The SOS Proposal and Colorado’s “Taxpayer’s Bill of Rights”

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The Stop Overspending initiative has been compared to Colorado’s "Taxpayer’s Bill of Rights," a 1992 amendment to the Colorado Constitution. The amendment, commonly referred to by the acronym "TABOR," was implemented in 1993. TABOR regulates the growth of Colorado’s state spending and revenue, capping it in most years at the sum of the percentage rates of inflation and population growth. In this, TABOR resembles the SOS proposal.

TABOR, however, contains different local taxpayer provisions than the SOS proposal does, and TABOR does not contain the state lawmakers’ pension provision discussed earlier. Even TABOR’s spending cap and treatment of state surpluses do not quite match the details of the SOS proposal. The TABOR cap in its original form (the amendment was modified in fiscal 2005) thus shares an important similarity and three significant differences with the SOS proposal.

Spending Limits and Taxpayer Rebates

The most significant similarity between TABOR and the SOS proposal is that both use the inflation-and-population standard to regulate growth of a state spending limit. This provides a point of comparison regarding the SOS proposal’s potential impact on state spending.

Revenue taken from Colorado taxpayers did not exceed the TABOR limit from 1993 to 1996, the first four years after TABOR’s implementation. From 1997 to 2001, TABOR produced a total surplus of about $3.25 billion, all of which was refunded to Colorado taxpayers. The approximate total refund for a household of four people was $3,200.[14]

Unlike TABOR, the SOS proposal would have sometimes placed surplus state tax revenue in a budget stabilization fund, rather than returning it to taxpayers. The fact that the SOS proposal would have established a larger budget stabilization fund would have reduced the taxpayer refunds that SOS would have provided. Regardless, the estimated rebates to Michigan taxpayers through fiscal 2007 would have been about $8 billion if the SOS proposal had been in effect in fiscal 1995. This sum would have represented more than $3,000 per household of four.[15]‡‡

Thus, the total refund provided under TABOR to a Colorado household of four from 1993 to 2001 is similar to an estimated total refund provided under the SOS proposal to a Michigan household of four from fiscal 1995 to fiscal 2007. Colorado’s slightly higher figure could be the result of Colorado’s strong economic growth or of the SOS requirement that some of the surplus tax revenues be deposited in the budget stabilization fund, rather than returned to taxpayers. In any event, the similarity between the Michigan and Colorado household figures suggests some plausibility in the Michigan Senate Fiscal Agency’s estimate of a $9.6 billion surplus since fiscal 1995 under a hypothetical SOS proposal.

‡‡  This calculation is based on a shorthand per-capita calculation that divides the almost $8 billion in total rebates by the state’s population of about 10 million. It is thus calculated in the same way as the earlier $3,200 estimate for a Colorado household of four.

Because the SOS proposal’s tax rebate is based on the amount of income tax paid, a household with no income taxpayers would not have received a rebate, while a household that included income taxpayers could have received substantially more than the $3,000. It also bears noting that lawmakers — knowing that SOS would not have allowed the state to keep this surplus revenue — could have instead elected to reduce the rate of collection of taxes other than the personal income tax (such as the Single Business Tax, for example). While this would probably not have changed the overall size of tax relief, it may indeed have changed the amount of relief awarded to any specific taxpayer.

Additionally, the possibility exists that these tax reductions may have exceeded the figures cited, leading to larger tax relief, smaller surpluses and, thus, smaller deposits into the budget stabilization fund.

Definition of Spending

One significant difference between TABOR and the SOS proposal is the type of revenue that is initially counted toward the state spending limit. In two significant ways, the original TABOR was stricter in restraining state spending than the SOS proposal would have been.

First, tuition paid by students to state institutions of higher learning was counted against the original TABOR spending cap, thus making tuition increases the equivalent of a state spending increase. This provision made the original TABOR far more likely to trigger tax rebates.[16]

As a point of comparison, tuition and fees paid to Michigan’s public universities and community colleges exceeded $2.4 billion in 2004.[17] This amount was equivalent to almost 9.5 percent of all spending that would have been counted under the SOS proposal.[18]

Additionally, from 1995 to 2006, the average in-state undergraduate tuition at Michigan’s autonomously governed public universities increased more than 98 percent — more than triple the inflation rate for the period. The SOS proposal’s exclusion of tuition and fee revenue from the calculation of a state spending limit would have made the SOS proposal substantially less restrictive than TABOR.[19]

Second, TABOR was originally drafted to include unemployment insurance taxes against its revenue base. The federal government mandates that states maintain an unemployment insurance system, and to remain solvent, the system must tax employers with a tax rate that rises and falls in inverse proportion to the strength of the economy. The inclusion of these payments in the TABOR revenue count has tended to push TABOR surpluses lower when the economy is strong and higher when the economy is weak.[20] The SOS proposal specifically excluded unemployment insurance taxes from the calculation of the revenue counted under the spending limit, thus negating the potential for this effect.

The Budget Stabilization Fund

TABOR does not permit creation of a budget stabilization fund comparable to what currently exists in Michigan or to what would have existed under the SOS proposal. TABOR does require the establishment of an "emergency reserve" fund, but that fund must be maintained at 3 percent of total TABOR spending and cannot be used to address "economic conditions" or "revenue shortfalls."[21]

In contrast, the SOS proposal would require that Michigan use up to half of surplus state revenue to build a rainy day fund amounting to 10 percent of the SOS proposal spending limit. Hence, relative to state spending, the potential size of the stabilization fund under the SOS proposal would have been more than three times that of TABOR’s emergency reserve fund.

The SOS proposal would also have specifically required withdrawals from the budget stabilization fund when state revenue was less than the spending limit. Thus, state government would have used the budget stabilization fund to supplement state revenues under the SOS proposal in a way that Colorado state lawmakers cannot use the TABOR emergency reserve.

The TABOR "Ratchet Effect"

TABOR differs from the SOS proposal in the case of declining state revenues. TABOR resets Colorado’s annual spending limit to the actual spending level for any year when the state revenues available are not sufficient to reach the spending cap. The amendment also requires a popular vote to raise state taxes of any kind. Since TABOR does not allow lawmakers to tap a budget reserve when revenues lag, the spending cap can fall downwards from year to year (an outcome popularly referred to as the "ratchet effect").

As noted earlier, the SOS proposal would not have allowed the spending limit to ratchet downward to the actual spending level. Rather, the proposal would have locked the current spending limit in place for the following year whenever revenues and withdrawals from the stabilization fund did not enable Michigan lawmakers to meet the current spending limit. In addition, the substantial budget stabilization fund created by the SOS proposal would have increased the likelihood that state spending would have actually reached the spending limit in any given year.

The SOS proposal did not alter the existing authority of the governor and the Legislature to pass new taxes or to increase existing ones. If new taxes had allowed state spending to reach the SOS cap, the cap would have resumed its annual upward climb based upon population growth and inflation. The provisions of the SOS proposal would have made it unlikely that the spending limit would have remained constant for long, unless the state had suffered a serious economic decline.