TABOR Under Assault

The Colorado Freedom Report:  An independent journal of politics and culture.

The Colorado Freedom Report--www.FreeColorado.com

TABOR Under Assault

by Ari Armstrong, January 26, 2005

The Taxpayer's Bill of Rights (TABOR) is under assault. When Republicans held the legislature, they raided cash funds and delayed the population adjustment to keep state spending higher than was arguably allowed by law. Now that Democrats control both houses of the legislature, they want to gut TABOR and allow state spending to grow faster forever. Meanwhile, the Democrats' cheerleaders in the media, who write editorials for both the news pages and the editorial pages, can't say enough nasty things about restrained government spending. And the individual's right to control his or her own income? Not even a whisper of that concept may be heard among Democrats and most Republicans and journalists.

What is TABOR? In 1992, voters approved an initiative promoted by Douglas Bruce and many others that changed the state's constitution. It achieves two main things. First, TABOR allows an annual increase of state spending according to inflation plus population growth, and more if approved by voters. Second, TABOR prohibits tax increases without specific voter approval.

In many years, tax revenues exceed the spending limits, in which case the excess tax revenues are returned to the tax payers. In years of economic downturn, such as recent years, it is possible that the tax revenues are less than what the TABOR spending limits would otherwise allow. In that case, the state can only spend what's available.

As State Senator Mark Hillman pointed out at a January 20 dinner sponsored by the Colorado Union of Taxpayers (CUT), even during the last few years of tight budgets, state spending has increased every year. The general fund decreased once, and several programs have been cut.

Whenever tax revenues exceed the spending limits, the legislature must return the excess funds to the tax payers. When tax revenues decline, though, the state may not be able to spend as much as the spending limits would otherwise allow. This intentional, two-pronged restraint recently created a situation that proponents of big government hate. Let's consider a simplified example to illustrate the point. Let's say spending is $100 in year one, and the spending limits allow increases of 5% per year, maximum. In year two, spending would be $105, and by year ten spending would be $155. But now let's say that, in year two, spending is held to $100 because tax revenues don't jump. In year three, spending is $105 rather than $110.25. Every year spending is less than it would have been if the maximum had been met, such that by year ten spending is about $148 rather than $155.

Those who hate TABOR call this "the ratchet effect." State spending is decreased every year, relative to what it would have been under the maximum allowed. Those who like TABOR call this prudent restraint of the growth of government. Indeed, my only complaint is that TABOR allows state spending to grow too rapidly.

Unfortunately, the Republicans, led by Governor Bill Owens, reduced the impact of "the ratchet effect" by delaying the population adjustment (which arguably violated the law). According to Penn Pfiffner, the president of CUT, "During the current fiscal year (July 1, 2004 to June 30, 2005), the total tax burden is $375 million more because of the delayed population adjustment. After next year's expected population adjustment, the total new taxes will be $463 Million every year."

Usually, the economy grows faster than inflation. Why is this so? In a free market economy, or one that even approaches free markets, people invest in capital -- the machines, factories, tools, technology, and skills that allow people to produce more goods and services in less time. There is nothing inevitable about economic growth: for many thousands of years humans have survived -- barely -- without it. Notably, the more money government wastes, the less money people have for private investments, and thus the slower the rate of economic growth.

There is every reason to expect the growth of the economy to outpace the growth of state spending. The costs of the operations the state properly handles -- stopping the initiation of force and fraud and running the court systems -- should remain roughly constant from year to year. Indeed, with higher wages come less crime, more voluntary charity, and a greater ability to pay for goods and services on the market (including better security). Thus, arguably, state spending should actually decline in real terms, at least per capita, from year to year.

But the supporters of the massive state will hear none of it. For example, the Denver Post's editorial writers pointed out in a January 26 column that Republicans "have been cautious, saying House Speaker Andrew Romanoff's plan won't control the growth of government spending." The editorialists add, parenthetically, "Growth? That's a laugh. Fourteen years under TABOR have slashed state government spending from 7 percent of the total state economy to 5 percent."

But why should "growth" be defined as an increasing percent of economic output, which properly expands from year to year? Why shouldn't growth be defined as, well, growth? Under that common-sense understanding, state spending has indeed grown every year under TABOR.

Romanoff's plan would allow state spending to keep pace with economic growth and consume 6% of economic output every year. According to numbers Hillman distributed at the CUT meeting, the first fiscal year state spending became less than 6% of economic output (at least since 1976) was 2001-2002. From 2000-2001 to 2001-2002, TABOR revenue decreased from $8,875,800,000 to $7,760,500,000. (Again, total state spending went up that year nevertheless.) Meanwhile, Colorado personal income increased from $128,386,500,000 to $143,043,200,000.

By 2008-2009, TABOR revenue is projected to be $10,008,500,000, while personal income is expected to be $183,527,000,000. Thus, revenue is projected to be 5.5% of personal income. 6% of revenues is around $11 billion.

Because, as our political masters and their courtesans among Denver's media inform us, state spending under TABOR of $10 billion just isn't enough. (By the way, in fiscal year 1976-1977, the equivalent of TABOR revenue was about $1.4 billion.)

Why do Romanoff and the editorial writers at the Post want state spending to grow much faster than it has since the introduction of TABOR? The only explanation is that they believe, as people grow richer, they should be forced to pay more into welfare programs. This is not merely about cutting poverty. As the economy grows, people can make more money and spend more on voluntary charity, so actual poverty decreases. So the forced transfers of wealth are more about egalitarianism: forcing the relatively wealthy to hand over their income to others.

As the Rocky Mountain News reviewed last year, the state spends around $5 billion per year or more on various welfare programs, including welfare for education. (The News didn't phrase the matter quite the way I did. The News didn't make clear how federal funds are dispersed.) With Amendment 23 now in effect, welfare for K-12 education is set to automatically increase every year, even though that has required cuts in other programs in recent years. As the Rocky Mountain News reported January 25, Romanoff's plan would "[d]edicate new spending to education, health care and transportation."

The CUT Meeting

There is one central reason why Democrats want to gut TABOR, why they think taxpayers will go along, and why the media mostly follow along. Colorado conservatives are too afraid to fight. This became apparent at the CUT meeting.

State Treasurer Mike Coffman said changing only the "revenue side" would "not be a permanent fix." He said that, if the only change is to allow the state to spend more money, "mandated" social welfare programs and K-12 spending increases might create "another budget shortfall in the future." Coffman said that a "permanent solution" would be to run a ballot measure in 2006 that would ease TABOR limits and also restrict the spending increases of Amendment 23. He advocated a "shared burden with Amendment 23."

To cut aside the euphemisms, Coffman supports a tax hike every year into the future. In exchange, he wants spending for certain programs to increase slightly less than they otherwise would. This is the Republican position, the party allegedly for smaller government and freer markets.

And what of the federal "mandates?" These are not mandates at all, as Hillman later made clear. Instead, they are instances of federal blackmail. Here's how it works. The national government forces Colorado citizens to pay money to the national government. Then, the national government redistributes some of this money to state governments, on the condition that the state governments jump through certain hoops and spend the money in certain ways. Why state legislators don't tell national legislators to take a flying leap is beyond me. That money should never leave Colorado.

Hillman pointed out that the economic recession had more to do with the budget crunch than TABOR did. However, without TABOR, state politicians probably would have been quicker to raise taxes.

Hillman offered general support for free markets: "The economy is more efficient and more productive than we [politicians] are." Thus, Hilllman does not want to replace the inflation standard with an income mark in capping the growth of state spending.

Yet Hillman backed down. "We have to recognize politically that not everyone believes as we do philosophically," he said. Cutting certain programs over the next couple of years, at a time when the state is expected to refund money to taxpayers, will be "difficult to defend in the court of public opinion," Hillman believes. However, with a few exceptions, conservatives haven't bothered to bring any argument to that court. Pfiffner and those associated with the Independence Institute are doing a great job defending TABOR and fighting tax hikes. However, as far as I can tell, most Republican legislators have buckled on the matter of tax hikes.

Hillman noted that, while general state spending has increased every year, programs that have been cut include transportation, the maintenance of buildings, and libraries.

Hillman, one of the better legislators, finally encouraged the legislature to be "cautious" in how large of a tax hike it asks voters to approve. At least he suggested that the business personal property tax be repealed.

Republican Representative Kevin Lundberg proclaimed boldly: "I'm here to defend TABOR." Well, sort of. He urged the legislature to find "efficiencies" in order to cut the budget. Then he begged for a "dollar-for-dollar trade" in weakening TABOR and restraining the spending hikes of Amendment 23.

Democratic State Senator Ken Gordon offered the most interesting comments, if the ones farthest from the thinking of most of those in attendance.

Gordon admitted, "Taxes are an infringement on freedom," adding that "people who pay them have a right to demand" the money is spent well. He outlined five areas where he thinks state spending should be increased.

Gordon predicted that state spending on higher education would be eliminated by the end of the decade, if no changes are made to TABOR. He claimed that subsidies to colleges produce "spin-off benefits" that make "us all more prosperous." However, subsidies for colleges are entirely unnecessary, and they violate the rights of Coloradans to use that portion of their income as they see fit. The subsidies are only a small portion of college budgets now, so the loss could be made up fairly easily. If taxes were cut in proportion to the cut in subsidies, people would have more money to spend on college and give to colleges. There is simply no plausible argument that college subsidies somehow capture an "externality;" indeed, Gordon didn't even bother to try to make such an argument. Instead, almost all the benefits of a college education is captured by the students. Thus, students and their families should rightly pay the bills. In cases of poor students, sliding tuition rates, scholarships, and private contributions are sufficient to handle the problem. If the concern is technological advances, then businesses should fund their own research or find private contributions, not accept corporate welfare. If Republicans really cared about free markets, they would cheer the proposal of eliminating education welfare for college students. As a side benefit, ending college subsidies would take higher education entirely out of the hands of meddling politicians.

The next item on which Gordon wants to spend other people's money is transportation. It's less obvious that state spending for transportation should be cut. If anything is a "natural monopoly," the system of roads is. Yet there are two easy ways that state spending on transportation could be cut. First, new subdivisions could be required to supply all the roadways that provide access to the area. (Democrats claim to dislike so-called "sprawl," and, while their concerns are misplaced, at least sprawl should not be subsidized.) Second, new highways could be built as toll roads. That way, people who used the roads would pay for them. In general, if the government is going to run an enterprise (which I'm not willing to grant is necessary), at least it should set user fees to cover costs. In the case of roads, the gasoline tax is a very close proxy to use. Thus, I would rather see transportation costs funded out of the gasoline tax than through general taxes. In terms of rail, such projects are usually horrendously expensive relative to the benefits, and thus they should only be build if private businesses can figure out how to fund them and make them profitable.

Third, Gordon argued the state should fund health care. He made a pathetic argument that state funding is useful for reducing the externality of contagious diseases. He then made a vague argument that funding health care especially for children creates a "stronger and better community." However, health care is something in which government obviously has no proper role. Most people can afford to pay their own medical bills, and those few who can't should seek voluntary charity, including charitable clinics. Forcing people to pay other people's medical bills is a clear violation of individual rights. It is in fact the whining Democrats who are mostly responsible for the problems with modern health care. State interference has increased costs and skewed incentives. The best thing politicians can do for health care is leave it alone.

Fourth, Gordon wants to spend more money for the treatment of substance abuse in prison. I'm not sure he's wrong on this point. Gordon claimed that such treatment can reduce recidivism, thereby saving money in the long run. Prisons seem to be a natural function of the state. Thus, it would seem that the state should run prisons as well as possible, with a view toward reducing future criminal activity. Of course, this should apply only to those who commit actual crimes, not those who peaceably use drugs, who should not ever be sent to prison.

Finally, Gordon wants to fund "mental health treatment" presumably for poor people in the general population. The counter argument is similar to that for health care subsidies. People should not be forced to fund questionable treatments for others. Gordon argued that spending money on such treatment might reduce future criminal activity. However, it is not the job of the government to try to predict future criminal activity, but rather to locate and stop actual criminal activity. If Gordon thinks it's a good idea to fund mental health treatment for poor people, he is perfectly free to start a charity to do that.

Gordon didn't address K-12 education, because even many Republicans grant spending for that should be increased. However, spending should actually be decreased. Even from a leftist perspective, it makes no sense to tax a working poor couple without kids and hand that money over to rich yuppies in the suburbs who have kids in "free" schools. A good reform would be to slowly implement fee-based education, in which parents pay for their children's education. Taxes should be cut correspondingly. I don't see how a leftist could in good conscience argue against cutting taxes for the poor and requiring the rich to pay their own education expenses. If we got to the point where only the poor were subsidized, that would be an enormous improvement over today's system. (The teachers' unions would hate such a reform, because it would give parents far too much control over the schools.) At that point, we should consider private charity and sliding tuition rates to fund education for the poor.

In short, the current budget crunch offers an excellent opportunity to reevaluate a variety of state programs, many of which should be cut completely. Not only should taxes not be increased, state spending should be cut significantly below current levels. Unfortunately, most Republicans lack the principles and the courage to suggest such cuts.

* * *

Both Hillman and Gordon pointed out the oddities of voter preferences. Hillman noted that spending for K-12 was going up even before Amendment 23, and now it is going up more quickly. Yet voters believe that education has been hurt the last few years. This seems to indicate that voters are fundamentally ignorant of politics, a point Jeffrey Friedman has been making for many years. Friedman argues that people cannot know the complexities of modern politics -- indeed most politicians don't even know those complexities -- and the solution is to radically simplify politics and leave people otherwise free to run their own lives.

Gordon described one person who said he wanted tax cuts along with smaller class sizes in government schools. In general, he said, people indicate through polls they want "more services, lower taxes, and a balanced budget."

During the question period, Gordon made another comical remark in response to Joe Chavez's suggestion that Democrats are trying to rip the heart out of TABOR by stripping it of the spending limits. Gordon said TABOR doesn't indicate what is its heart, and likewise nobody has said what constitutes its leg or liver. I'll go a step further and suggest that few people have ever read TABOR. Indeed, I suppose that only a minority people in Colorado even know that it exists. I suppose that if pollsters asked, "What is TABOR?", and provided no hints, only a minority could even come up with the acronym, much less describe its provisions. Among the things this indicates is that advocates of free markets must make the intellectual case for liberty, not rely on legal devices, which can be easily manipulated.

Gordon also pointed to the curiosity of Republicans praising voters for passing TABOR while ridiculing them for passing Amendment 23. Apparently, he joked, Coloradans were smart in 1992, yet they'd grown dumb within the decade.

Gordon also suggested a representative body is better able to run the government than is the mass electorate. For example, people who vote for initiatives don't have to be bothered with balancing the numbers. But there is an obvious tension in Gordon's position. If people are too ignorant to run the government directly -- which they obviously are -- then why are they smart enough to elect the best representatives? The only answer, though one uncomfortable for leftists and big-government conservatives, is that a highly complicated government is necessarily alienated from the masses. Today's government is so complicated that even the people who pass and enforce the laws can only begin to comprehend them.

There is really only one way to put the people back in charge of the government, as Friedman suggests. That is to reduce the size, scope, and complexity of the government dramatically, so that the average lay person can understand what's going on. The fact that such a proposal is more consistent with individual rights is a pleasant, and not entirely coincidental, benefit.

The Colorado Freedom Report--www.FreeColorado.com