Tax Relief in Colorado Happens by Strengthening TABOR

C olorado governor Jared Polis (D) and Art Laffer, the economist and Presidential Medal of Freedom honoree, recently critiqued the state’s Taxpayer’s Bill of Rights (TABOR) at this venue. While not meritless, much of their argument is paradoxical, highlighting an overarching issue of fiscal unsustainability that warrants a reality check.

TABOR recently had its 30th birthday. Voters approved the constitutional amendment in 1992, establishing the strongest tax and expenditure limit in the country. It’s been the gold standard for a sound spending limit ever since.

Under the amendment, annual growth in spending cannot exceed the state’s population growth plus inflation, which is a good measure of the average taxpayer’s ability to pay for spending. When adopted, the limit covered about two-thirds of state spending. It requires voter approval for tax increases and mandates refunds to taxpayers if tax revenue exceeds the limit.

In their critique, Polis and Laffer correctly acknowledge that TABOR surpluses indicate that income-tax rates are too high. They’re correct that the state should seek to reduce income-tax rates to prevent overcollection instead of handing out refunds. They’re also correct that a broader tax base is preferable. It enables the tax rates, and therefore the marginal effect of the tax burden, to be reduced as much as possible for all.

But Polis and Laffer incorrectly criticize TABOR without realizing its pivotal role in achieving their purported goal to reduce taxes. Without a crucial spending check such as TABOR, the state would tie its budget directly to revenue levels, eliminating any surplus.

While Polis has only recently touted reducing state income-tax rates with surpluses, the Independence Institute has long supported a plan called “Path to Zero.” The plan simply limits government spending and uses resulting surpluses to lower tax rates until they’re zero. This is similar to my efforts in Texas, Louisiana, and other states, which start with a sustainable budget approach, as recently explained in a release by Americans for Tax Reform.

Unfortunately, courts and politicians have eroded the strength of TABOR over time, primarily because of politicians’ lack of fiscal restraint. The result has been that TABOR now covers less than half of state spending, allowing expenditures of all state funds, which excludes federal funds, to grow faster than population growth plus inflation.

Specifically, appropriations of all state funds have increased by 74.2 percent, compared with an increase of just 46.5 percent in population growth plus inflation over the last decade. This has resulted in the state appropriating $4.2 billion more in just fiscal year 2023–24 than if it had been limited to the rates of population growth plus inflation over time, amounting to higher spending and taxes of about $3,300 per family of four. The summed difference each year in all state funds above this metric over the decade amounts to $16.3 billion, or $11,300 per family of four.

These amounts don’t necessarily mean that the state needs to start cutting its budget to get back on track, but they do mean that the time to start reining in the budget is now, to reduce these excessive burdens on taxpayers. To that end, Ben Murrey, director of the Independence Institute’s fiscal-policy center, and I have shown the path forward with the Sustainable Colorado Budget (SCB).

The SCB is a maximum threshold for the initial appropriations of all state funds and is based on TABOR’s rate of population growth plus inflation. This will help reinforce the original intent of TABOR, by broadening the spending limit to all state funds. The plan would limit nearly two-thirds of state spending each year, as when voters first adopted TABOR. Doing so will result in larger surpluses to reduce income-tax rates yearly until they’re zero. Polis and Laffer are right to want rate reductions, but there are none if there is no surplus.

For the upcoming FY 2024–25, the SCB proposes an all-state funds ceiling of $27.70 billion. This uses the prior FY 2023–24 amount of $26.15 billion and increases it by 5.9 percent, calculated using TABOR’s current method and reflecting a 1.0 percent increase in the state’s population and 4.9 percent inflation. As noted above, it would be even better to grow the budget by less or not at all to correct past budgeting excesses. This more robust TABOR approach outlined in the SCB helps to freeze inflation-adjusted spending per capita, allowing the average taxpayer to afford the cost of government.

In recent years, the current TABOR limit alone has already produced substantial surpluses that have been refunded to Coloradans. But instead of using this year’s $1.7 billion TABOR surplus to refund overcollected taxpayer dollars, the legislature could have cut the income-tax rate from a flat rate of 4.4 percent, which ranks 14th in the country, to 3.81 percent.

Further, had the state over the past decade followed the SCB, which has a larger base budget, lawmakers could have lowered the income-tax rate to 2.96 percent, putting it on a faster path to becoming the lowest flat income-tax rate in the country, below North Carolina’s 2.49 percent. It would also pave the way to zero income taxes by 2042.

Polis in his recent article criticizes TABOR for acting as a spending restraint rather than a mechanism to reduce tax rates. Indeed, his track record in the governor’s office demonstrates his distaste for limitations on spending. The state budget has grown 45 percent since he took office less than five years ago; his budget request for the upcoming fiscal year would constitute an astounding 52 percent increase. In a state with a constitutional balanced-budget requirement, it’s paradoxical to support tax cuts without spending restraints.

Unfortunately, given his poor track record on spending and his critique of TABOR’s spending restraints — which he and Laffer improperly call a revenue limit — Polis is unlikely to adopt our sustainable budget to produce larger surpluses with which to cut tax rates. On the contrary, this year he supported a measure that would have increased state spending above the current limit, erroneously claiming that it would cut taxes using state surpluses.

“A similar tax-rate reduction for property taxes, Proposition HH, failed on the ballot recently in Colorado,” Polis and Laffer write in their recent NRO article. While a clever misdirection, this argument doesn’t hold up.

Prop HH didn’t directly offset the TABOR surplus through tax cuts, as an income-tax reduction would. That’s because the measure influenced only local property-tax revenue. Because the State of Colorado generates no tax revenue from property taxes, as those are collected only by local governments, reducing those rates won’t affect the TABOR surplus. Polis and Laffer contend that the state budget indirectly benefits from local property taxes. However, Prop HH would have lessened the state’s share of local funding by only approximately $125 million.

Far from lowering tax rates using TABOR surpluses, as Polis and Laffer argue, Prop HH would have increased the state spending limit, leaving fewer surplus dollars to lower the state’s income-tax rates. Recall that Polis wants to use the surplus for income-tax reduction without changing the state budget. Because spending determines the ultimate burden of government, however, had Prop HH succeeded in raising the spending cap, the state budget would have expanded, rendering it impossible to lower income-tax rates without affecting the budget.

This isn’t Polis’s only move that raises concern. He has rejected numerous opportunities to decrease tax expenditures.

During the state’s recent special session, Polis signed a bill that expanded the state’s earned income-tax credit by $182.5 million. That amounts to an increase of about a $50 per capita, not a cut. He also failed to speak up while his party rejected a Republican bill that would have reduced the income-tax rate to 4.0 percent.

Had Polis enforced a budget reflecting no more than the rate of population growth plus inflation, as outlined in the SCB, there would now be much more surplus available to reduce income-tax rates. Colorado policy-makers should embrace the SCB and leverage surpluses to reduce the income-tax rate in the upcoming legislative session commencing January 2024.

Sound fiscal responsibility of sustainable budgeting and reductions in the income-tax rate using surplus dollars until the rate equals zero is the best way to eliminate income taxes in Colorado. This is also the best way to let people prosper across the state.

By focusing on tax-rate cuts of income taxes without strengthening TABOR’s spending limit, there won’t be sound fiscal policy, and Coloradans will suffer. While well intentioned, the severe shortcomings of the Polis and Laffer approach must be addressed.

It’s time for a bold and pragmatic economic strategy for the Centennial State with the Sustainable Colorado Budget.