Transcript Colorado Tax and Spending Limits

Nancy McCallin
September 11, 2008
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.
What is the TABOR Limit?
 Colorado is most known for its “spending” limit called
TABOR – The Taxpayer’s 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.
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.
Federal Funds
30.9%
General Fund
54.3%
Cash Funds
14.8%
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
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.
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.
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.
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%.
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.
Gallagher has had Disparate Impacts
 Significant tax relief for residential property ($7+Billion).
 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.
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.
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.
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.
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!
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.
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%.
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: Colorado’s 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.
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
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.
TABOR + Amend. 23 + Recession =
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%.