Politics & Policy

Owens Vs. The Ratchet

The Colorado governor's tough situation.

Gov. Bill Owens of Colorado is used to praise from conservatives. National Review dubbed him “the best governor in America” on its cover (illustrating a profile by John J. Miller). Conservatives lauded him for, among other things, his record of cutting taxes and spending. In recent weeks, however, Owens has announced a budget deal with Democrats that has some conservatives furious. Grover Norquist, the head of Americans for Tax Reform, accuses Owens of “betraying” taxpayers. The editors of the Wall Street Journal have zapped him. Owens’s critics say that he is not only raising taxes, but weakening his state’s constitutional limits on taxes.

Colorado voters added a “taxpayer’s bill of rights” (TABOR) to their constitution in 1992. Owens has been a vocal supporter of it. TABOR stipulates that revenues can grow no faster than prices and population rise. If prices rise by 2 percent and population grows by 2 percent in a year, then revenues can grow by 4 percent. (And thanks to another amendment, revenues can’t rise more than 6 percent even if inflation and population growth would warrant it.) Any revenue above that level has to be refunded to the public. The government cannot keep any more money unless the public votes for it. Nor can it raise taxes unless the public votes for it.

TABOR kept Colorado government from growing much during the boom years of the late 1990s. Other states expanded Medicaid to provide many services that the federal government didn’t mandate. Not Colorado. TABOR is a government-shrinking device. If revenues and spending can grow only with prices and population, then as the state economy grows the state government should, over time, make up a smaller and smaller proportion of it.

Conservatives think of Colorado’s TABOR as something of a model for other states. But they generally agree that other states should modify its provisions. One modification is to get rid of what’s sometimes called the “recession ratchet.”

Colorado’s recent fiscal history illustrates this “ratchet.” The recession and a drought caused revenues to drop substantially–by 13 percent one year and then by 4 percent. The state, under Governor Owens, cut the budget accordingly. Note, incidentally, that these cuts were not caused by TABOR’s limits on revenue growth. There was no revenue growth to limit. TABOR wasn’t a constraint on revenue growth in the first year of recovery, either: Revenues were up only 3 percent, but inflation plus population growth were 4.5 percent.

But TABOR is going to start to constrain the budget next year. Revenues are expected to grow by around 6 percent, but inflation plus population growth are only 1.2 percent. The extra revenue will have to be refunded. Which brings us to the ratchet. Let’s say that population growth and inflation between 2001 and 2011 will average 3.2 percent a year. You might think that under TABOR, revenues would grow by an average 3.2 percent a year, too. But you’d be wrong. When a recession hits, revenue growth drops below that trendline–and when it ends, TABOR won’t let revenues go back up to it.

That creates a political bind for Gov. Owens. Revenues can rise by only 1.2 percent. But mandatory Medicaid expenses are going to rise by a lot more than 1.2 percent. Thanks to another amendment the voters of Colorado made to their constitution in 2000, K-12 education spending has to rise faster than that too. That means everything but Medicaid and education will have to be cut–and not just “cut” in the Washington sense. These will have to be real cuts, and they will come after substantial cuts have already been made. Colorado’s budget is nothing like California’s or New York’s. It is one of the lowest-taxed states in the nation.

Governor Owens argues that a TABOR that results in these additional cuts will not be sustainable. That’s why the American Legislative Exchange Council, the conservative state legislators’ group, is promoting a version of TABOR that avoids the recession ratchet.

This being an odd-numbered year, Owens can’t propose a constitutional amendment that changes TABOR or, for that matter, changes the education amendment. What he is instead doing is using TABOR’s provision to allow the government to keep extra revenues if the public votes for it. The refunds will shrink–by $3.1 billion over 5 years. (Colorado has a $14 billion budget.)

In the debates over federal tax policy over the last few years, conservatives have argued–rightly, in my view–that to shrink a scheduled tax cut is to raise taxes. By that standard, what Owens is proposing is clearly a tax increase. He has cut taxes substantially before, however, so even with this proposal he is a net tax-cutter. And it’s also worth noting that if his proposal is adopted and the government sticks to it, revenue growth will be up an average 2.9 percent a year from 2001-2011. Government, that is, will not be keeping up with inflation and population. Owens’s plan foresees a tighter constraint on the growth of the budget than the rule that ALEC–and the National Tax Limitation Committee–want other states to adopt.

What about the charge that Owens is “weakening” TABOR by using its provisions? It’s always possible that politicians will get into the habit of proposing to keep the tax refunds. But the public will have to vote on those proposals, and it’s hard to believe that voters are going to get into the habit of approving tax increases.

If I were a voter in Colorado, I would probably vote against Owens’s proposal. A public repudiation of tax increases would, presumably, answer Owens’s worry about the sustainability of TABOR. And I can certainly understand that national anti-tax groups can’t afford to cut Owens any slack. But Owens is certainly not in the same league as other tax-raising Republican governors–he’s no Bob Taft or Bob Riley. He has tried to find the best way forward in a difficult situation, and even those of us who disagree with his choice ought to be able to sympathize with him.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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