ARCHIVE - December, 2001

Economic Effects of Colorado's TABOR Amendment and the 6% Rule
Sierra Swearingen, Boulder Faculty Assembly Administrator

The TABOR amendment limits the yearly amount of tax revenue the Colorado government can keep (i.e. the amount it may collect less the amount it must return to the taxpayers) to the rate of population growth plus the rate of inflation. Both population growth and the rate of inflation can decline which by the terms of the Tabor Amendment would decrease state revenue rather than simply restricting its growth.

The 6% rule, also called the Arveschoug-Bird Statute, limits the amount of state spending from the General Fund to not more than 6% over the previous year.

Unfortunately the expenses of state agencies often increase at a greater rate than the caps set by the TABOR amendment and/or the 6% rule. Among the items that have grown more rapidly are the wages and salaries of state employees, the cost of contracted services, health care, education enrollment (including enrollment in colleges and universities), and highway use.

Another complication is that the 6% rule applies to the sum of spending by state agencies as a whole, not to spending by each individual agency. One agency may increase expenditures more than 6% if another agency's increases are less than 6%. This causes different branches of state government to compete for money to cover operating expenses. Exceptions to either the TABOR amendment or the 6% rule must be approved by a vote of the people.

Inflationary Economy

Under conditions of inflation, the value of the dollars collected by the state decreases. Inflation adjustments are included in the TABOR formula, but the 6% rule would seriously limit the ability of state agencies to maintain their services: in an inflationary environment, operating expenses would increase by more than 6% per year. Until recently Colorado has experienced low inflation, yet the legitimate operating expenses of state agencies have increased by more than 6% per year, resulting in persistent pressure to decrease services even with relatively low inflation. In times of higher inflation such pressure would be far more severe.

Flat Economy

In a flat economy (with neither inflation nor deflation) the value of dollars collected by the state remains stable, but the 6% rule still limits the ability of government agencies to maintain services because both operating expenses and population tend to increase at more than 6% per year. At a zero inflation rate no additional General Fund monies would be forthcoming beyond what is allowed by the "population increase" portion of the TABOR formula. And this increment is itself constrained by the 6% limit.

Recession or Depression

About 90% of the revenue affected by TABOR comes from individual income tax plus sales and use taxes. In a depressed economy, business activity, prices, and individual income all decrease. Consequently income taxes, sales taxes, and use taxes also decrease. Thus the amount of tax revenue the state can collect falls below the limit set by TABOR, and state agencies cannot maintain the same level of expenditures. Since operating costs would also fall as a consequence of deflation, this situation may be less difficult for state agencies than an environment of inflation.

The 6% statute allows a more flexible response to fiscal emergencies than does the TABOR amendment. In a true fiscal emergency, the 6% spending limitation could be suspended on a year-by-year basis, but the TABOR revenue restriction would still stand. According to James Jacobs writing in the Denver Post, the Tabor Amendment is "the most restrictive revenue and spending limit placed upon state and local governments in the nation." Ever since the New Deal, government spending has been the principal antidote for sagging economies. Thus, in conditions of nationwide depression, the economy of Colorado might well slide more rapidly than that of any other state.

Compared to public universities in other states, the University of Colorado is highly tuition-dependent as opposed to reliant upon state funding. Tuition revenues would probably decline sharply in the event of a nationwide depression. With significantly reduced tuition revenues, and located in a fiscally vulnerable state (due to the TABOR Amendment and the 6% rule), CU and other higher education institutions in Colorado are likely to suffer more from a general depression than their peers in other regions.

Because higher education does have access to tuition revenues, the impact of a downturn would even be greater on other agencies (e.g. highways, K-12, prisons). Thus the latter would be even more compelled to fend off the crisis with General Fund monies, which might challenge the appropriation for higher education. And if CU’s funding from state and local governments falls below 10% of its total budget, the University might attain "enterprise" status and become exempt from the TABOR rule and its requirements.

Out-of-State Tuition

If Colorado's economy becomes depressed relative to the national economy, out-of-state tuition would remain intact but, due to state level deflation, the actual value of these dollars would increase. Under the TABOR amendment, however, these tuition and fees would be considered tax revenue thus contributing to “surplus” and the mandated taxpayer refund.

If out-of-state tuition is increased, this could simply increase the so-called surplus that TABOR requires the state return to taxpayers. In the event of a tuition increase, the state might even argue that General Fund appropriations to CU should be reduced in order to prevent an overall increase in state revenue.

According to current state regulations, no fewer than 55% of incoming freshman must be in-state students. If recession affects the state and the nation about equally, then CU’s out-of-state tuition revenue could be maintained either by lowering standards for admission to maintain the same number of students, or by increasing tuition while accepting a smaller number of students. If a recession is sufficiently severe, many fewer students could afford high tuition, and neither of these measures would suffice to maintain out-of-state tuition revenue.

Capital Construction Considerations

In a depressed economy, TABOR and the 6% rule would decrease or eliminate capital construction by state agencies.

Colorado's Assembly treats the TABOR obligation to return excess revenues to the taxpayers as an expense for the following fiscal year. This has a two-fold effect:

1) Tax reductions intended to reduce the following year's surplus combined with the obligation to return the prior year's surplus places a double burden onto a single budget. This impacts both the ability of the state to meet its current financial obligations and to provide capital construction funding.

2) A cash flow problem arises in a recession. If the TABOR surplus is less than that of the preceding year (as it would be in a recession), the required refund to taxpayers must come from other sources including capital construction monies and the General Fund.

Until recently, capital construction has continued unabated. The amount available for capital construction is the difference between (a) what the state spends on operating needs under the 6% limit and (b) the amount of the General Fund the state collects and then keeps under TABOR after meeting all its other obligations. Capital construction is currently exempt from the 6% appropriations limit. Expenditures from the state’s reserves are also exempt from this limit. Because of these exemptions, it has been possible for General Fund appropriations to grow more rapidly than the TABOR growth limit. The General Fund appropriations base has been lower than the TABOR revenue base on which the 6% limit is calculated. Moreover, the state has been spending from reserves which are not subject to the TABOR limit. But in a recessed economy, capital construction dollars dry up as the amount the state is able to collect below the 6% limit falls.

Summary

In a flat economy,

1) General Fund revenue given to the agencies does not increase.

2) The 6% limit on appropriations (spending) requires state agencies to cut services in order to meet cost increases above 6%.

3) Capital construction can slow down or stop. This depends on whether TABOR revenues keep pace with the prior year, and whether new tax relief measures are instituted.

In a depressed economy,

1) General Fund revenue provided to the agencies decreases.

2) The 6% limit on appropriations can be suspended for one year if a fiscal emergency is declared. Then state agencies – including the University of Colorado – can spend whatever funds they have to meet increases in operating costs (if any).

3) Capital construction stops.

IN THIS ISSUE:

The opinions expressed in these articles are those of the authors, and do not represent those of the Boulder Faculty Assembly, CU faculty at large, or the University of Colorado.

Responses to these articles are welcome. We are developing our capacity to collect responses on-line. In the meantime, please send your comments via e-mail to Thomas.Mayer@Colorado.edu.

Click here for the names and contact information of the membership of the BFA Communications Committee.