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Colorado Tax and Spending Limits

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.

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Colorado Tax and Spending Limits

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  1. Colorado Tax and Spending Limits Nancy McCallin September 11, 2008

  2. 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.

  3. 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.

  4. 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.

  5. 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

  6. 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.

  7. 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.

  8. 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.

  9. 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%.

  10. 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.

  11. 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.

  12. 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.

  13. 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.

  14. 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.

  15. 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!

  16. 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.

  17. 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%.

  18. 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.

  19. 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

  20. 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.

  21. TABOR + Amend. 23 + Recession =

  22. 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%.

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