The taxpayer's bill of rights : evidence from Colorado and implications for Arizona

              The Taxpayer’s Bill of Rights:
Evidence from Colorado and
Implications for Arizona
February 2005
Dennis Hoffman, Ph.D.
Professor of Economics, Director
L. William Seidman Research Institute
Timothy Hogan, Ph.D.
Professor Emeritus
L. William Seidman Research Institute
Note: The authors gratefully acknowledge the research support provided by the Arizona
Office for Strategic Planning and Budgeting and the Arizona Department of Commerce
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INTRODUCTION
For those interested in one of the most extreme state tax and expenditure limitations
(TELs), TABOR – Colorado’s initiative that limits the funding of most expenditures to
annual revenue growth restrained by the sum of annual population growth and inflation
rates – would seem to be exactly the right choice. To some, the initiative simply limits
government to spend within its means. However, the analysis in this paper reveals that,
true to the language in the 1992 Colorado initiative, TABOR limits government growth,
and over time the public sector, as a share of the overall economy, declines sharply –
crowding out opportunities for investments in strategic initiatives or opportunities for tax
reform that may be popular with large voter constituencies or the business community.
Advocates point out that provisions in TABOR do allow for voter overrides, but these are
costly in both time and money, and until the overrides take place, government is
hamstrung. A simpler, more efficient alternative would be to elect fiscally conservative
legislators and hold them accountable for prudent fiscal decisions that strike the right
balance between a tax base conductive to economic growth and strategic investments
that provide public sector infrastructure, nurturing the business climate and promoting
the health and well-being of the citizenry.
The paper first outlines the TABOR amendment in Colorado and examines its fiscal
consequences for that state. It then examines the potential impact of a TABOR in
Arizona.
WHAT IS TABOR?
The Taxpayers’ Bill of Rights, popularly known by the acronym TABOR, is an
amendment to the Colorado Constitution [Article X, Section 20] approved by initiative in
1992. As stated in its first paragraph, the primary objective of the amendment was to
limit the growth of government. To do so, it requires voter approval of any tax changes
that would increase revenues and imposes limitations on the amount of revenue that
government can collect and spend. TABOR applies to all levels of state and local
government in Colorado.
Voter Approval of Tax Increases and Debt
TABOR requires prior voter approval of any new tax, any tax rate increase, any
increase in the assessment ratio for a class of property, any extension of an expiring
tax, or any tax policy change that would cause a net tax revenue increase. Voter
approval is also required for the creation of most financial obligations that extend
beyond the current year unless government sets aside enough money to fund the
obligation in all years that payments are due. The requirement for voter approval can be
temporarily suspended for tax increases in declared emergencies.
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Spending (Revenue) Limits
TABOR limits the maximum annual percent change in spending in a given fiscal year to
the sum of the inflation rate (as measured by the Denver-Boulder-Greeley CPI) and a
measure of growth in the prior year. For the state, the growth measure specified is the
percentage change in population (as estimated by the U.S. Census Bureau) in the prior
year. For local governments, it is the percent change in the valuation of real property in
the jurisdiction; and for school districts, the growth measure specified is the percent
change in student enrollment.
Since TABOR classifies as spending any transfer of revenues into reserve accounts or
to other governments, the limit effectively applies not only to spending but to revenues.
Thus, in practice, TABOR operates as a limit on revenues that can be retained by
government. The TABOR limit applies to spending of both General and Cash Fund
revenues (both taxes and fees), but excludes federal funds, litigation settlements, gifts,
and donations.
TABOR Surplus
Any revenue collected above the allowable TABOR limit for that fiscal year must be
refunded to the taxpayers in the following fiscal year. The amendment does not specify
the refund procedures to be used. With voter approval, a government may retain or
spend all or a portion of its TABOR surplus.
Other Provisions
Prohibited Taxes
Any new or increased real estate transfer tax, local income tax, or state real estate
property tax is prohibited by TABOR. Any state income tax change is required to have a
single tax rate applicable to individuals and corporations with no surcharge and may not
take effect until the following tax year.
Emergency Reserve
TABOR requires an emergency reserve equal to 3 percent of fiscal year spending. This
reserve can only be spent in a declared emergency. The amendment defines
“emergency” to not include economic or fiscal crises.
Voter Approval for Changes in Existing Revenue, Spending, or Debt Limits
Any changes that would weaken current limits on state or local government revenue,
spending, or debt require voter approval.
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Government Enterprises
Enterprises, defined as a government-owned business approved to issue revenue
bonds and receiving less than 10 percent of its revenue from state and local taxes, are
exempt from TABOR limitations.
THE RATIONALE FOR TAX AND EXPENDITURE LIMITATIONS
Various types of tax and expenditure limitations (TEL) have been adopted in more than
half of the 50 states. Proponents of TELs assert that without such restraints the normal
political process will result in increasing tax burdens and a growing government sector
over time. California’s Proposition 13, which focused on property tax relief, is often
credited as the first of these initiatives, but the trend in most states has been to broaden
the measures into restrictions on taxation or spending in general. (This phenomenon
includes California, which passed a more comprehensive TEL in 1979.)
Most TELs have been based on two basic approaches:
1) A “fiscal cap” establishing a limit on state revenues and/or expenditures – These
limits have been defined in various ways but most often by (a) setting a limit on
total revenues or total spending as a proportion of some variable measuring the
size of the total economy; or (b) setting a limit on the future rate of growth of
revenue and/or spending.
2) A “supermajority” requirement – This approach seeks to limit the growth of
government by requiring either a supermajority of the legislature (usually two-thirds)
or voter approval for any tax increase.
Although TELs could be adopted that would cause immediate cuts in spending or taxes,
both the supermajority requirement and the fiscal caps (that have been put into effect)
have been aimed at restricting the growth of the public sector or limiting its size to some
proportion of the total economy.
TABOR is a fiscal-cap TEL. Twenty-eight states have some form of fiscal-cap TEL.
Some states, like Colorado, actually have more than one type of fiscal cap in force. The
precise formulation of these fiscal-cap TELs differs widely. The key differences relate to
whether the limit is on spending or revenue, how the limit is calculated, and the
treatment of any surplus over the limit.
1. Spending or Revenue Limit – A majority of the states have limits that apply to
spending (16). Four have limits on revenue; three have TELs that limit
appropriations to the estimated revenue; and three (including Colorado with TABOR)
have limitations that are some type of combination of
revenue/spending/appropriation limits.
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2. Calculation of the limit
a. Colorado (TABOR) and three other states use the sum of population growth and
inflation to calculate their limits
b. Four states base their limits on a percent of state personal income.
c. Seven states use the percent change in personal income to calculate their limits.
d. Three states use a combination of share of personal income and percent change
in personal income.
e. Four states limit appropriations to a percentage of revenues received.
f. Five states have miscellaneous other systems.
3. Treatment of the Surplus
a. Colorado (TABOR) and only one other state require the surplus to be refunded.
b. Five states have a system that provides for partial return of the surplus.
c. Six states put any surplus into a “rainy day" fund.
d. Four states transfer the surplus into other reserve funds
e. One state requires any surplus be used to retire debt.
f. Ten states make no provision for any surplus.
[For a more complete comparative analysis of fiscal cap TELs, see Resnick 2004.]
HOW DOES TABOR COMPARE WITH OTHER STATE TAX
AND EXPENDITURE LIMITS?
TABOR is generally considered to be one of the most restrictive TELs in the country.
This evaluation is founded on the following characteristics of TABOR compared with
other TELs:
1. TABOR establishes limits on General Fund and Cash Fund revenues (hereafter
referred to as TABOR revenues). Revenue limits generally are more restrictive than
expenditure limits. In addition, TABOR applies to a broad definition of revenues, not
just the General Fund, and also applies to fees in addition to tax revenues.
2. Growth in TABOR revenues is limited to the sum of the percent change in population
and the inflation rate. This formula apparently is based upon the assumption that
government spending should grow only if it has to provide services to a larger
population or if the cost of providing services increases. It ignores any effects of
increases in standard of living or other factors. In most years, this type of limit is
more restrictive than a limit based on change in aggregate personal income.
3. The Arveschoug-Bird limit, a second TEL in Colorado, also establishes limits on
General Fund appropriations. Their growth is limited to a maximum of 6 percent. In
many years during the 1990s, this limit was more restrictive than the TABOR limit.
4. TABOR requires the refunding of any surplus in the next fiscal year. Any other use of
the surplus must be approved by the voters. In most other states, these funds can
be put into a rainy day fund or used for other purposes.
5. The TABOR limit is based upon the lesser of the prior year’s limit or actual revenues
in the prior year. Whenever Colorado’s revenues are less than the allowable limit, a
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so-called “ratchet-down effect” occurs, with the lower actual revenue figure
becoming the new base for calculating the next year’s limit, and the TABOR limit is
permanently reduced for subsequent years. This method is more restrictive than the
procedures used by other states. For example, if the calculation is based only on the
previous year’s allowable limit or as a maximum percent of personal income, no
similar ratchet-down effect would occur.
6. Any change in the tax system that would result in a net increase in revenues must
be approved by the voters. The TABOR limit applies to aggregate revenues, but this
provision prohibits changes that would increase revenues from one tax to offset
decreased revenues from another.
7. The TABOR definition of an “emergency” specifically excludes economic conditions
or fiscal crises.
FISCAL IMPACTS OF TABOR ON THE STATE OF COLORADO
Colorado’s early experience with TABOR was benign due to the rapid economic and
demographic growth the state experienced during most of the 1990s. By 1992, when
TABOR was adopted, Colorado had emerged from stagnant economic conditions of the
late 1980s and early 1990s and entered a period of strong growth that lasted through
2000. Personal income growth averaged 8.2 percent per year during the 1990-2000
decade – ranking it second only behind Nevada. Even with robust economic growth,
Colorado did not incur its first TABOR surplus until Fiscal Year 1997, the fourth year of
its existence. The state’s population growth rate was the third-fastest in the nation
during the 1990s, averaging 2.7 percent per year. This rapid population growth in
combination with moderate inflation (3.6 percent over the 1992-2000 period) produced
annual TABOR growth factors averaging about 6 percent for the FY1994 – FY2001
period.
Starting in FY1997, revenues exceeded the TABOR limit for five consecutive years,
resulting in a total of $3.2 billion in TABOR surpluses over the FY1997 – FY2002 period.
In addition, permanent cuts in both income tax and sales tax rates also were enacted in
1999 and 2000, which reduced the stream of TABOR revenues (and the surplus) about
$1 billion per year [Center for Budget and Policy Priorities 2004].
Unfortunately, the boom ended in 2001. The combination of the dot-com crash, the
national recession, and the impact of Sept. 11th hit the state hard. Personal income
growth fell from second-fastest in the nation in 2000 to 49th in 2002. State revenues
subject to the TABOR limit declined by 12.6 percent in FY 2002 and an additional 1.1
percent in FY2003 [Colorado Office of Strategic Planning and Budget 2004].
The Legislature responded to the fiscal crisis with three policies to offset the revenue
shortfalls: transferring monies from cash and reserve funds to the General Fund;
increasing existing fees and establishing new ones; and cutting spending. In the
absence of a rainy day fund, the Legislature used $1.1 billion in one-time transfers from
cash and reserve funds to prop up the General Fund. To deal with revenue shortfalls to
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cover immediate needs and arguably to mitigate the ratchet-down effect, government
officials in Colorado also have increasingly relied on fee increases. The Massachusetts
Taxpayer’s Foundation (MTF) reports that Colorado’s ranking of combined state and
local fees per capita soared from 10th highest overall in 1992 to sixth highest in 2002. (In
contrast, Arizona residents pay very low fees. The state ranked 45th on a per capita
basis in 1992 and 50th in the 2002 survey – some $760 per person – lower than
Colorado.)
Because of TABOR’s ratchet-down effect, whenever actual revenue is less than the
allowable TABOR limit, the base for determining the following year’s limit is reduced.
This occurred in both FY2002 and FY2003. Actual revenue in FY2002 was $366 million
lower than the FY2002 limit. Similarly, revenue in FY2003 was $584 million lower than
the limit. Because of the ratchet-down effect, the TABOR base for FY2004 was $950
million below the FY2002 base, and so even if revenues rebound, the base to which the
state applies the formula is permanently shifted down by nearly $1 billion. The Colorado
Office of Strategic Planning and Budget’s September 2004 forecast indicates that
TABOR surpluses will begin to appear again as early as the current fiscal year
[Colorado Office of Strategic Planning and Budget 2004] even though the state has a
structural deficit estimated by some in the range of $500 million [Poulson 2004].
Colorado’s fiscal problems were exacerbated by conflicting voter-approved initiatives.
First, the Gallagher amendment limits residential property taxes to only 45 percent of
the total property taxes collected. To maintain this restriction, assessment ratios on
residential property have been reduced to about 8 percent in comparison with non-residential
assessments of 29 percent – a disparity even larger than is observed in
Arizona. Some business advocates argue that the existence of TABOR has limited their
progress in addressing this disparity.
Perhaps a greater contributor to the current fiscal crisis in Colorado is the inherent
conflict between the state’s TABOR and Amendment 23 that requires spending on K-12
to increase on a per-pupil basis by the rate of inflation plus 1 percent. As a result,
agencies other than K-12 have borne the brunt of the reductions that have taken place
over the last several years. Table 1 reveals that funding for health care, K-12 education,
public safety, and even local affairs have continued to grow despite the fact that the
latter two have seen reductions in funding that comes from the state. Higher education,
regulatory and environmental agencies have seen the slowest growth over the period,
with support from the General Fund plummeting. The Colorado Fiscal Policy Institute
concludes from this information that “many departmental activities that could be funded
with fees, special revenues or federal funds instead of taxes, were ‘refinanced’ at least
in part, in order to reduce their General Fund dependence. “ [Fiscal Policy Institute,
November 2004]
8
% General Fund Growth % All-Funds Growth
Health Care Policy 24.0 31.0
Education 18.5 34.3
Judicial 6.3 12.3
Corrections 18.0 15.5
Public Safety -1.2 32.2
Military-Veterans Affairs -4.3 10.2
Higher Education -21.3 8.6
Revenue -21.9 9.2
Law -22.5 8.8
Natural Resources -23.2 10.4
Personnel & Administration -45.6 19.6
Regulatory Agencies -47.9 5.3
Public Health & Environment -59.7 9.4
Local Affairs -60.7 32.3
Treasury -85.5 -2.8
Governor -20.8 -4.0
Source: Colorado Fiscal Policy Institute, November 2004
Table 1
FUNDING BY AGENCY
Percent Change, FY 02 over FY 01
The fiscal challenges posed by TABOR in Colorado have impacts on the overall
economy. Joe Blake, President and CEO of the Denver Metro Chamber of Commerce,
believes that TABOR has been an impediment to needed tax reform in Colorado. The
fiscal constraints imposed by TABOR have made it impossible to reduce business
property taxes where, like Arizona, business property is assessed at rates far higher
than are residential property owners. Blake also laments the lack of strategic
investments in transportation and higher education that are the direct result of TABOR
restrictions. As the fiscal challenges loomed in Colorado, bond rating agencies
decreased their ratings on state projects, citing the uncertainty of the revenue streams
available. As a result, capital projects cost more than they would in the absence of
TABOR.
The Denver Business Journal reports [December 2004] that business groups have
aligned behind making significant changes in Colorado’s TABOR. On their agenda is tax
reform (the business property tax), water issues, and economic development. But
addressing the serious fiscal issues – including funding for higher education and
transportation – is tied to achieving fiscal stability. Denver Metro Chamber’s Blake
contends “it is no longer satisfactory to say you need to keep cutting to make the state
the kind of state that will grow… and attract jobs.”
Proponents of TABOR may argue that it sends a clear signal of fiscal responsibility and
austerity to businesses considering relocation to Colorado. But the measure drives tax
relief and control for overrides to individual taxpayers rather than a pro-business
initiative per se. The business sector wants relief from business taxes and regulations
and, at the same time, an education/transportation/ infrastructure that supports both
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vibrant consumer markets and skilled labor markets. And an important ingredient in this
mix is fiscal stability. It is not clear that states with tax structures that shift
disproportionate burdens from residents to corporations will foster business expansion
over the long run.
TABOR AND ECONOMIC GROWTH IN COLORADO
Colorado, along with a number of states and regions across the nation, experienced
rapid growth in economic activity. What role did TABOR play? Joe Blake of the Denver
Metro Chamber of Commerce contends that no one in the business community believes
that TABOR was responsible for the economic expansion Colorado experienced in the
1990s. The nonpartisan Colorado Legislative Council [2003] reports there is no
evidence that TABOR played any role in the expansion or contraction of business
activity in Colorado over the last decade. Indeed, Colorado enjoyed the economic
success brought by the boom in the telecom industry and related expansions in
information technology industries. Arguably, the economic boom created by this rapid
economic expansion masked any adverse effects from TABOR until the inevitable
downturn occurred in 2001.
Figure 1 depicts growth in Colorado state real per capita Gross State Product along with
similar growth rates for Arizona and the United States as a whole. Colorado led both
Arizona and nation in the late 1970s and early 1980s; then both Arizona and Colorado
lagged the nation in the late 1980s as both states experienced the real estate
adjustments associated with the savings and loan crisis, and Colorado lagged as
interest in alternative sources for energy (e.g. oil shale) waned. Throughout much of the
1990s both Colorado and Arizona again led the nation in real per capita state GSP
growth, then they lagged the nation in the most recent downturn. Growth in real per
capita GSP in Arizona in the 1990s was nearly as large as that in Colorado. But, no
doubt growth in Silicon Valley (not depicted) was even more rapid – despite a far more
onerous tax environment than in either Arizona or Colorado.
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Figure I
Growth in Real Per Capita Gross State Product
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
United States Arizona Colorado
Source: Bureau of Economic Analysis and author calculations.
THE FUTURE OF TABOR IN COLORADO
The fiscal impasse in Colorado has the business community on edge. TABOR
necessitates immediate action on the part of Colorado lawmakers, and business
community advocates are clearly concerned, as should any business contemplating
relocation to Colorado. Chuck Berry, president of the Colorado Associate of Commerce
and Industry, reports: “Our overall objective is increased job creation in Colorado. We
want the economy to fully recover. We really hope that they will not introduce and vote
for legislation that will increase the cost of doing business.” Colorado technology
companies are also worried about the consequences. The Denver Business Journal
[December 2004] reports that industry officials like Les Wyatt of PeopleSoft/Oracle are
pushing for adequate funding for education while considering tax policies that help
companies conduct research and development – all while keeping taxes to a minimum.
According to the Denver Business Journal [December 2004], Bob Moody, executive
director of the Colorado chapter of the National Association of Industrial and Office
Properties, says: “…. TABOR needs fixing. We are watching higher education get
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screwed, and for most of the business community, higher ed is a big economic
development issue.”
Colorado’s conservative Governor Bill Owens, one of two governors who received the
highest conservative rating from a recent Cato report, has said that several key changes
must take place in order for the state to “make the needed investments in
transportation, higher education and other essential services.” [Denver Business
Journal, December 2004]. Among Owens’ recommendations are to ask voters for
permission to retain some $500 million in expected TABOR surplus revenues and to
amend TABOR to eliminate the ratchet effect during and following recessions.
ARIZONA AS A TABOR CANDIDATE
Arizona seems an unlikely candidate for a TABOR limitation. First, the state already
has a TEL, which prevents appropriations of revenue collected from growing faster than
the overall pace of the economy. Article 9 section 17 of the Arizona Constitution reads,
The legislature shall not appropriate for any fiscal year state revenues in excess of
seven per cent of the total personal income of the state for that fiscal year as
determined by the economic estimates commission. The limitation may be exceeded
upon affirmative vote of two-thirds of the membership of each house of the legislature
on each measure that appropriates amounts in excess of the limitation.
History has shown that appropriations have rarely threatened this TEL limit.
Second, the Massachusetts Taxpayers Foundation report indicates that Arizona state
and local revenue collections fell from $164.60 per $1,000 of personal income in 1992
to $142.75 in 2002, and the ranking among the states plummeted from 18th highest to
39th. Arizona’s relative position in revenue collection among the states [see Table 2]
dropped from 34th to 47th on a per capita basis, according to the Massachusetts study,
using the most recent census data [Massachusetts Taxpayers Foundation 2004]. The
2002 figure is also below the 1972 level of $158.92. On a real per capita basis,
collections have grown just over 1 percent on average since 1972 and less than half of
that since 1992.
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Fiscal
Year
Per
Capita
(Current
Dollars) Rank
Per
$1,000 of
Personal
Income Rank
Tax & Fee
Collection Growth
1992-2002 (annual
average)
Personal Income
Growth 1992-2002
(annual average)
Real Per Capita
Tax & Fee
Growth 1992-
2002 (annual
average)
1992 $2,726 34 $163.26 18
6.3% 7.7% 0.4%
2002 $3,640 47 142.74 39
Table 2
TOTAL TAXES AND FEES: ARIZONA
(Combined State and Local Collections)
Source: Massachusetts Taxpayers Foundation and U. S. Census, U.S. CPI used as the price
deflator, Bureau of Economic Analysis, author calculations
The District of Columbia Tax Study [2004] reveals that the Phoenix metro area is
relatively kind to taxpayers represented by hypothetical families of four [see Table 3].
The Phoenix area ranks among the bottom 10 in tax burdens for the largest city in each
of the 50 states, and well below median and mean levels across the nation. This result
holds for families at low, moderate, and high income levels.
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ESTIMATED BURDEN OF MAJOR TAXES FOR A FAMILY OF 4
Total Taxes Rank
Phoenix $1,338 42
National Average $1,816
National Median $1,740
Total Taxes Rank
Phoenix $3,025 44
National Average $4,172
National Median $4,070
Total Taxes Rank
Phoenix $4,782 44
National Average $6,832
National Median $6,805
Total Taxes Rank
Phoenix $6,901 42
National Average $9,203
National Median $9,391
Total Taxes Rank
Phoenix $10,888 41
National Average $13,859
National Median $14,011
Source: Tax Rates and Tax Burdens in the District of Columbia,
A Nationwide Comparison, August 2004
$75,000
$100,000
$150,000
Table 3
BY INCOME, 2003
$25,000
$50,000
Arizona already has reaped benefits that might accrue from the label as a fiscally
conservative state. It is hard to find evidence of anyone who has a different assessment
of the state’s standing when it comes to fiscal conservatism. But questions do remain
about the state’s willingness to build an education/transportation/communications
infrastructure that can support quality growth that will maintain high living standards for
all Arizonans.
THE IMPACT OF A TABOR RULE ON ARIZONA REVENUE COLLECTIONS
TABOR is no doubt championed by proponents as a measure that compels government
to “spend within its means” – with rates of growth limited by the simple sum of
population growth and inflation. However, the following arithmetic demonstrates that
application of TABOR rules led to substantial reductions in the share of the aggregate
economy that comprises the public sector. For those with a taste for shrinking
government (as a component of a state or region’s economy) with time, TABOR is a
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savory recipe. These illustrations are directly applicable to the Arizona economy, but the
basic arithmetic conclusions will apply in most states or regions.
There are a number of ways to design a TABOR rule. For purposes of both illustration
and comparison with other states, we examine the implications for restricting growth in
collections on the combined state and local level to the sum of population growth and
inflation. Alternatives clearly exist. Focusing only on state revenues (about 50 percent)
of the combined state and local collections would change the scale of discussion, but
the findings of the analysis would not be materially different. That is, if applied
exclusively to state revenues, the simulations would portray a shrinkage of state
collections as a share of overall economic activity at essentially the same rates as
observed in the simulations in this section.
The basic arithmetic of TABOR and its consequences for Arizona tax collections can be
seen by examining the amount of tax and fee collections that take place at the state and
local level across the states.1 In 1992, Arizona’s total state and local collections were
12.2 percent below the national average and ranked 34th among the 50 states on a real
per capita basis, according to census estimates, and 18th as a share of personal income
[see Table 2]. By the year 2002, the state’s collections were 20.8 percent below the
national average and ranked 47th on a per capita basis and had slipped to 39th as a
share of personal income – about 6.2 percent lower than the state average. Indeed,
using the CPI to control for inflation, real per capita tax and fee collections grew only 0.4
percent per annum from 1992 through 2002 while growth across the 50 states averaged
1.5 percent on a real per capita basis.
Aggregate nominal personal income growth averaged 7.7 percent from FY 92 through
FY 2002, while total nominal revenue from own sources grew 6.3 percent on an annual
average basis. The basic picture of Arizona suggests that over much of the 1990s, tax
and fee collections actually were growing 1.4 percent per annum slower than the overall
economy (6.3 percent vs. 7.7 percent) and that the tax burden, measured against total
population or total personal income, declined in comparison with other states.
These numbers suggest that imposing a TABOR-type restriction on all taxes and fees
collected in Arizona (ignoring ratchet-down effects) would not have had much impact in
the last 10 years because the state’s collections did not grow substantially above the
TABOR limit. Indeed, with real per capita growth in collections at 0.4 percent per
annum, collections in the state only exceeded the TABOR restriction (a rate of zero on a
real per capita basis) by 0.4 percent! These conclusions are consistent with the findings
of Edwards, Moore, and Kerpen [2003] who, in writing for the Cato Institute, noted that
1 The analysis is based on comparison tables published by the Massachusetts Taxpayers Foundation
[2004] that utilize U.S. Census data on total tax and fee collections. The numbers used by the MTF can
be obtained by dividing census own source revenues by state for each fiscal year by the “prior” calendar
year personal income number published by BEA. We verified the per capita numbers by checking the
Arizona numbers with population data from DES. All adjustments for prices in the analysis are conducted
using the national CPI.
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Arizona was one of the few states in the nation that did not reap a “windfall” in revenue
collections in the 1990s.
If TABOR had been imposed across the board on all state and local taxes and fees in
Arizona in 1992, assuming no ratchet-down effects, revenue available to state and local
governments would have been 23 percent below the national average in 2002 (rather
than the actual 20 percent) [see Table 4]. With TABOR, Arizona would slip to 33 percent
below the average in 2012, assuming current growth trends prevail for the decade for
the other 49 states. Even without TABOR, if current trends were to continue, per capita
state and local collections in Arizona would be 28 percent below the national average by
2012. If TABOR had been imposed in 1992, Arizona would have ranked 49th in taxes
and fees per capita and 44th as a share of personal income in 2002. By 2012, the state
would rank last among the states in combined state and local tax and fee collections. If
TABOR were imposed in 2002, Arizona collections would be some 31 percent below the
national average by 2012.
Year Imposed As of 2002
As of 2012
(with TABOR)
As of 2012
(w/o TABOR)
1992 -22.9% -33.4%
-27.7%
2002 -19.7% -30.6%
* Table entries represent percent departure of Arizona combined
state and local tax and fee collections on a real per capita basis
when compared with the average among the 50 states. Scenarios
to 2012 assume rates of growth for the 50 states from 1992-2002
occur for the next 10 years.
Table 4
Hypothetical Simulations from 1972
Finally, the Arizona TABOR simulation demonstrates that the ratchet-down effect is
likely to make TABOR even more restrictive. As discussed in the definition of the
Colorado TABOR, ratchet-down effects occur because TABOR limits for a given year
are established by growing from the prior year TABOR limit or actual revenue,
whichever is less. Based upon census data, actual revenue in Arizona grew less than a
TABOR limit in five of the last 10 years. Adjusting the TABOR limit to the realities of
Arizona revenues would have left it some 11 percent below the level actually collected
in the year 2002.
LONG-TERM IMPLICATIONS OF A TABOR RULE
The negative consequences that a TABOR rule would have on the public sector really
become clear when examined over longer time horizon. Simple illustrations using data
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observed in Arizona, for perspective, reveal that a TABOR would result in substantially
shrinking the relative size of the public sector in comparison with the overall economy.
Table 5 presents the basic landscape for Arizona.2 Total own source revenues in
Arizona generally have grown just slightly slower than overall personal income growth
and slightly above the simple sum of population and inflation growth over the past 30
years.
Own Source
Revenue
Growth*
Personal
Income
Growth**
Population
Growth**
CPI
Inflation**
TABOR Rule
(No Ratchet)
72-02 9.65% 10.04% 3.48% 5.04% 8.52%
82-02 7.99% 7.80% 3.22% 3.39% 6.61%
92-02 6.29% 7.80% 3.41% 2.66% 6.07%
* Fiscal year: Combined State and Local Collections
** 71-01, 81-01, 91-01
Source: Census data, BEA, DES and author calculations
Table 5
BASIC FACTS
(Average Annual Growth)
In contrast, suppose total state and local collections had grown at exactly the same rate
as personal income since 1972. In this case, collections in 2002 would have been
$158.92 per $1000 of personal income, about 4.4 percent higher than the national
average, and would have ranked 18th overall – the same ranking Arizona maintained in
1992.
Now suppose that a TABOR rule had been imposed on all state and local revenues in
1972. Assume that NO ratchet effects apply (which would result in substantially lower
collections). With TABOR, net collections would have grown about 1.1 percent slower
per annum over the 30 years and would have totaled about $104.73 per $1000 in
personal income, some 31.2 percent below the national average and 12.9 percent
below number 50, New Hampshire, in the 2002 rankings [see Table 6].
2 Growth rates for total own-source revenues refer to fiscal years and growth rates for personal income,
population, and prices refer to calendar years. Setting personal income, population and price indices as
averages over two calendar years or at the second calendar year of the two years spanned by the fiscal
year would slightly change the arithmetic but have NO substantive impact on the basic conclusions
reached in this analysis.
17
Total State & Local
Collections per $1,000 in
Personal Income Rank
% Departure from
Average State
Today $142.74 39th -6.2%
Hypothetical:
72-2002 @ PI
Growth $158.92 18th +4.4%
Hypothetical:
72-2002
Simple
TABOR Rule $104.73* 50th -31.2%
* 12.8% below New Hampshire, #50 in 2002
Source: Data sources for Table 2 and author calculations
Table 6
TABOR HYPOTHETICALS
The effects of a TABOR rule show up over longer time periods simply because of the
arithmetic of compounding minor differences in growth rates. This can be demonstrated
dramatically by assuming that the rates of growth in personal income, population and
prices for the 1992-2002 period will prevail over the next 10, 50 and 100 years
respectively. In 2002, total Arizona state and local collections per $1,000 in personal
income were $142.74. Under a simple TABOR rule (with no ratchet-down effects),
collections would total $121.29 per $1000 in 10 years, $63.21 in 50 years and only $28
per $1,000 of personal income in 100 years. These figures suggest that under a simple
TABOR rule, the state and local government sector would shrink from about 14 percent
of the aggregate economy today to under 3 percent in 100 years [Table 7]!
Comparisons with other states are obtained by allowing their revenue bases to grow at
the rates they have grown over the most recent decade – just allowing them to continue
on the same trend. Arizona collections plummet from today’s number of 6.2 percent
below the state average, to over 80 percent below the state average!
18
Total State & Local
Collections per $1,000 in
Personal Income
% Departure from
Average State*
2002 $142.74 -6.2%
2012 $121.29 -20.3%
2052 $63.21 -58.5%
2102 $28.00 -81.6%
Table 7
PROSPECTIVE SIMULATIONS
Simple TABOR Rules
(10yr, 50yr, and 100yr scenarios)
*Actuals in 2002, simulated in future years by allowing AZ revenues to grow at TABOR restricted rates
and other States to grow at the average annual rates observed over the last 10 years. Source:
Massachusetts Taxpayer’s Foundation, Census, and author calculations.
Adding ratchet-down effects (assuming recessions at approximately one per decade)
would hasten the descent sharply. Based upon similar growth assumptions but including
cyclical fluctuations in the revenue stream, the size of the state and local sector in
Arizona would drop from 14 percent to 7 percent of the total economy in 20 years and to
less than 3 percent after 50 years.
All simulations to this point have been based on applying TABOR to the combined state
and local revenue of the state. This is reasonable in light of the stated intent of the
legislation in Colorado. Moreover, it facilitates comparisons with revenues collected in
other States. However, Table 8 examines the impact of a TABOR restriction on total
state collections and General Fund collections. Estimates suggest that the impact on
major revenue categories is quite dramatic. Within 20 years (assuming some ratchet
effects), total state collections including the General Fund plus all highway taxes and
charges, university tuition, and all state user fees, shrink in scale to a percent of
personal income that is just slightly greater than the share the General Fund is today.
To understand the impact, presume that the General Fund is used today to incur all the
expenditures now covered by highway taxes, tuition, and general fees – without using
any money from these sources! Basic arithmetic suggests that significant cuts must
occur somewhere. In 50 years (again assuming ratchet effects), all revenues available
to all levels of state and local government will be (as a share of aggregate income) less
than the General Fund is today. The impact can be gauged by thinking about how
difficult it might be to finance all of state and local government (all education, all police,
fire, etc.) today with $6.4 million (about 35 cents on each dollar that is currently
available to state and local government). Some might argue that TABOR is an attempt
at efficient government or forcing government to “live within its means.” These
simulations suggest that TABOR is simply a plan to relegate government to an
insignificant role in the economy.
19
Table 8
TABOR Impact Simulations
General
Fund Total State
Combined
State and
Local
FY-05
Dollars(est.)
Billions of
current Dollars 6.4 10.6 19.8
percent of personal income
Share of
Personal
Income
(est.) 4.70% 7.80% 14.60%
Simulated Shares (% of personal income)
TABOR 10
years
no ratchet down 3.91% 6.48% 12.10%
ratchet down 3.22% 5.34% 10.00%
TABOR: 50
years
no ratchet down 2.03% 3.37% 6.30%
ratchet down 0.97% 1.60% 3.00%
TABOR:
100 years
no ratchet down 0.90% 1.50% 2.80%
ratchet down 0.40% 0.67% 1.25%
Note: Simulations based on assumption that personal income grows at
average annual rate observed over the past decade and that the TABOR rule
grows at the average annual rate observed over the past
decade.
Ratchet down simulations are obtained by simulating business cycles at the
frequency observed in the past decade, approximately one episode per decade.
The long-run negative effects that a TABOR rule would have on the Arizona economy
was stated succinctly by Rep. Brad Young, chairman of Colorado’s Legislative Budget
Committee: “There is a hole in the bottom of the boat – that is the TABOR spending
limit. It works for a little while, but you go out in the future and you sink the boat.”
[Colorado Springs Gazette, March 2, 2004].
SUMMARY AND CONCLUSION
Some proponents argue that TABOR simply forces government to “live within its
means.” The fiscal crisis that Colorado is enduring, coupled with the numerical
illustrations presented above, show instead that the application of a TABOR rule
20
actually results in shrinkage of government as a share of the economy over time,
resulting in reductions that go well beyond a simple conservative fiscal agenda.
But there also are serious limitations placed on responsible public policy by Colorado’s
TABOR rule:
• A TABOR rule inhibits the tax system from acting as an automatic stabilizer. An
efficient stabilizer would take money out of the economy during expansions and
buffer downturns by injecting funds when economic conditions erode. TABOR
preempts this stabilization feature by restricting the transfers into a rainy day fund
when revenues grow above TABOR limits.
• Expansion periods provide opportunities for states and regions to address long-run
infrastructure (transportation/communication/education/water/environment)
needs. TABOR simply returns surpluses to taxpayers, limiting or preventing
spending on these initiatives.
• Business advocates argue that TABOR inhibits tax reform for tax codes that
become unbalanced or outdated. Often, there is simply no opportunity to deliver
tax relief in needed areas.
• The mechanism for rebating surpluses to taxpayers in Colorado need not be
optimal or free from political haggling. There is no evidence that the particular
redistribution formula adopted by Colorado has nurtured the business climate in
the state.
• In Colorado, TABOR has forced the state to conform to federal laws, resulting in
unintended tax cuts.
Clearly, TABOR is consistent with a political agenda aimed at shrinking state and/or
local government as a share of the overall economy. But setting politics aside, it is
difficult to understand why a TABOR rule is superior to an effort to plan for business
cycle fluctuation by setting and maintaining tax rates at low rates across a broad base of
taxpayers, both individuals and businesses alike.
The rates are optimal when the trend growth in revenue is just sufficient to support
infrastructure investment and social needs over time. In expansionary periods,
policymakers should “save” any surplus in a budget stabilization fund or take
opportunities to make strategic investment that accrue benefits over a long time horizon.
The stabilization fund should be built in sufficient quantity to support spending needs
when inevitable business cycle downturns occur. Prudent policymakers would leave
some room for discretion in this fiscal planning model rather than setting the maximum
growth at some arbitrary level – like a TABOR limit.
21
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