down, and the state budget can’t catch up. We must ask voters to eliminate this unintended consequence,” Owens said.



Proposes Five Step Plan

The Owens plan includes the following steps:

  • Ask voters for permission to retain $500 million in TABOR surplus.
  • Reduce the state’s income tax to 4.5 percent (from 4.63 percent).
  • Invest $100 million annually in transportation, allowing the state to issue bonds for up to $1.7 billion in projects statewide.
  • Amend TABOR to eliminate the “ratchet effect” during and following recessions.
  • Securitize the state’s future tobacco settlement funds--about $850 million--to address short-term budget needs.

“This plan uses the specific provisions of TABOR to address Colorado’s investment needs going forward. It respects the fact that every dollar in the budget belongs to taxpayers and it asks their permission to keep additional funds,” Owens said.



Searching for Middle Ground

Owens said the TABOR surplus over the next two years will be about $540 million. By retaining $500 million, the state can fund key programs and leave TABOR’s key provisions intact, he said.

“I think he’s trying to find a middle ground, and it really is better than nothing. ... It’s a very big table, and there’s room for lots of proposals,” House Speaker Andrew Romanoff (D-Denver) told Rocky Mountain News reporter Jim Tankersley for a December 21 story after Owens presented his plan.

Denver political analyst Eric Sondermann told Tankersley, “It’s Bill Owens. Not Bill Owens of The Wall Street Journal editorial page, but it’s Bill Owens dealing with the new political reality in Colorado.”



TABOR Backers Upset

Caldara views the proposal differently. He said that although asking taxpayers whether the TABOR surplus should remain with the state government “is perfectly within the realm of the Taxpayer Bill of Rights, the governor has gone one step farther and said we should remove the ratchet mechanism, which I think is one of the most interesting and important aspects of TABOR.

“The shortfall is caused by a spending mandate, called Amendment 23, which was approved in 2000 and says K-12 spending will go up above the rate of inflation, despite recessions,” Caldara said. “Amendment 23 is the cause of our shortfall. The governor’s plan asks for more money than is needed to fill the shortfall, and it takes away the ratchet and changes the state constitution. We don’t need to change that to keep the surplus.”


Steve Stanek (stanek@heartland.org) is managing editor of Budget & Tax News.


For more information ...

on Colorado’s Taxpayer Bill of Rights, see “On the Frontier: Colorado’s Taxpayers Bill of Rights,” part 2 in a three-part Budget & Tax News series by Lew Uhler and Barry Poulson. The article ran in the February 2004 issue of Budget & Tax News and is available online at http://www.heartland.org/Article.cfm?artId=14338; parts 1 and 3 ran in January and March 2004, respectively.

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)