A plain reading of the Taxpayer’s Bill of Rights (TABOR) in the state Constitution suggests that last year’s income tax cut should have lowered the state’s revenue cap, but the legislature has failed to make such an adjustment in their forecasts. That means when Coloradans voted to pass a tax cut for themselves last year the legislature effectively said, “Fine, you can have your tax cut, but we’ll take it out of your future tax refund.” Here’s how.
TABOR creates revenue limits for state and local governments. If the state collects more tax revenue in a given year than allowed by TABOR, “the excess shall be refunded in the next fiscal year.”
An increase in revenues therefore moves us closer to the threshold for a TABOR refund; a decrease in revenues likewise puts a refund further out of reach. TABOR, however, also includes a little-known exception to this rule.
Section 7 of TABOR explains, “The maximum annual percentage change in state fiscal year spending equals inflation plus the percentage change in state population in the prior calendar year, adjusted for revenue changes approved by voters.”
Each year, the General Assembly’s Legislative Council Staff (LCS) calculates the amount of revenue subject to TABOR and the revenue cap, known as the Ref C or TABOR cap. Section 7 tells them how to do that.
The first part, which adjusts the cap annually for population growth and inflation, is well known. The final clause, while less known, can just as much affect whether taxpayers receive a TABOR refund any given year.
It establishes that the legislature must make adjustments in calculating the TABOR cap and consequently TABOR refunds when voters explicitly approve a revenue change via the ballot box. This, of course, makes sense.
Consider a hypothetical scenario. One year the state collects $15 billion in TABOR revenue and the TABOR cap limits revenue to exactly $15 billion. The state would not need to issue a refund, because revenues did not exceed the cap. If in that same year, however, a voter-approved tax increase generated an addition $1 billion in revenues, increasing TABOR revenues to $16 billion, would the legislature then have to turn around and immediately issue a $1 billion refund to taxpayers? Of course not.
Per section 7 of TABOR, the legislature would adjust for the revenue change approved by voters. Thus, while the tax increase generated $1 billion in new revenues, it puts us no closer to a TABOR refund.
Last year’s voter-approved Proposition EE—a $177 million tax increase on cigarettes, tobacco, and nicotine products—exemplifies how the legislature recently handled this in a real-world scenario. LCS makes it clear in their fiscal note on the proposition and in their latest economic forecast that they applied section 7 of TABOR to that tax increase: “Revenue from the new taxes is exempt from TABOR as a voter-approved revenue change.”
While this brief explanation intentionally lacks some technical nuance for simplicity’s sake, the point is simple: LCS followed section 7 of TABOR after voters approved a revenue change with Proposition EE. While tax revenues increased, that increase put us no closer to a TABOR refund. Rightly so.
The problem is, they did not apply section 7 in the same way to the other revenue change approved by voters the same day. LCS’s fiscal impact statement for Proposition 116 purports, “The measure does not change expectations concerning TABOR refunds.”
What’s the difference between the voter-approved revenue change in Proposition EE versus that in Proposition 116? The former increased tax revenues while the latter decreased them.
In other words, the legislature has determined that a voter-approved tax increase puts us no closer to the threshold for a tax refund—the correct interpretation—but a voter-approved tax decrease puts us further from our next TABOR refund. Only a lawyer could reason how a tax increase constitutes a “revenue change” while a tax decrease does not.
A plain and honest reading of the text certainly begs the question: Why has the legislature failed to adjust their forecasts to reflect the will of the people with regard to Proposition 116?
Proposition 116 decreased the state’s flat income tax rate from 4.63 percent to 4.55 percent. Legislative Council projected that this would decrease revenues by $154 million in fiscal year 2021-22.
Legislative Council currently expects next year’s revenues to fall just $328 million shy of the TABOR cap. By declining to apply the requirements under TABOR in the same way to a tax cut as it did to tax increases, the legislature threatens to withhold future refunds due taxpayers under the state constitution.
If the legislature applies TABOR consistently, however, taxpayers stand a much better chance of receiving a tax refund for the coming fiscal year and years thereafter.
Ben Murrey is fiscal policy director at the Independence Institute, a free market think tank in Denver.
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