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Wednesday, May 13, 2020

How to Blame A Lockdown Deficit on TABOR

For almost 30 years now, Colorado has had a tax-limitation feature, TABOR, in place that has kept state spending in check. Now the left is launching an all-out attack on it. We must save it.

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The ideas for gigantic spending continue to pop up in Congress, with Speaker Pelosi now asking for another $3 trillion - three trillion dollars - of spending. This is, of course, a clear-cut case of fiscal insanity. It would grow the size of government above the 50-percent mark, giving America one of the largest government sectors in the world, but it would also blow the budget deficit up to far above 100 percent of tax revenue.

It would exacerbate an already dangerous macroeconomic situation where we are faced with either destructive tax hikes or hyperinflation.

In this situation, the last thing a state wants to do is raise taxes, yet that seems to be where some people's minds are moving. In Colorado, for example, there is a mounting effort to remove the state's almost 30-year-old Taxpayer Bill of Rights, better known by its TABOR acronym. One of the forefront soldiers in this effort is the Denver Post, whose May 12 story on the deep hole in the Colorado state budget is a thinly veiled, and frankly patently absurd, attempt to blame TABOR for that very same budget deficit:
Colorado is facing a budget shortfall measured in the billions to pay for schools, roads and other state services — and history suggests next year will be even worse. “We are going to have to live with a new abnormal,” said House Speaker KC Becker, D-Boulder. “It’s going to be a while.” 
Let us, right off the bat, note that this budget deficit was not caused by a regular recession. It was caused by a regulatory disruption where government, including the Colorado state government, invaded the private sector and stopped it from operating normally. This is essential to keep in mind for two reasons, the first being that TABOR has nothing to do with the deficit, even though the Denver Post will try gallantly to make the connection.

The second reason is that an economic disruption does not unfold as a recession. A recession is caused by sprawling pessimism and growing uncertainty among consumers, investors and business owners. It is an organic process that slows down economic activity and keeps it at low gear for the duration of the sense of pessimism and uncertainty.

By contrast, when a regulatory disruption ends, we will see a return of the optimism that prevailed before the disruption. It will drive the economy back up to speed fairly quickly. The only thing standing between the state budget in Colorado and the tax revenue it needs, are the emergency disruption measures controlled by Governor Jared Polis. The sooner he rolls them back, the quicker Colorado taxpayers will get back to work.

Back now to the Denver Post story:
The public will find out just how big the immediate problem is Tuesday, as state analysts release an updated economic forecast for the 2020-21 fiscal year. The state could be short $3 billion — roughly 10% of the state budget overall, and closer to 25% of the budget’s general fund, which covers core services. 
The state of Colorado has had a problem paying for its expenses for a long time, and the reason is not that TABOR has held back tax hikes. To begin with, total private-sector economic output in Colorado has grown by five percent per year in the past five years. This number, also known as private-sector GDP, is the broadest possible measurement of a state's tax base.

Private-sector personal income, which is the base for the income tax, and private consumption, the source of sales-tax revenue, tend to grow very closely to GDP. In other words, the economic base from which the state of Colorado gets its revenue, has grown at a nice, steady pace in the past several years. 

In other words, the state has had a good, solid economic base from which to earn its tax revenue. TABOR has not done anything to prevent that tax base from growing; on the contrary, it is very likely that TABOR has in fact contributed to the growth of the Colorado economy. Businesses like low, stable and predictable taxes, something Wyoming learned the hard way last year when the Revenue Committee proposed a corporate income tax. The month after they did, private-sector employers basically stopped adding jobs in Wyoming.

The problem in Colorado is, plain and simple, spending. Here is an overview of operating-budget appropriations by fund source for the past five years:

Table 1
Source of raw data: Colorado Legislative Appropriations Report
FY16FY17FY18FY19FY20
General Fund5.6%5.3%6.0%7.5%7.0%
Other Funds8.6%0.0%2.6%14.1%6.7%
Federal Funds10.3%1.0%6.2%2.9%1.9%
Note: Reappropriated funds are counted as Federal Funds, which is where they originate.

The average annual growth for the General Fund is 6.3 percent, 1.3 percent faster than the private-sector GDP tax base. Other Funds spending has grown at an almost identical pace, 6.4 percent, although as evident in Table 1, this category of spending tends to fluctuate quite a bit.

It is also interesting to note how General Fund spending actually accelerates over time, with its annual growth being seven percent or more in the past two budgets. This has not happened by accident, nor is it driven by pressing needs from a recession. In 2017, 2018 and 2019, the Colorado economy was doing quite well, with an annual real GDP growth rate averaging 3.9 percent.

In other words, the spending growth is unrelated to economic hardships. It looks much more like an expression of overall fiscal frivolity and an ideological desire to expand government. 

This impression is reinforced by attacks on TABOR, such as the one launched by the Denver Post. Which brings us back to their article about the budget-deficit forecast:
Lawmakers are constitutionally obligated to pass a balanced budget, so by the beginning of June, one way or another, some significant percentage of spending will be cut. The state’s Joint Budget Committee has already spent seven days rewriting, nearly line-by-line, the budget for the next fiscal year, and it’s been a painful exercise. Tears have been shed on multiple occasions. The committee’s chair, Rep. Daneya Esgar, D-Pueblo, said weighing cuts to services for adults with severe disabilities “broke all of our hearts.” 
This reference is, frankly, repugnant. Was that really the best example the Denver Post could come up with? Was it really the frontline of budget reductions in the entire Colorado state budget? Of course not. The very fact that spending has consistently outgrown the tax base for several years, in a strong economy, tells us that the state budget is full of non-essential spending.

Speaking of non-essential spending. The Post again:
Also difficult were discussions on cutting Colorado’s tourism marketing budget and nixing a plan to give state employees pay raises. Those employees could soon face furloughs or layoffs. 
For some reason, there are never hand-wringing stories like these when the private sector has to make staff cuts, drop benefits coverage or reduce outlays on non-essential items. 

Then the Post goes on to declare that the coming years will be even worse than 2020. 
This kind of hacking likely won’t be a one-time exercise. “Recall,” said Carol Hedges, executive director of the Colorado Fiscal Institute, that in the last recession, “the worst budget year was not 2008. It was 2009, 2010. It’s the years that follow the immediate shock. 

They do this based on the experience from the Great Recession, again ignoring the fact that an economic disruption caused by a government-enforced lockdown does not have the same long-term effects on the economy as a regular recession. As soon as government lifts its lockdown, the private sector will work its way back to full gear again.

Then, once the Post has presented a scary outlook with a long, arduous recession with high unemployment, a contracting economy and general economic hardship, they load both barrels and aim for... you guessed it:
Many states will have to confront the prospect of a prolonged contraction. But none of them have TABOR. TABOR, or the Taxpayer’s Bill of Rights, bars Colorado governments from raising taxes without voter permission. That barrier has meant that state government spending here has, in many ways, not kept pace with the state’s phenomenal growth
Oh my... As I just explained, in the last five years alone state spending has handily outpaced current-price GDP growth. But let's use a different metric, namely the TABOR cap. In the past five years,

  • Colorado state inflation has been 1.2 percent per year, on average;
  • The state's population has grown by 2.7 percent;

adding up to a total growth rate of 3.9 percent per year. This is the rate at which the state government could have grown its annual spending over the past five years and stayed perfectly within its TABOR limitations.

And we haven't even looked at actual tax-revenue growth. According to the Census Bureau, the Colorado state government has enjoyed an annual tax-revenue increase in excess of 6.2 percent per year. It has been a bit volatile, with 11.8 percent in 2018 and 6.3 percent in 2019, but the story in these numbers is that there is no shortage of revenue in government coffers. 

Granted, a small portion of this money is going back to taxpayers under TABOR, but that refund amounts to fractions of a percent of all tax revenue. It has no real bearing whatsoever on the state's ability to fund its budget.

And, again, these are just its tax revenue. Other Funds, also called "cash funds", account for about as much of the state's revenue as taxes do. As explained earlier, there is no shortage of revenue growth there, either.

Rather than attacking TABOR, perhaps the Denver Post should start asking two questions:

1. What functions of government are essential, and what functions are non-essential?
2. Can we do essential government functions better, smarter and more efficiently than we do today?

With a conversation centered in on these two questions, Colorado could both keep TABOR and provide good services to Colorado taxpayers.

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