Colorado Tax and Spending Limits

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Colorado Tax and Spending Limits

• Nancy McCallin
• September 11, 2008

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Colorado Has a Long History of Spending Limits

• Initiated limits on the ballot back to 1966.
• Failed attempts to pass initiated tax and
  expenditure limits in 1966, 1972, 1976, 1978,
  1986, 1988, and 1990.
• Legislative limits on property taxes enacted in
  1913.
• Legislative limit on state appropriations enacted
  first in 1977 7 limit.

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What is the TABOR Limit?

• Colorado is most known for its spending limit
  called TABOR The Taxpayers Bill of Rights
• Four primary provisions
• Limit revenues collected by state and local
  governments.
• Voter approval for tax rate increases and for tax
  policy changes that result in increased revenue.
• Voter approval to weaken any existing spending
  limit.
• Prohibition on debt/multi-year financial
  obligations.

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Although TABOR is widely believed to be a
spending limit, it is actually a revenue limit.
It applies to all revenues in state government
except Federal Funds.
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The TABOR Limit Applied to Taxes and Cash Funds
User Fees

• University/College Tuition
• Gas Taxes, registration fees
• Unemployment insurance revenues
• Gambling Taxes
• All Fees

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The Tabor Revenue Limit

• State Limit Revenue is allowed to increase by
  inflation plus population growth.
• School Districts Revenue is allowed to increase
  by inflation plus student enrollment growth.
• Other Local Governments Revenue is allowed to
  increase by inflation plus a measure of growth in
  real property construction.
• The Ratchet Down Effect If revenues decrease,
  so does the limit. In times of recession, with
  declining revenues, the limit adjusted down and
  future growth is from the lower limit.

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Existing Limits Were Constitutionalized

• State General Fund appropriations limit of 6 per
  year.
• Property Tax Limit of 5.5 growth each year.
• The Gallagher Amendment, enacted in 1982, limits
  the amount of taxable value on homes to 45 of
  all taxable values.

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Why did the TABOR Limit Pass in 1992?

• The State was at the end of a severe economic
  downturn.
• Several lawmakers were advocating tax increases
  to resolve the budget problems and a tax increase
  was on the ballot for K-12.
• The Gallagher Amendment had shifted at least
  2.44 billion in property taxes from the
  residential to the nonresidential sector and
  business sought relief from property tax
  increases. To date, more than 6.5 billion has
  been shifted.

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The Gallagher Amendment Keeps the residential
property tax burden low

• Passed in 1982 and limits the share assessed
  taxable values on homes and residences to 45 of
  overall assessed values. The residential
  assessment rate automatically decreased to
  balance the 45 requirement.
• Assessed Value Property Value x Assessment Rate
• Property Taxes Assessed Value x Mill Levy (tax
  rate)
• In 1982, the residential assessment rate was 30.
  Today the residential assessment rate is 7.96.
  
• In both 1982 and today, the nonresidential
  assessment rate is 29.

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What does this mean?

• For a 100,000 property
• Residential 100,000 x 7.96 7,960 of value
  is taxed
• Nonresidential 100,000 x 29 29,000 of value
  is taxed
• Local governments set property taxes (mill
  levies).
• Prior to TABOR, local governments could increase
  tax rates without a vote of the people. Since
  the continually decreasing residential assessment
  rate kept residential property taxes in check,
  the impact of property tax rate increases were
  blunted to most Coloradans.
• Businesses bore the brunt of most property tax
  hikes.

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Gallagher has had Disparate Impacts

• Significant tax relief for residential property
  (7Billion).
• Today, while 78 of all Colorado property is
  residential, residential property owners bear
  only 45 of the tax burden. In 1983, only 53 of
  Colo. Property was residential.
• There has been a large shift in the tax burden
  from residential to non residential properties.
• Those localities with large amounts of
  residential property and/or with slow growth in
  values have difficulty raising revenue.
• Those localities with nonresidential property can
  raise more revenue for any given tax rate.

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Gallagher has had Disparate Impacts

• This leads to localities pursuing nonresidential
  investment, specifically retail. Some suggest
  this also leads to urban sprawl, proliferation of
  governmental jurisdictions, and makes it
  difficult to cooperate regionally as localities
  are competing for non residential development.
• Residential property owners (VOTERS) love
  Gallagher and any efforts to change it are
  resoundingly defeated 2003 effort to freeze the
  res. asses. rate failed 77 to 23.
• Nonresidential property owners sought relief from
  the shift and TABOR provided that relief by
  requiring a vote for any new tax rate increases.

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Gallagher has had Disparate Impacts

• Rural/farm areas with weak growth in residential
  values suffered property tax decreases and it was
  difficult to raise revenue for government.
• Limiting the share of residential taxable values
  also limited the revenue capacity of school
  districts. This caused the state share of K-12
  funding to increase significantly.

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The TABOR Era 1992-2001

• TABOR base was established in FY 2001-02. Much
  effort was made to make this base as high as
  possible.
• The state TABOR Limit inflation population
  growth. This is considered one of the most
  restrictive limits. Only 3 other states use this
  restrictive of a limit.
• Any revenues above this limit must be refunded to
  the taxpayers in the next fiscal year. No
  specific refund mechanism was stipulated.
• All revenues including taxes and fees are
  subject to TABOR unless voters allow otherwise.

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TABOR Guarantees refunds in a Growing Economy

• Refunds will occur whenever the economy grows.
• The largest share of state TABOR revenue comes
  from income taxes.
• Income taxes will grow at a rate greater than
  inflation because of capital gains and
  productivity in other words, workers expect and
  receive raises higher than inflation!

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TABOR Guarantees refunds in a Growing Economy

• If TABOR had been in effect from 1975 to 1992,
  revenues would have exceeded the TABOR limit in
  all but 2 years, for a total TABOR refund of 6.5
  billion from FY 75 to FY 92.
• Revenues subject to TABOR grew 8.5/year versus
  the TABOR limit of 6.5/year in the 16 years
  before TABOR passed.
• Most states with revenue growth limits tie them
  to personal income rather than inflation
  population growth.

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The TABOR Experience

• TABOR surpluses did not occur until FY 96-97
  because of efforts to raise the initial year
  base.
• From FY 1996-97 through FY 2000-01, TABOR
  surpluses totaled 3.25 billion, with the highest
  level just at the start of the recession, at 927
  million in FY 2000-01.
• In effort to prevent collecting the revenue
  before TABOR kicked in, many tax relief efforts
  were enacted
• Income tax rate lowered from 5.0 to 4.63.
• Sales tax lowered from 3.0 to 2.9.

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Creativity or Flexibility in Applying TABOR???

• The FY 1991-92 TABOR revenue base was maxed out
  using the Medicaid disproportionate share
  program.
• The population dividend Colorados population
  was undercounted in the 1990s according to the
  2000 census. Thus, CO had refunded more than
  necessary and a population adjustment of 6 was
  allowed in 2000-2003.
• HB 1414 Spent TABOR Revenues in advance of
  refund.
• Higher Education became an Enterprise and
  therefore tuition increases became exempt.

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Ballot Initiatives to Alter TABOR or allow
government keep Revenues?

• Local Elections have been very successful 93
• State TABOR elections for exemptions/changes have
  been mixed
• 1996 exempt unemployment insurance from TABOR
  FAILED
• 1998 Retain 200 million of surplus for five
  years for capital projects for higher education,
  transportation, and K-12. FAILED
• 2000 Homestead exemption for senior citizens
  PASSED

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Amendment 23 K-12 on Auto Pilot

• 2000 Amendment 23, exempted one-third of one
  percent of the income tax from TABOR for K-12 and
  required K-12 to grow at inflation enrollment
  growth 1 through 2011. Thereafter, K-12 must
  grow by inflation enrollment growth.
• K-12 ended up growing slowly/decreasing when
  TABOR was enacted from 1992 to 2000, so K-12
  advocates ran their own ballot initiative
  Amendment 23.
• K-12 is 41 of the budget.
• This caused a collision course One foot on the
  brakes and one foot on the gas.

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TABOR Amend. 23 Recession
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2005 Referendum C

• Five year time out from TABOR to allow recovery
  of government from the recession that reduced
  revenues by 16.
• Elimination of the Ratchet Effect
• Passed by 52/47.