October 19, 1998
The Taxpayers Bill of Rights (TABOR) Limit and Referendum B:
Assessing the Affordability of Public Services and Investment
by Nicholas Johnson
The 1992 Taxpayers' Bill of Rights (TABOR) amendment to the Colorado constitution sharply limits the amount of money the state government can collect from taxpayers and spend each year. The limit, which applies to most state spending as well as to spending by each Colorado local government, holds spending growth to a rate that cannot exceed the sum of population growth and inflation. Any revenue above the limit must be refunded to taxpayers.
There is, however, an important exception to the TABOR limit. If taxpayers approve, the state may spend funds that exceed the limit. For the first time since the amendment's enactment, voters this fall have an opportunity to permit additional spending. Referendum B on the November ballot would allow the state to invest up to $200 million per year above the limit for the next five years if revenues continue to come into the state treasury as strongly as they recently have. The additional $200 million per year would be earmarked for highway and transit construction ($100 million), elementary and secondary school renovation and construction ($60 million), and construction of facilities at state-supported institutions of higher education ($40 million).
Some opponents of Referendum B suggest that rather than spending $200 million above the TABOR limit, Colorado should allocate funds within the TABOR limit for road and school construction even if such allocation comes at the expense of other spending programs. If the state were to spend $200 million a year to compensate for past disinvestment in roads and schools using only the funds available under the TABOR limit, it is indeed likely that public services would have to be reduced below their current level. Even if the referendum passes, it may prove difficult for the state over the next several years to maintain services within the TABOR limit, because the TABOR limit is based on a mathematical formula that fails to reflect the fiscal realities confronting Colorado.
The formula set forth in the TABOR amendment limits each year's growth in spending to last year's spending multiplied by the sum of population growth and consumer price inflation. This formula fails to take into account a number of important factors that affect the cost of state government. These include increases in measures of workload such as school enrollment, highway usage, or other services that may exceed the growth rate of the overall population; growth in the wages and salaries paid to government employees or in the cost of contracted services after adjustment for inflation; health care inflation greater than the general rate of inflation; and other factors.
For example, in the areas of education and transportation, which represent over half of state spending, workloads have recently increased faster than population growth while cost increases have exceeded inflation. During the last decade, the state's population grew by about 18 percent. But elementary school enrollment increased by 21 percent. Enrollment in public colleges and universities increased by 24 percent, and the number of vehicle-miles traveled on the state's roads increased by 30 percent.
Areas outside of education and transportation face rising costs as well that are not reflected in the TABOR limit. For instance, after a period in which savings from managed care offset rising health care costs, health care inflation is again projected to increase at faster than the general rate of inflation. And while the state population is projected to increase at an annual rate of about 1.6 percent to 1.8 percent over the next several years, the number of students graduating each year from public high schools a good predictor of workload pressure on institutions of higher learning is expected to increase by about 3.4 percent annually. The number of residents over age 65, a major portion of the workload for public health programs such as Medicaid, is projected to increase 3.4 percent annually. And the number of inmates in Colorado prisons is projected to increase at an annual rate of 6.6 percent.
As a result, funds available under the TABOR limit are unlikely to keep pace with the rising cost of existing services, much less provide additional funds to invest in public school facilities or in transportation. If Colorado attempts to finance new road and school construction within the TABOR limit, it is likely that the state will have to make significant cuts in other government programs such as social services, health care, and prison operation.
By going above the TABOR limit to finance road and school construction, Colorado may compensate at least in part for past years' disinvestment in roads and schools. Over the past ten years, state officials report and national comparisons show that Colorado education and transportation services have measurably declined. Since the mid-1980s, for example, the percentage of state roads rated "poor" has doubled, the student-teacher ratio in public schools has risen, and public school teacher salaries have fallen below the national average. The additional funds from Referendum B would allow the state to fix more roads and would ease the burden of facilities construction and renovation on cities, counties, local school districts, and institutions of higher learning, allowing them to reduce or reverse those declines in services.
While the passage of Referendum B will allow the additional investments to be made, it will not substantially weaken the spending controls imposed by the TABOR limit. Current projections show that even with passage of Referendum B, state spending relative to the state's economy is likely to decline substantially over the next five years, and taxes will also decline.
- In 1992-93, state spending and revenue subject to the TABOR limit equaled almost 7.0 percent of personal income in the state.
- By fiscal year 2001-02, the last year for which Referendum B would authorize extra funding for roads and schools, current projections from the Colorado Legislative Council show that revenue and spending including the additional $200 million for roads and schools would equal 6.4 percent of personal income. After Referendum B expires the following fiscal year, spending would drop even more sharply.
This downward trend in spending, combined with the TABOR amendment's prohibition on enactment of new taxes or tax rate increases, suggest that Colorado's taxes already among the lowest in the country will not be increased under Referendum B. Colorado already collects less of its residents' incomes in state and local taxes than 44 other states and less than any of its seven neighboring states. Those rankings are likely to be relatively unchanged over the next several years whether or not Referendum B is enacted.
The TABOR Limit Does Not Adjust for Increasing Cost of Public Services or Need for Services
The 1992 TABOR amendment to the state constitution created a number of constraints on the state's ability to spend funds. Among other constraints, the amendment created a ceiling on state spending, known as the "TABOR limit." The amount of spending allowed under TABOR generally is not enough to fund a constant level of services year after year as the population that needs services and the cost of services grow. The TABOR limit is set in a way that is likely to lead to declines in service levels over time.
- The TABOR amendment uses a simple mathematical formula to dictate each year's allowable spending. Each year's spending may be no more than the previous year's spending increased at a rate equal to the annual percent change in population, as measured by the Census Bureau, plus annual percent change in the Consumer Price Index for the Denver-Boulder area, as measured by the U.S. Bureau of Labor Statistics. The TABOR amendment thus reflects population change and consumer price inflation, which are two of the factors that affect the cost of providing services.
- But factors other than population change and consumer price inflation are also important to determining the cost of public services. These factors include workloads that may grow faster than the overall population; salary and wage growth that exceed the rate of inflation; rising health care costs; the need to compensate for lack of public investment in previous years; and other factors. As a result, the TABOR limit generally does not permit funding of a continuing level of services year after year.
- The TABOR amendment recognizes the likelihood that changing needs and demands for public services in Colorado may require the mathematical limit to be adjusted periodically. It explicitly permits taxpayers, without restriction, to approve spending above the limit through a referendum. Until now, however, no such referendum has been placed on the ballot at the state level.
A simple example of the extent to which that workload growth may exceed population growth is provided by the relative workloads in the areas of K-12 education, higher education, and transportation, which together make up slightly over half of all state spending. Over the last decade, Colorado's population has risen 18 percent. But enrollment in public colleges and universities has risen 24 percent, public school enrollment has risen by 21 percent, and the number of vehicle-miles traveled on state highways has risen 30 percent. Since education and transportation account for more than half of state spending, these increases have substantial impacts on the state budget.
Workload levels in a number of areas will continue to increase faster than population growth over the next several years. For example, while the state population is projected to increase at an annual rate of about 1.6 percent to 1.8 percent over the next several years, the number of students graduating each year from public high schools is expected to increase by about 3.4 percent annually. This suggests the growth in the number of Colorado students seeking higher education will also increase more rapidly than the overall population increases. The number of residents over age 65 is projected to increase 3.4 percent annually, suggesting that the number of elderly requiring nursing home services and other health care under the Medicaid program will also increase more rapidly than the general population. And the number of inmates in Colorado prisons is projected to increase at an annual rate of 6.6 percent.(1)
Similarly, the cost of providing a given level of services is likely to increase faster than the inflation adjustment in the TABOR limit over the next several years. Average income in the state is projected to increase faster than inflation, which will increase the cost of paying competitive salaries to teachers and other employees and also increase the cost of hiring contractors. And health care inflation, which recently has been constrained by the expansion of managed care in both the public and private sector, may once again return to high levels.
Relative to the state's economy as a whole, the TABOR limit already has contributed to a reduction in state spending.
- In fiscal year 1992-93, spending subject to the TABOR limit equaled about $5.1 billion, or about 7.0 percent of state personal income.(2)
- In fiscal year 1996-97, spending equaled about 6.6 percent of personal income.
- In fiscal year 1997-98, spending equaled about 6.5 percent of personal income.
Both these historical data and current budget projections suggest that unless the TABOR limit is augmented, public spending will continue to decline sharply as a share of the economy over the next several years. The Colorado Legislative Council publication Focus Colorado forecasts annual personal income growth of 6.9 percent in calendar 1998, 6.3 percent in 1999, 6.0 percent in 2000, and 5.8 percent in 2001. At the same time, it predicts that the TABOR limit will permit spending growth of 5.3 percent, 5.0 percent, 4.9 percent and 4.7 percent in fiscal years 1998-99 through 2001-02 respectively.
Enactment of Referendum B would moderate, although it would not reverse, that downward path. Referendum B would allow the state to spend $200 million from funds that exceeded the TABOR limit in fiscal year 1997-98, and as much as $200 million from excess TABOR funds in each of the next four years as well. But that additional spending would not offset fully the decline in spending relative to the state's economy required under the TABOR formula. In fiscal year 2001-02, the last year for which Referendum B would authorize extra funding for roads and schools, projected spending assuming passage of Referendum B would equal about $8.5 billion or about 6.4 percent of personal income. If Referendum B fails, spending in 2002 would equal a modestly smaller 6.2 percent of income.
TABOR Limit Prevents Catch-Up for Past Disinvestment
In addition to failing to provide sufficient funds for the state to maintain services over time, the TABOR limit's "population-plus-growth" formula has another consequence. It makes it more difficult for the state to offset past years' failure to maintain spending at adequate levels in the years before TABOR took effect. In the areas of education and transportation, the state's failure to maintain spending over the last ten years has had measurable results.
- For example, from 1986 to 1995, Colorado state and local spending on highways, adjusted for inflation, failed to increase while traffic levels were increasing by more than one-fourth. The percentage of state highways with surface conditions rated "poor" nearly doubled during that time period from 20 percent to 38 percent.(3)
- Since the mid-1980s, per-pupil spending on K-12 education in Colorado, including capital spending on school facilities, has fallen from 6.8 percent above the national average to 5.6 percent below the national average. The impact of the relative decline in capital spending is difficult to measure with available data. But the effects of reduced operating spending are clear. Student-teacher ratios have risen from 17.6 students per teacher to 18.5 students per teacher, and teacher salaries in Colorado, which were about 3 percent above the national average in 1986, are now about 9 percent below the national average.(4) The state's backlog of unmet school maintenance and construction needs (see below) suggest that capital spending has fallen relative to need roughly in tandem with operating spending.
Referendum B seeks to take steps to redress the historic decline in funding for roads and schools. The additional funds set aside by Referendum B are specifically targeted for infrastructure that is, construction and rehabilitation of transportation and school facilities. Referendum B thus seeks to respond to one particular effect of the failure to maintain spending: the lack of funds to build new infrastructure to accommodate the state's growth. For instance, based on a recent study of state transportation needs, the Colorado Legislative Council estimates that the state has a "funding gap" of close to $5 billion between the amount of spending needed to upgrade the state's roads over the next two decades and the amount of resources from federal aid, gasoline tax revenue, and other sources available for highway spending. The Colorado Association of School Board Executives estimates that school districts need to spend $2.4 billion to correct health and safety problems and reduce school overcrowding; a recent lawsuit contends that the state government is obligated to share in financing some of those costs. Higher education officials estimate that an additional $1.3 billion is needed to maintain and expand college and university facilities.
New Investment in Roads and Schools Cannot Be Financed Within Existing Limits Unless Other Services Are Cut
Opponents of Referendum B contend that, even if more road and school investment is required, Colorado can find alternative ways to pay for road and school construction without exceeding limits. This is unlikely. Most states can spread such investments over a number of years by issuing general obligation bonds and paying off the bonds over the lifetime of the investment. But the Colorado Constitution bars the state from issuing such bonds.
Another option in some states might be for local governments to pay the cost. But the burden of paying for needed improvements cannot be shifted to local governments in Colorado because local governments are themselves constrained in their revenue and spending options and have little capacity to make additional expenditures.
- Local governments face even greater fiscal constraints than the state government. Local governments, like the state government, face TABOR restrictions that constrain taxes and spending. Local governments are further constrained by the so-called "Gallagher amendment" to the state constitution, which restricts local property taxes on residences. And their revenue options are more limited. Their primary sources of revenue property taxes and sales taxes generally tend to provide less new revenue over time than state revenue sources such as income taxes.
- Local governments vary widely in their ability to pay for new projects. Although some wealthy communities may be able to pay for needed infrastructure improvements, many poor communities lack the fiscal capacity to generate needed funds. And not all of the communities in which growth has imposed the highest costs of road congestion and other impacts of growth have received commensurate revenue boosts. For instance, a locality may find itself having to pay for road construction to relieve congestion caused by commuters traveling between two other jurisdictions.
- Local governments already bear a substantial portion of the burden of paying for public services in Colorado. Local governments levy 48 percent of all Colorado state and local taxes, the fourth-highest percentage among all 50 states and well above the U.S. average of 39 percent.
With neither bond financing nor local government financing a realistic option for paying for the needed improvements, some opponents of Referendum B suggest that rather than spending $200 million above the TABOR limit, Colorado should allocate funds within the TABOR limit for road and school construction. As the Colorado Legislative Council's "Blue Book" analysis of the referendum paraphrases the argument:
Rather than spend another $1 billion over the next five years, the state should place a higher priority on roads and schools with the money it has and reduce spending in other areas. The constitution already lets state revenues increase by roughly $1.8 billion over this period, which should adequately provide for growth and infrastructure needs.(5)
Expressing revenue growth as a nominal dollar figure, unadjusted for inflation, population, or workload growth as this does, paints a misleading picture of state fiscal health. Revenues as a share of the state's economy are declining and will continue to decline over this period. As noted above, revenues and spending allowed under TABOR will decline from the current 6.5 percent of state personal income in 1997-98 to 6.2 percent in 2001-02. This means that funds available under the TABOR amendment will not meet the continuing cost of providing today's level of public services to Coloradans, much less free up an additional $200 million per year for school and road construction.
The challenge for the Colorado budget over the next several years will be to continue to provide funding for current public services within the TABOR limit in the face of school enrollments, road usage, health care inflation, and other factors that are likely to rise at rates that exceed the "population-plus-inflation" adjustment allowed under the TABOR limit. This cannot be accomplished without significant program reductions in other areas. If an additional $200 million a year for road and school construction also had to be carved out of spending under the existing limits, the required reductions in other programs would have to be that much deeper.
It is unclear whether failure of Referendum B would, in fact, lead Colorado to cut other program areas more deeply in order to pay for road and school improvements or whether those improvements simply will not be made. It is clear, however, that the referendum's failure would lead to an intense battle for a dwindling amount of state funds, and the likely casualties would include many perhaps all of the beneficiaries of public services now provided by the state.
Referendum B Would Not Increase Taxes
The declining public services described in the preceding pages would be understandable if Colorado's economy was so weak that it could not generate the revenue needed to maintain those services. In fact, Colorado's economy and hence its ability to pay for public services are strong. Colorado is a low-tax state, and the TABOR limit will keep Colorado a low-tax state even if Referendum B passes. If the economy should weaken in the future, the additional spending would not be made under the terms of Referendum B.
Colorado's total state and local taxes are now lower than the taxes in 44 other states. A Colorado Legislative Council staff issue brief points out that Colorado taxes are lower than those in any of its seven neighboring states.(6) Including non-tax revenue from sources such as fees and tuition, Colorado's total state and local revenues are lower than own-source revenue in 35 other states. As discussed above, the TABOR requirement will force state revenue and spending as a percent of income to decline in the coming years even if the referendum passes. Similar declines are likely at the local level, since local governments are also subject to restrictions on their ability to raise revenue. As a result, it is likely that Colorado will remain one of the nation's lowest-taxing states.
Referendum B would allow the state government to retain and spend more tax revenue on public services than would otherwise be permitted. Some opponents of the referendum therefore consider it a "tax increase." Referendum B, however, does not allow the state to raise taxes, nor does it permit any new tax. Rather, Referendum B allows the state to spend money that it collected in 1998 and that it is projected to collect over the next four years under current tax law. To the extent that these revenue collections are higher than in past years, they reflect the growth of the state's economy; the legislature has not enacted any recent tax increases, nor is it allowed to do so under the TABOR amendment without voter approval.
1. The Colorado Legislative Council staff forecasts annual population growth of about 1.6 percent between 1998 and 2001 (Focus Colorado: Economic & Revenue Forecast, 1998-2003, June 1998, p. 36). Over a longer period, 1995 to 2005, the U.S. Census Bureau projects a slightly higher population growth rate of 1.8 percent per year (Population Projections for States by Age, Sex, Race, and Hispanic Origin: 1995 to 2025, 1996). The forecast of graduates from public high schools is for 1998 to 2003 and comes from the U.S. Department of Education, National Center for Education Statistics, Projections of Education Statistics, 1997, Table 51. (Note, however, that the Colorado Legislative Council projects that actual enrollment in public colleges and universities in Colorado will grow at a somewhat slower rate over the next few years as an increasing number of Colorado high school graduates choose to attend private schools or leave the state for college, perhaps as a result of high tuition or inadequate facilities.) The estimate of the increase in the number of residents over age 65 is from Census Bureau, Population Projections. Prison inmate population projections are for 1997 to 2004 and come from a Colorado Legislative Council staff memorandum entitled Colorado's Department of Corrections Prison Population Projections, December 18, 1997, p. 3.
2. These calculations are based on data contained in Colorado Legislative Council, Focus Colorado. "Spending" is defined here as it is defined in the TABOR amendment, as spending from specified revenue sources including most non-federal sources; in other words, TABOR spending is by definition equal to TABOR revenue minus taxpayer rebates.
3. Spending data based on U.S. Bureau of the Census, State and Local Government Finance Estimates, By State, 1985-86 and 1994-95; traffic figures from federal data collected by the Colorado Department of Transportation and provided in telephone conversation.
4. The spending figures here were calculated using data on Colorado and U.S. elementary and secondary school finances estimated by the U.S. Census Bureau and using enrollment data from the National Center for Education Statistics. Student-teacher ratios calculated by the Colorado Department of Education, Colorado Public Education Facts; salary data from Office of State Planning and Budgeting, Colorado Changes, 1998.
5. Colorado Legislative Council, Analysis of 1998 Ballot Proposal (the "Blue Book").
6. Colorado Legislative Council staff, How Colorado Compares in State and Local Taxes, November 14, 1997, with nationwide ranking updated to reflect new data released in 1998 by the U.S. Census Bureau.
Additional related reports: