A Tax and Spend Lesson

April 19, 2004; Page A20

Spending discipline has a lot to do with how states fare when the nation's economy heads south. Anyone who doesn't think so probably hasn't been following California's budget nightmare. And that's why the current assault on Colorado's tax and expenditure limits has national implications.

Twelve years ago, voters in Colorado had the good sense to put constitutional restraints on government growth. The state's Taxpayers Bill of Rights, or Tabor, holds state spending to the annual growth in inflation and population, with a 6% limit over the previous year. Surplus revenues must be returned to taxpayers, and taxes can't be increased without voter approval.

The results have been impressive. Between 1995 and 2000, Colorado ranked first in gross state product growth and second in personal income growth. >From 1997 to 2002, it led the country in tax reduction and issued annual rebates totaling more than $3 billion. No wonder a poll conducted last year found that 60% of Colorado voters support Tabor, while only 15% oppose it.

But more important, Tabor is one reason Colorado has emerged from the latest economic downturn in much better shape than most states. It has avoided the super-size deficits and severe budget cuts seen elsewhere. As GOP Governor Bill Owens wrote on these pages in October when he was urging California to adopt Tabor-like reforms: "Like other states, our tax revenue dropped due to a national recession . . . So our budget challenges would exist without Tabor -- and they arguably would have been far deeper."

The main criticism of Tabor is its so-called "ratchet-down effect." The baseline for spending is determined by the previous year's revenues. So when an absolute decline in revenues occurs -- as in the past two years -- a lower spending level is put in place. Even when subsequent receipts increase, which is now happening, spending is governed by the lower level.

Following a revenue decline, that's problematic in Colorado because a separate provision of the state constitution -- Amendment 23 -- requires annual increases in school funding equal to inflation plus 1%. This means that over time education spending, already at 44%, will eat up more and more of the budget. Combined with other spending mandates such as Medicaid (21%), nearly two-thirds of the budget already is off-limits.

And lawmakers are frustrated. Revenues are expected to exceed the Tabor limit by $25 million during the current fiscal year, by $327 million in 2005-06 and by $515 million in 2006-07. Upset that these surpluses will have to be returned to taxpayers, efforts are now under way to remove the limits. The Republican-dominated Legislature is working to put a constitutional amendment on the November ballot that would essentially gut the law.

A proposal by GOP State Representative Brad Young would loosen spending controls to the point of making them meaningless. And sadly, even Governor Owens has changed his tune. Now he says he wants to place Tabor and Amendment 23 "on hold" for two years, a move that would simply pass the buck to a future governor, not solve the problem. We'd have thought that allowing fiscal strictures to erode on his watch is not something a GOP Governor with Presidential aspirations would want on his resume.

But if politicians want to make life under these limits easier, there's no need to throw out Tabor with the bath water. One alternative, favored by Senate President John Andrews and State Treasurer Mike Coffman, is to preserve the structural spending limits but create a reserve fund. It would serve as a mechanism for stabilizing the budget during future economic downturns. A portion of the coming surpluses could be put aside to cushion the next revenue shortfall and help neutralize the ratchet-down effect on the spending baseline.

"The real problem is that the state doesn't have a mandated rainy day fund," says Mr. Coffman. "We can do that and still preserve the core elements of Tabor." Those core elements are why more than a dozen states, including Texas, New Jersey, California, Alabama and Tennessee are interested in implementing similar reforms.

The proposals need a two-thirds majority in Colorado's House and Senate and then approval by voters in November. So at least Colorado's electorate will have the final say on any Tabor tinkering, which is yet another feature that recommends it.

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