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February 2012 Policy Study, Number 12-2

   

TABOR: A Pro-Growth Solution for Iowa

by John Hendrickson

   

 

Mechanics of TABOR

   

 

The Colorado TABOR provision is probably the most famous and most forceful of all tax and spending limitation rules to be applied and it should be considered seriously by policymakers in Iowa. In 1992, voters in Colorado enacted TABOR through a citizen initiative.[20] Both the initiative and referendum have been used for conservative and liberal economic and social policy goals, but Iowa currently does not have these citizen tools.

 

Originally the initiative and referendum were tools advocated by the progressive movement during the early 20th century, and now they are considered democratic tools by both conservatives and liberals in achieving policy objectives. “‘Direct democracy’ in the form of the initiative/referendum may thus be said to function as a kind of ‘firewall’ protecting the interests of voters against the potential opportunism of the politicians they elect to public office,” argued economist Gary Anderson.[21]

 

In regard to tax and spending limits, it is assumed that having citizens vote on tax or spending increases will hold Legislatures more accountable. Nevertheless, as Anderson noted, “supermajority requirements do not limit the power to tax explicitly, but provide an implicit constraint in the form of increased difficulty of actually enacting tax increases.”[22] Since Iowa does not have the initiative or referendum, the Legislature would have to work through a statutory TABOR provision or try to get a constitutional amendment passed.

 

“Conversely, TELs enacted through citizen initiatives are likely to be drafted by interest groups that actually possess an interest in limiting state spending, giving them considerably greater potential for effectiveness,” argued New.[23] This is exactly the case dealing with the passage of TABOR in Colorado in 1992. Citizens wanted to hold the Legislature more accountable in dealing with tax and spending policies. “Colorado voters passed TABOR in 1992 to end the undisciplined spending and tax increases of the 1980s, which increased the effective state income tax by 15 percent and the gasoline tax by 214 percent.”[24] TABOR represented a taxpayer revolt against high taxes and spending, which diminish a state’s economy.

 

The reason and purpose for TABOR was to bring more accountability to fiscal policy in Colorado by bringing spending and taxes under control as well as promoting economic growth. The TABOR amendment also provided more citizen control over fiscal policy. Other policy and reform objectives of TABOR included:

 

•slowing — not stopping or cutting — growth of state and local governments’ taxes and spending;
•controlling and providing information about local debt;
•putting the people more in control of their taxes;
•encouraging better utilization of public monies;
•creating incentives for fiscal prudence and government productivity;
•as a result of the above, stimulating growth of businesses and jobs, and reducing unemployment.[25]

 

Colorado’s TABOR provision “restricts the growth in state revenue and spending to inflation plus the percentage change in state population.”[26] In addition, “surplus revenue above that limit must be rebated to taxpayers.”[27] Barry Poulson further describes the functions of TABOR:

 

The TABOR limit ratchets-down the amount of revenue the state can keep and spend as revenue falls. The TABOR limit is determined by applying the sum of inflation and population growth to actual TABOR revenues or the TABOR limit, whichever is lower. When revenue falls in a recession, that lower revenue then sets a new base against which the sum of inflation and population growth is applied.[28]

 

“One of the fundamental reasons to enact revenue and spending limits is to protect taxpayers from constantly rising demands on their pocketbooks,” noted Alison Acosta Fraser, Director of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.[29] States are faced with funding education, health care, social welfare, transportation, and a variety of other related programs which are all competing for the taxpayer’s money. This is why priority-based budgeting is crucial in reforming the budget, because it forces the Legislature to consider what are the top priorities and responsibilities for government.

 

The current fiscal crisis that many states are facing is a direct result of uncontrolled spending and providing generous pension programs that outperform the private sector. More government spending on programs and services does not necessarily mean that those programs or services will be improved. Education, for example, has seen an incredible sum of money being spent by all levels of government to improve the quality of learning in our schools, but at the same time all of this money has not really improved education across the board.

 

Colorado actually voted down Proposition 103, which would have led to higher taxes for more spending on education. As Andrew J. Coulson, Director of the Center for Educational Freedom at the Cato Institute wrote:

 

Coloradans have said no to higher educational taxes, voting down Proposition 103 by a two-to-one margin. There was good reason for that decision. Total per-pupil spending in Colorado has more than doubled since 1970, even after accounting for inflation. The same is true at the national level. Over that same period, student achievement at the end of high school has stagnated in math and reading and declined in science. So raising taxes has a long record of educational failure.[30]

 

A number of school choice programs across the nation are demonstrating that more competition and choice in education will result in higher standards and better schools. Lower spending and tax rates will not just improve the economic standing of a state, but also lead to better policies.

 

TABOR not only places a check on spending increases, but also tax increases as well. “The TABOR Amendment also placed a procedural constraint on the power of government to raise taxes,” noted Poulson.[31] This also required voters to approve a tax increase:

 

Voter approval is required for any new taxes, tax-rate increases, extensions of an expiring tax, or tax-policy change directly causing a net revenue gain. Voters approval is also required for state and local government to retain and spend revenue in excess of the limit.[32]

 

The intent of TABOR was to provide taxpayers the power to decide any tax increase rather than leave the decision in the hands of the Legislature. “In the ten years after TABOR was passed in 1992, the state government refunded over $3 billion to taxpayers — about $3,200 for a family of four,” stated Alison Acosta Fraser.[33]

 

Colorado not only reined in taxes and spending, but also experienced a period of economic growth as the “post-TABOR decade thus regained some of the ground that taxpayers had lost during the pre-TABOR decade of soaring taxes and spending.”[34] Fred Holden, a Senior Fellow at the Independence Institute, argued that with TABOR “taxpayers and businesses made more money, giving their employees more spending, saving and investing power because significantly less was taken from them in taxes.”[35] This was in addition to more employment opportunities as a result of the pro-growth fiscal policies resulting from TABOR.[36] “TABOR frees up capital in the private sector to create more wealth-creating jobs that boost productivity and output,” noted Holden.[37]

 

Holden described the economic results of TABOR:

 

•private job sector creation more than doubled while government job growth held steady;
•an average Colorado family paid about $16,700 less in state taxes during TABOR’s first decade;
•per capita state taxes and spending growth had been growing far faster than inflation-plus-population. That extreme growth rate was halted;
•state government growth was very much in line with population-plus-inflation.[38]


   

 

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