News: CJ Exclusives

Fiscal Reformers Look to Colorado

Spending cap limits annual growth to inflation and population growth

“If we can prevent the government from wasting the labors of the people, under the pretence of taking care of them, the (people) must (be) happy. We say the (government) raised not only enough (money), but too much; and that after giving back the surplus we do more with a part than they did with the whole.”
— Thomas Jefferson, in a letter to Thomas Cooper on Nov. 29, 1802

When Gov. Mike Easley introduced his proposed biennial budget last year, he asked the legislature to implement spending limits tied to the average growth in personal income during the previous 10 years.

“The current budget model needs to be reformed,” Easley said in February 2003. “Last year, we have reduced the state operating budget for the first time in over 30 years and brought spending under control, but now it is time to take the next step. We must stop the practices of letting spending run away when the economy is strong.”

The request was the first significant effort in North Carolina since 1991, by an elected official with power, to create an outside force to protect taxpayers from excessive state spending. At the time even the John Locke Foundation, publisher of Carolina Journal, offered limited praise for Easley because he at least started a debate over government spending limits. Fiscal conservatives had long supported a Taxpayer Protection Act for the state, which some legislative sponsors have proposed in recent years. But many thought Easley’s gesture did not go far enough. Besides, the legislature failed to adopt the idea into state law.

Weaknesses in Easley’s model

Critics, citing failures in other states that implemented similar measures, say Easley’s measure contained several flaws. First, they thought a cap tied to personal income, rather than to population and inflation, would allow government to increase too rapidly even if strictly adhered to.

“Because personal income typically grows faster than the combined rate of inflation and population growth… the governor’s proposal would essentially freeze the tax burden at its current level, which is the second-highest tax burden in the region and about twice what it was 20 years ago in [inflation-adjusted, per-capita] terms,” wrote Locke Foundation President John Hood in a March 2003 Spotlight Report, “Follow Easley’s Lead: Spending Cap Should Be Tightened, Constitutional.” “(A) Taxpayer Protection Act [tied to population growth inflation] would allow North Carolina’s tax burden to shrink over time.”

Another perceived shortcoming of Easley’s proposal was that it would have been written in statute, rather than into the state constitution. Tax and expenditure limits in other states have shown that legislatures can, and often do, suspend statutory caps, which they cannot do when mandated by their constitutions.

Also, states where limits require the government to rebate unspent revenues to taxpayers, rather than to accumulate in off-budget accounts, have proven to be more effective restraints on spending. Easley’s proposal did not include such a provision.

And while not an option in North Carolina, limits hold elected officials more accountable when passed by citizen initiative instead of through the state legislature.

Taxpayer’s Bill of Rights

Probably the most well-known tax expenditure limit in the country, and the one most admired by taxpayer organizations, is the Taxpayer’s Bill of Rights, passed in 1992 by the voters of Colorado. TABOR became a constitutional amendment expressly for the purpose of restraining the growth of government. Increases in tax rates may be approved only by voters, and spending may grow only according to increases of state population and inflation as measured in the previous year.

Passage of a Colorado taxpayer-protection initiative required several attempts. Fred Holden, a senior fellow in budget policy for the Golden, Colo.-based Independence Institute, said tax-limitation propositions appeared on the ballot four times between 1966 and 1978. In 1986 a proposed amendment to require voter approval for tax increases failed again, gaining only 37 percent support.

However, every two years afterward tax limitation initiatives gained increasing voter approval. Colorado Springs anti-tax activist Douglas Bruce led efforts that produced 43 percent support in 1988, and 49.5 percent in 1990.

Colorado lawmakers began to see where voter sentiment was going, and passed the Bird-Arveschoug 6 percent spending limit. Holden said it was often referred to as “the Swiss cheese” limit because “it was so full of holes,” Holden said.

After the narrow loss in 1990, Bruce removed a requirement to limit state fees in the proposed 1992 bill of rights amendment. “Like an English bulldog that never lets go,” Holden wrote in an Independence Institute paper called “A Decade of TABOR: Analysis of the Taxpayers’ Bill of Rights,” “Bruce in 1992 brought out what was to be the third and last Amendment 1, finally passed by 54 percent of Colorado voters.”

TABOR limits spending

The Taxpayer Bill of Rights, fortified with the taxpayer-rebate condition, has slowed, not stopped, the growth of state government ever since. “Polls show that strong majorities of taxpayers and small-business owners, leaders, and managers love TABOR,” Holden wrote. “Those who like to control and expand state spending or are its recipients hate it.

“With TABOR, taxpayers need not regularly, continuously, relentlessly, and exhaustively monitor and react to the fiscal foibles of the political process. The people have their own quite demanding personal, professional, and family lives, and prefer a systematic, ‘always on’ solution. What they chose in TABOR was to use the authority and power of the Constitution to do the important work of limiting government growth.”

Holden reported that in the 10 years before the passage of the taxpayer bill of rights, inflation grew at 29.7 percent and population grew by 10.4 percent, for a total of 40.1 percent. During the same time state revenues increased by 104.7 percent and state spending grew by 89.8 percent.

The premise for the bill of rights is that for every percentage point that inflation grows, the same increase in purchasing power is required to buy the same amount of goods and services for the same number of people. For every percentage increase in the population, the same percent increase in revenue is needed to provide government services for the additional people.

In the 10 years since its passage, the bill of rights accomplished what Colorado voters intended. Population and inflation together grew by 62.6 percent, in line with state revenue growth of 61.3 percent and state spending growth of 63.8 percent.

But the bill of rights has not exempted Colorado from recent years’ fiscal troubles. “Because fees are not covered by the Colorado limit, they have shouldered a greater burden for generating revenue in the Centennial State…,” reported the National Conference of State Legislatures.

Critics, such as the Washington, D.C.-based Center on Budget and Policy Priorities, say the bill of rights exacerbated Colorado’s financial problems during the economic downturn.

“In some years,” the liberal group CBPP said, “revenues decline or grow more slowly than the sum of population growth and inflation. In such years, the TABOR formula uses the new, reduced level of revenues as the base for computing the next year’s limit.”

This is known as the “ratchet effect.” CBPP argued that “TABOR is causing state revenues to fall further and further below what they would be if they had grown at the pace of population and inflation since TABOR’s enactment.”

Still, Colorado residents maintain the power to allow government to increase taxes and spending, and polls show that voters would like to keep it that way.

According to the National Conference of State Legislatures, other state taxpayer bills of rights “ha(ve) not been very effective in slowing government growth as desired by proponents,” chiefly because of their design. After most states’ fiscal suffering the last few years, NCSL says the coming years may see renewed efforts to create or tighten limits.

Chesser is an associate editor at Carolina Journal.