Colorado's "Taxpayer's Bill of Rights": A Lesson on How to Limit Government?

Beginning in the late 1970's, anti-tax activists began to use new tools to limit the ability of state and local governments to raise taxes. Ironically, these anti-tax movements would employ a tool introduced into American politics by the Progressives of the early 20th century. The ballot initiative process, pushed by the Progressives as part of a populist agenda to make government more "responsive," met the most success in the West where ballot initiative provisions were integrated into several state constitutions. The Progressives had intended that the initiative process make government more robust, yet the process has been used successfully to pass some of the most stringent tax control measures in the nation's history.

Among the most famous of these is California's Proposition 13, a property tax limitation measure known for having set off a "tax revolt" in the late 1970's. The strongest and broadest tax limitation measure in the country, however, is the "Taxpayers' Bill of Rights" (TABOR) added by initiative to the Colorado constitution in 1992. "Amendment 1," as it was called, was put to the voters through the standard initiative process of collecting a required number of signatures from voters requesting that a specific amendment be added to the ballot. TABOR was approved by the voters, and ever since has acted as a significant barrier to government growth and spending in the state. The amendment, lauded by tax-control proponents and detested by many whose fortunes are linked to ready access to tax funds, remains a model for tax-limitation proponents in other states.

The measure remains highly controversial and is considered "extreme" by many in Colorado, but from a libertarian point of view, the measure is actually quite moderate. TABOR enables government to grow every year, yet the fact that the growth rate is limited by the Constitution has produced heated rhetoric about "starving the government to death" and forcing "massive cuts" in "essential" government programs. Such rhetoric rather overstates the situation. When compared to other states, and certainly compared to the federal government, government growth in Colorado is in fact quite restrained and has clearly slowed since TABOR was approved in 1992.

If one's goal is to shrink government to a tiny portion of its current size, TABOR is by no means a cure-all. The voters can — and do — approve new tax and revenue increases fairly often, and the governments of the state have hardly withered away to nothing. The state, unlike the federal government, has no central bank to print the money up if taxpayers do not approve taxes. If TABOR's purpose is to slow the rate of government growth and to allow the private sector to grow at a faster rate than the government sector, it has certainly done its job.

The TABOR experience in Colorado can be instructive in how governments and interest groups respond to limitations on the government's ability to raise revenue. It illustrates well the business community's considerable fondness for government-funded amenities, and it exposes a fundamentally hostile relationship between many voters and the government. While the ballot initiative process has numerous shortcomings as a tool to limit government power, TABOR has nevertheless shown that when used as an additional barrier to the passage of tax increases, it can be an effective tool.

The Origins of TABOR

When it passed in 1992, "Amendment 1" was the latest iteration of tax limitation measures authored by anti-tax activist Douglas Bruce. Bruce's first attempt at limiting state or local taxing authority appeared in 1986 as a voter authorization requirement for new or increased taxes. That attempt failed, so Bruce endeavored to get similar measures passed in 1988 and 1990, each of which failed but with the margin of defeat shrinking with each successive attempt. Two years later, Bruce introduced Amendment 1, a much stronger tax limitation measure compared to his 1986 and 1988 proposals, and the amendment passed to the considerable dismay of the local political establishment. Indeed it was quite frightening for those who depended on the largesse of the state, for Amendment 1 was the most stringent law of its kind in the nation, far more limiting on government than any of the tax proposals passed by other tax limitation pioneers like Howard Jarvis or Paul Gann.

The amendment's organized supporters were not numerous. The campaign to pass the measure enjoyed the support of The National Taxpayers Union and the Colorado Union of Taxpayers, but few other high profile organizations signed on. The opposition, on the other hand could boast of a veritable "who's who" list of influential policymakers and statewide interest groups. Numerous former and current legislators joined the "No on 1" campaign as did a multitude of local government officials. The arts and culture lobby joined with chambers of commerce, economic development corporations, numerous labor unions, public school pressure groups, and all major media outlets to defeat the measure.

The opponents claimed that the amendment would destroy the "deliberative" law-making process that allegedly takes place in legislatures, and that it would not allow the state government to engage in long-term planning. Common Sense Colorado declared that "efficient planning and management of resources would be impossible." The Greater Denver Chamber of Commerce called the measure "incredibly harmful and irrational." The Colorado Association of Commerce and Industry stated that "the provision irreparably undermines the principle of representative government…In a democracy, we do not cripple public officials who do not do the public's will. We replace them." In the end, many just dismissed the proponents of the measure as cranks, as did John Lay, chairman of the No on 1 campaign who concluded that the proponents didn't understand their own position and that "they just want to be disruptive."

The campaign against TABOR also illustrated quite well that big business does not prefer a laissez-faire political environment. Chambers of commerce and other business associations, fearful that TABOR would mean cuts in public education, government-paid tourism advertising, infrastructure, and corporate subsidies, opposed the measure.

Dire predictions of economic collapse accompanied most arguments against TABOR. Opponents concluded that no one would want to invest in or move to a state where government agencies were not awash in tax funds. Opponents predicted that violent criminals would have to be let out of prison, and that emergency services would have to be cut back so severely that 911 emergency calls would no longer be answered. Highways would fall into disrepair, illiteracy and ignorance would sweep the countryside, and Colorado would become, in the words of a popular local saying, "worse than Mississippi."

However, the best efforts of big business, unions, the entire public school establishment, and state and local government officials were not enough to defeat the measure. TABOR was approved and became Article X, Section 20 of the Colorado State Constitution.

So what exactly does TABOR do? TABOR restricts the growth of government through tax limitation, prohibitions of certain types of taxation, and institutes a unique system of revenue and spending caps. TABOR is a tax control measure. It requires that any new taxes, any increase of tax rates, and any new debt incurred by governments must be approved by the voters in an election. TABOR prohibits the use of certain kinds of taxes, stating that "new or increased transfer tax rates on real property are prohibited. No new state real property tax or local district income tax shall be imposed." It also prohibits progressive taxation on income.

TABOR limits the rate of increase in revenue collection and spending of the state government and of the local governments in Colorado. It does this by means of a revenue cap that allows the government to grow at a maximum rate of "inflation plus population growth." In reality, however, the state can only spend at this inflationary growth rate. The growth rate allowed for tax revenue is in fact capped at 6% due to a statute[ii] passed years earlier but made unchangeable by TABOR. So, state tax revenue can only grow by 6% each year although the state can spend more than 6% if it has cash funds or other miscellaneous sources of income to spend.

Needless to say, these measures are seen as thoroughly draconian by the governments of Colorado. But, these measures can be overcome in two ways. The state as a whole, or a local government, can "de-Bruce," (a term referring to TABOR's author) meaning that the state or a local government has successfully requested that the voters of the district in question allow the government to impose a new tax, raise the rate of an existing tax, incur new debt, or simply keep more of the revenue it collects. De-Brucing is the means of raising extra revenue outlined in TABOR itself, and does not entail a change to the constitution. However, if a local government wished to impose a tax not allowed by TABOR at all — a local income tax, for example - TABOR would have to be modified through a constitutional amendment.

Since its adoption in 1992, TABOR has been regarded as the most stringent tax-control measure in any state constitution. Several states have laws requiring supermajorities within the legislature to approve new taxes, and some even have constitutional provisions requiring voter approval of new taxes or tax increases. Yet, no others have multifaceted limitations in their constitutions like TABOR that simultaneously constrain revenue collection, require voter approval of new taxes and debt, and prohibit several types of taxes altogether.

Years after the voters approved it, Douglas Bruce would declare that the adoption of TABOR was "the most important political event since statehood." Bruce's assessment of TABOR's significance is debatable, but there is no question that the measure has significantly changed the fortunes of state and local governments in Colorado.

Economic Performance

The predictions of economic collapse proffered by some of TABOR's opponents have failed to materialize. In fact, the Colorado Gross State Product (GSP) grew at a rate of 8.71% in the 8 years following TABOR compared to 4.24% in the 8 years before. At the same time, non-government sector job growth increased at double the rate of the ten years preceding the adoption of TABOR.

TABOR's opponents, while admitting significant economic growth in the decade following TABOR, point to the fact that correlation does not prove causation, and thus deny that TABOR is necessarily the cause of the economic expansion of the 90's. Given the economic success of neighboring states during the 1990's, this may appear to be a valid point to many. Of course, this line of thinking ignores mountains of sound economic theory and historical experience that shows that low taxes do indeed promote economic growth, but if we look to what is politically significant in this case we find that TABOR did not in any perceptible way stifle the economy, and Colorado in fact outperformed most other states in economic growth during the 1990's.

This has not stopped critics from predicting economic collapse in the future. Citing declines in tourism and government spending on a variety of programs deemed "essential," critics of TABOR continue to make the "worse than Mississippi" argument on a variety of topics ranging from education to tourism, to economic development. This argument has produced some political fruit since the recession of 2001-2002, and as we shall see below, the voters in 2005 approved Referendum C, a statewide de-Brucing measure which increased state spending and revenue collection substantially, although falling short of actually modifying TABOR.

Performance as a Tax Limitation Device

TABOR has been very successful in doing what it was intended to do. As a constitutional device to slow the growth of government in relation to the private sector, TABOR is unrivaled in its effects on the growth of government. The chart below illustrates some "Pre-TABOR" (1983-1992) and "Post-TABOR" (1993-2002) growth rates.

Source: "A Decade of TABOR" by Fred Holden. Published by the Independence Institute.[iii]

Note that per capita personal income grew much faster than per capita state spending. Under most tax regimes, if the economy expands a rapid rate, tax revenues will expand at a rapid rate as well, as incomes increase and economic activity (all of which is taxed) increases. Under TABOR however, unlimited growth in revenues is not permitted, and revenues are capped at the usual constitutional rate of increase. Consequently, even though TABOR allows government revenues to grow every year by 6%, private sector growth tends to outpace government growth by a substantial margin.

Naturally, such thorough limitations on government growth have led to numerous attempts to increase revenues, taxes, debt, and tax rates through de-Brucing efforts at both the local and state levels. Local governments have successfully de-Bruced hundreds of times. Indeed, by 1998, over 400 such revenue, tax, or debt increases had been approved by voters in local elections. This does not imply undue ease in having such measures approved, however. Local governments report that they will only put forward de-Brucing measures that they believe have a good chance of winning voter sympathy and will ultimately pass. Experience has shown that governments need to illustrate exactly how much the new provisions will cost taxpayers, and exactly what the money will be spent on.

At the state level, de-Brucing measures have been far less successful. Until the approval of Referndum C in 2005, no such effort had won voter approval. In 1998, for example, the voters turned down a ballot proposal that would have allowed the state to retain additional revenue for education and transportation. The 1998 measure was notable in that it actually made it to the ballot. Most ballot measures to increase taxes poll so poorly, or are deemed so expensive to promote, that they are never submitted to the public at all.

In 2005, the voters approved Referendum C, a ballot measure allowing the state to spend billions of dollars in revenue over five years that TABOR would not normally allow the state to keep. After five years, TABOR re-imposes its regular revenue and spending limitations. Considering the fact that state discretionary spending is six to seven billion dollars, this is a substantial infusion of tax money into the state coffers. Referendum C was a serious setback for the proponents of tax and revenue limitation, but TABOR itself remains unchanged. Indeed, while voters approved Referendum C, they simultaneously defeated Referendum D which would have allowed the state government to incur billions in new debt, costing hundreds of millions of dollars in interest payments.

The campaign rhetoric surrounding Referendum C had in many ways reflected the rhetoric of 1992 when TABOR itself was on the ballot. The referendum was supported by virtually the same coalition of interest groups as had opposed TABOR in 1992. As in 1992, the referendum proponents predicted severe economic troubles for the state if the state were not allowed to keep billions in new revenue, with startlingly similar predictions of crumbling infrastructure, a collapsing public education system and economic stagnation. In the end, the best thing the measure had going for it was the fact that it did not actually increase any tax rates or create any new taxes. It only allowed the state to bypass the 6% revenue limit and the inflationary spending limits for five years.

Opponents of tax limitation nationwide immediately hailed the passage of Referendum C as the "Death of Tabor" and that the voters had enthusiastically overturned the measure. This would be an overstatement to say the least. Given the vast sums of money expended to gain a bare majority for the measure and the defeat of Referendum D, enthusiasm appears lacking. It is worth noting that while TABOR itself had been an initiative originating outside of government, Referedum C, as its name implies, was written, promoted, and sent to the ballot by the government itself as a desperate bid to gain access to more tax funds.

The pronouncements of TABOR's death notwithstanding, the referendum did nothing to undo any provisions in TABOR at all. The temporary suspension of the spending and revenue caps is allowed under TABOR's own provisions (with voter approval, of course). The spending cap was not adjusted to reflect personal income growth - something TABOR opponents had urged be added to the referendum — and it will again cap spending with the standard TABOR restrictions beginning in 2010. In the meantime, all the tax prohibitions and voter approval requirements remain in full force.

Conclusion

Tax limitation measures are serious business, and since there is so much at stake for governments and those who benefit from controlling their funds, it is to be expected that the critics of tax limitation will constantly be seeking new ways to overturn or outmaneuver such constitutional restrictions.

As Ludwig von Mises noted in Liberalism, governments can never be expected to respect private property on their own:

Thus, there has never been a political power that voluntarily desisted from impeding the free development and operation of the institution of private ownership of the means of production. Governments tolerate private property when they are compelled to do so, but they do not acknowledge it voluntarily in recognition of its necessity. Even [classical] liberal politicians, on gaining power, have usually relegated their liberal principles more or less to the background. The tendency to impose oppressive restraints on private property, to abuse political power, and to refuse to respect or recognize any free sphere outside or beyond the dominion of the state is too deeply ingrained in the mentality of those who control the governmental apparatus of compulsion and coercion for them ever to be able to resist it voluntarily.

Taxation is the fundamental concern of governments. Without the ability to tax and secure resources for itself, governments can do little. Without easy and ample access to taxpayer funds, governments cannot fund their programs, or pay their employees, or enforce their regulations. Governments can create any new programs or pass any new laws they like, but without funds to regulate and coerce, governments are little more than debate societies. For this reason, tax limitation measures strike at the very core of the contest between government and the private sector. It also means that the higher the stakes become, the greater and more steadfast the opposition will become.

It must be stopped: $18.95

For this reason, it is difficult to imagine a tax-limitation amendment being successfully forced on the federal government. At the local level, where programs like Medicare and public schools are the central issues, tax limitation is one thing. At the federal level, where the government commands vastly greater resources and can always claim prerogatives of "national security," tax limitation is something else entirely. What large organized interest group would support such an effort? Certainly not defense contractors or old people or farmers or environmentalists. We know that Leftists will oppose tax limitation under pretty much all circumstances, and the Right can hardly be relied on to provide support. The Right could be expected to retreat from a tax limitation measure the first time someone points out that the adoption of such an amendment might mean one penny less going to military spending. And, even if such a measure were to pass, the federal government could always find more revenue by simply inflating the money supply.

While it is hardly a destroyer of governments as its detractors claim, the TABOR amendment to the Colorado constitution has indeed slowed the growth of government, provided a veto on taxes to the voters, and, perhaps most importantly, made abundantly clear that limiting the government's access to a nonstop stream of tax funds does not spell economic Armageddon. It has lowered the real tax burden for many, and prevented the passage of numerous new taxes. All of these are good developments in themselves.

Yet, the primary danger to liberty and economic prosperity is not the state and local governments, but the gargantuan, bloated, and insulated federal government. When it comes to limiting taxes for Americans, TABOR is a nice place to start, but it is hardly an appropriate place to end.

Ryan W. McMaken teaches political science at Arapahoe Community College. His co-author is Derek M. Johnson, who teaches political science at Red Rocks Community College. For an earlier (and much longer version) of this essay, see here. Comment on the blog. Email McMaken.

Notes

[i] Winters, Richard F. "The Politics of Taxing and Spending." Politics in the American States. 7th ed. Eds. Virginia Gray, Russell L. Hanson and Herbert Jacob. Washington D.C.: CQ Press. 1999. 304-348.

[ii] This is known as the Bird-Arvescough statute.

[iii] See this document for the full text of TABOR