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Lessons from a taxpayer setback in Colorado.

Fiscal conservatives suffered a setback on Tuesday when Colorado voters approved Referendum C with 53 percent of the vote. Referendum C will suspend Colorado’s Taxpayer Bill of Rights (TABOR) for the next five years, allowing the legislature to spend rather than rebate, a projected $3.7 billion in revenues. It is certainly disappointing to see a flagship fiscal limit like TABOR suffer an electoral defeat. However, conservatives and libertarians should take heart. TABOR’s experience over the past 13 years has taught us some valuable lessons–lessons that should facilitate the passage of effective fiscal limits in the future.

Indeed, drafting effective fiscal limits has been a problem that has vexed fiscal conservatives for a long time. State-level revenue and spending limits gained widespread popularity during the late 1970s tax revolt. Between 1976 and 1983, 17 states enacted some kind of revenue or spending limit and by the mid 1990s the number of states with such a limit was up to 26. However, nearly every academic and policy study that has examined these fiscal limits has concluded that they have only had a marginal impact on state budgetary outcomes.

There are a variety of reasons for this. However, one problem that has consistently hindered the effectiveness of fiscal limits has always been enforceability. Attempts by legislatures to circumvent spending caps are often not noticed and typically inspire little outrage from voters or taxpayers. As such, many fiscal limits tend to be relatively short lived. Indeed, Article 1 Section 8 of the U.S Constitution, the Gramm Rudman Hollings Act, California’s Gann Limit, and Washington state’s I-601 are all examples of well known fiscal limits that have been weakened, ignored, or are no longer being enforced.

However, when TABOR was passed in 1992, it was different than these other fiscal limitations. It had a unique provision that called for immediate taxpayer rebates of surplus revenue. In 1997 revenues exceeded the TABOR limit for the first time and for the next five years, Colorado taxpayers received $3.2 billion in tax rebates from the state government. Colorado easily led the nation in both tax relief and economic growth during this time.

These annual tax rebates neatly solved the enforceability problems that plagued other fiscal limits. Since any attempt to spend money over and above the TABOR limit, reduced the size of everyone’s annual tax rebate, taxpayers and watchdog groups had greater incentive to insure that the Colorado state legislature abided by the TABOR limit. Similarly, statewide ballot proposals to spend over and above the TABOR limit have, up until now, met with very little success.

Indeed, Referendum C is only the most recent and most ambitious of several attempts by the Colorado state legislature to obtain voter approval to spend over and above the limit mandated by TABOR. Every year from 1993 to 1999 there was a measure on the Colorado ballot to either raise taxes or spend in excess of the TABOR limit. Each of these measures lost. These include an effort to increase the gasoline tax in 1998 and a 1999 proposal to use half the TABOR rebate for road construction. Overall, despite consistent opposition from the state legislature, TABOR has proven to be extremely durable for the past 13 years.

Furthermore, even though Referendum C passed, it does provide a useful example of the effectiveness of TABOR’s rebate provisions. Without the rebate provision, Colorado voters would have been voting to increase spending by a projected $3.7 billion over 5 years. However, TABOR’s rebate provision suddenly turned a $3.7 billion spending increase into a $3.7 billion tax hike. Suddenly, Colorado voters had to weigh the benefits of the additional government spending against the loss of their annual rebate checks. The fact that voters could more clearly see the costs of all this government spending doubtless made Referendum C considerably more difficult to pass.

Elsewhere, fiscal conservatives certainly have their work cut out for them. Conservative and libertarian activists in numerous states are interested in enacting similar legislation. However, progress in many states has remained stalled. There are a variety of reasons for this. One reason that cannot be ignored is that TABOR opponents have opportunistically blamed TABOR for all of Colorado’s recent fiscal woes.

It is certainly true that Colorado has endured fiscal pressures. However, TABOR supporters need to more aggressively make the case that Colorado’s revenue decline was brought about by the September 11th economic slowdown and a severe drought, not TABOR. Furthermore, an education-spending mandate which has forced Colorado to spend increasing sums on education at a time when revenues were falling, has made Colorado’s fiscal situation even worse.

Even more importantly: Fiscal conservatives need to go on the offensive and highlight all the good TABOR has done since 1992. Indeed, TABOR deserves a great legacy. For most of the past 13 years it has provided Colorado residents tax relief, economic prosperity, and a leaner government. However, it has given fiscal conservatives nationwide perhaps something even more significant: an effective model that can be used in other states.

Michael J. New is an adjunct scholar at the Cato Institute and an assistant professor at the University of Alabama.

Michael J. New is a research associate at the Busch School of Business at The Catholic University of America and is an associate scholar at the Charlotte Lozier Institute. Follow him on Twitter @Michael_J_New


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