Explaining Colorado's state budget
It all comes back to TABOR, the Taxpayer's Bill of Rights
Almost everybody agrees that Colorado’s state budget has problems.
Healthcare and other aid programs are getting cut while schools, public safety and transportation remain underfunded.
Some blame waste, fraud and corruption. But that’s only a small part of the story. The real causes are a lot more complicated.
I spent the last few weeks learning more about the basics of the budget here in Colorado, talking to experts and digging into economic research to better understand what’s going on with our tax money.
History of TABOR
If you pay taxes in Colorado, you’ve probably heard of TABOR, the Taxpayer’s Bill of Rights.
It’s the amendment to the state constitution that says the government has to run a balanced budget and send you a refund when it collects more taxes than it’s allowed to spend.
But TABOR’s tax and spending limits are at the core of Colorado’s budget problems, so understanding TABOR is fundamental for understanding everything else about the budget.
And to understand TABOR, you have to go back to the nationwide anti-tax movement that started in the mid-20th century.
People across the U.S. were feeling increasingly dissatisfied with how their taxes were being spent. Some of that was a bigoted backlash to the civil rights movement and government programs that helped people who were discriminated against. Some of it was a growing distrust of the government due to scandals like Watergate and the Vietnam War.
When the economy slowed down in the mid-1970s, a lot of people felt pushed to the brink by rising prices – so they looked to tax cuts for financial relief. Activists in California convinced voters to support an amendment to the state constitution that limited property taxes. And the success of that campaign inspired a wave of anti-tax initiatives in states across the country – including here in Colorado.
It took years of organizing and a few failed attempts to get TABOR passed here. But the constitutional amendment that voters finally approved by a small margin in 1992 is widely recognized as the most restrictive limitation on taxes and government spending of any state in the country.
“TABOR is the most consequential fiscal issue and policy in our state because it dictates everything else,” said Andrea Kuwik, an analyst at the Bell Policy Center, a progressive think tank.
What TABOR does
Think of the state budget under TABOR like a pie. You only get a single pie each year, so you have to decide how big of a slice to give to each program you want to fund. A bigger slice for one program means less for everything else.
And you can’t just make the pie as big as you want. TABOR limits the year-to-year expansion of the budget by tying it to two factors: the state’s population growth and the price of consumer goods.
On the surface, it sounds like that would allow the budget to adjust to changes in the economy. But in practice, government spending doesn’t always keep up.
One of the problems is that costs can grow more quickly for the government than for consumers.
Healthcare is a key example. It has become the biggest item in the state budget, in part because of big improvements in the quality of care that have caused prices in that sector to grow far faster than prices of other consumer goods. Expanding healthcare coverage to more Coloradans has also increased the overall expenditure.
“We don’t want to give that up because it increases the human flourishing of our society,” said Caroline Nutter, an analyst at the Colorado Fiscal Institute, a progressive think tank. “But high-quality healthcare comes at a cost, and that cost has increased far more than the price of groceries.”
Population growth is also an imperfect measure because it doesn’t account for the economic impacts of demographic changes. Population growth spurred by working-aged people moving into the state won’t have the same effects as an influx of young children or elderly retirees.
“Those populations cost more,” Nutter said. “They have healthcare costs and other costs that are just higher than your average 25-year-old full-time employee.”
How the budget got so complicated
Pretty soon after TABOR passed, the limits it placed on the state budget started to clash with Coloradans’ desire for greater government investment in certain areas.
In 2000, voters tried to give K-12 education more money by passing another constitutional amendment called Amendment 23, which mandated annual education spending increases. But after the start of a global economic crisis in 2008, lawmakers decided the state couldn’t afford to meet those requirements. So they created an accounting trick called the budget stabilization, or BS, factor that withheld billions in school funding over more than a decade.
Coloradans also voted for a big modification to TABOR in the wake of the economic downturn that followed 9/11 in the early 2000s.
Tax revenues fell because of the recession, but since the budget could only grow based on how big it was the previous year, this caused a “ratchet effect” where the budget got stuck at a lower baseline.
“The state couldn’t do any kind of counter-cyclical spending, which in economics is just the ability to inject money into the economy when the economy isn’t doing well. And it is a very proven and evidence-based way to respond to economic downturns,” Nutter said.
To deal with this issue, Coloradans passed Referendum C in 2005, which suspended TABOR’s budget growth limits for five years and eliminated the “ratchet effect.”
“Without that, it would have been billions and billions of dollars that would have been cut,” Kuwik said.
Why Colorado has so many fees
TABOR’s budget restrictions have also spurred lawmakers to turn some programs into government-owned businesses called state enterprises that generate the vast majority of their revenue through fees instead of taxes.
One example is the higher education system. In the mid-2000s, Colorado’s public colleges and universities converted to function as state enterprises, funded largely by tuition and federal grants.
Similarly, the state’s parks and wildlife agency is funded mostly by hunting and fishing license fees, park entrance fees and proceeds from lottery sales.
The patchwork nature of the state’s budget makes it hard to track exactly how the government is spending taxes, fees and money collected from various sources. That can generate distrust and contribute to the feeling that government services are inefficient, not worth paying for or in need of even stricter fiscal discipline.
“I see TABOR as a huge transparency problem,” Nutter said. “It’s not all in one place where the average person could look up what is the state budget, how we spend our money.”
On top of this, TABOR requires voter approval for new tax increases, which can warp voters’ perceptions of how heavy their tax burden really is. Colorado has some of the lowest tax rates in the country, but most Coloradans still feel their taxes are too high.
“They get asked these questions much more so than in other places, and so then it feels like you’re being taxed a lot,” Kuwik said.
Another important impact of TABOR was that it caused a shift toward higher local tax rates. Courts have ruled that local governments can get rid of TABOR’s tax limits if voters approve it, so local governments have raised taxes to fill gaps in state funding for things like childcare, transportation and housing.
“That creates a hodgepodge of inequities in certain places,” Kuwik said, pointing to the example of mountain resort communities that can impose taxes that mostly fall on visitors while other rural communities have to tax themselves to fund government programs.
“Who’s bearing the burden of the taxes becomes a challenging question,” Kuwik said.
Can Colorado’s budget be fixed?
This year’s $1.5 billion budget shortfall was mostly caused by new federal tax cuts that meant Colorado collected less state tax than expected.
But those recent tax cuts aren’t the only thing holding Colorado back from investing more in key areas like healthcare, education, transportation and public safety. TABOR’s budget restrictions are a big obstacle.
Politicians and advocates favoring smaller government often point to waste, fraud and corruption as major causes of Colorado’s budget problems. And there have been significant recent cases of healthcare fraud reaching into the tens of millions of dollars.
But reducing waste, fraud and corruption requires adjusting or adding accountability mechanisms. Simply keeping the budget small, without other measures, won’t solve those issues.
Colorado voters have shown a willingness to tweak TABOR’s limits when they’re seen as too strict. And advocates like Kuwik and Nutter see opportunities for reforms to TABOR that could make the budget more responsive to Coloradans’ needs while keeping state finances healthy.
Both of their organizations are backing a ballot initiative this fall that would allow the state to keep money above the TABOR cap to spend on K-12 education.
Progressive advocates are also backing a proposal that might be on our ballots this fall for a graduated income tax, under which people who earn less than $500,000 a year would pay a lower income tax rate than people with higher incomes. Under TABOR, everybody pays the same flat rate.
“A graduated income tax – getting more revenue into the system – is a really important step in trust and a really important step in showing people that government can be effective when it is adequately and sustainably funded,” Nutter said.