Monday, July 19, 2010

Bad Solution to the Wrong Problem

On July 1st a provision of Referendum C, the five-year Taxpayer Bill of Rights (TABOR) refund suspension, came to an end in Colorado. As we cast off this bipartisan travesty, it is important to look back and see why it happened, so it never, ever, happens again. Ref. C was a bad solution for a problem that didn’t exist.
Colorado’s economy was doing quite well throughout the ’90s. However, from 2001 to 2002 the economy took a dive and general fund tax revenue decreased from $8.8 billion to $7.7 billion, a 12 percent decrease. Those who see TABOR as a threat to their power decided to do as Rahm Emanuel advocates, “Never let a serious crisis go to waste. What I mean by that is it’s an opportunity to do things you couldn’t do before.”
This was their chance to cripple TABOR.
Supporters of Referendum C blamed the need for budget adjustments on the TABOR limit and so-called “ratchet effect.” They told Colorado voters that a five year exemption from the TABOR revenue limit was needed to prevent the state from collapsing into Mad Max style chaos. In 2005, Ref. C was predicted to raise $3.7 billion over five years, making it the largest tax increase in Colorado history. All of this, however, was based on the premise that the budget shortfall was caused by TABOR in the first place.
Reality disagreed.
The economy in most states suffered during the 2001 recession. Aggregate general fund revenues declined an average of 6 percent for all states. The 9/11 terrorist attacks compounded this problem and not only damaged the nationwide economy, but hit the Colorado tourist industry particularly hard. At the time, tourism accounted for 8 percent of all jobs in Colorado. As a result of 9/11, visits to ski resorts declined by 14 percent for the first part of the season and 4.4 percent for the entire season. National Parks visits fell by 8 percent, and the rafting industry saw its first commercial decrease since 1988.
On top of the recession and terrorist attacks, Colorado also faced the worst drought in 25 years in 2002. The entire state was declared a disaster area for the first time since 1977. It was the driest year since 1703 along the South Platte basin, and since 1579 along the Colorado River. As you can imagine, this was not a good year to be a farmer or rancher. Dry-land wheat production was at 45 percent of its 10-year average. Cattle breeding stock was down 40-50 percent and Southern Colorado ranchers lost 80 percent of their herd and $460 million.
The third major problem with the budget was a result of an earlier “solution,” Amendment 23. Amendment 23 mandates yearly increases in K-12 education regardless of revenue collections. If revenues are high, the increases come out of the TABOR refund, but if revenues are low, the increases come out of the general fund. In tough economic times, education spending continues to increase, but other services decrease even more than they would have otherwise. When the budget decreased from 2001-2002 by over $1 billion (12 percent), education spending actually increased by $846 million (16 percent). From 2001-2006, state school finance spending increased by 39 percent in Colorado.
Crisis (or perceived crisis) can cause people to act irrationally and to listen to opportunists looking to expand their power. TABOR was unnecessarily handcuffed and the taxpayers suffered. The silver lining will come if we can learn from this mistake and work towards solutions to problems that actually exist, such as so much of our current state budget being tied to federal programs that require automatic state spending increases every year.
Originally appeared in the Denver Daily NewsColorado Springs Gazette, and The Independence Institute on July 16, 2010
More information on Referendum C is available in my Independence Institute paper "Referendum C: The Wrong Solution for the Wrong Problem." 

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