2023 Leg Session, Ben Murrey, Gold Dome, TABOR, Taxes, Uncategorized

Murrey: Five fiscal policy issues to watch in the next legislative session

Colorado voters gave Democrats a decisive victory in this year’s election, yet they also passed Independence Institute’s income tax cut by approving Proposition 121. While they elect left-of-center candidates, they continue to expect low taxes and fiscal restraint by their government.

As recently as 2018, Republicans controlled the Colorado Senate and served as a roadblock to progressives’ tax-and-spend agenda. After Democrats won unified control over state government in 2019, they increased state taxes and fees by billions of dollars and worked to undermine taxpayer protections under the Taxpayer’s Bill of Rights (TABOR) at every opportunity.

After three years of these policies, consumer prices began rising faster in Colorado than in any other state, thanks in large part to costs imposed by state lawmakers. Against this backdrop, Colorado Democrats had the political savvy to distance themselves from their own destructive fiscal and economic policies going into the 2022 election cycle.

At the start of the 2022 legislative session, Colorado Democrats rebranded themselves as the party of affordability, TABOR refunds, tax cuts, and saving Coloradans money. Given this year’s election results, it worked. Democrats won every major state race and gained seats in both chambers of the legislature.

Democrats, however, should not misinterpret these results as evidence that Coloradans have moved left when it comes to fiscal policy. While voters marked their bubbles for D candidates, they also happily voted to slash taxes. Proposition 121 won with a 30-point margin, making the income tax cut more popular amongst voters than Gov. Polis and more popular than most Democratic legislators in their own districts.

There’s an important message here for the Left in Colorado—and it’s not a new one. When voters speak on fiscal issues directly via the ballot, they reject high taxes and unfettered government growth. They defend TABOR and their right to vote on new taxes.

Through the ballot, voters rejected billions of dollars in new transportation taxes in 2018. They rejected the abolition of TABOR refunds in 2019. They cut income taxes and required voter approval for new fees in 2020. This year they cut the income tax via the ballot again. Voters have allowed Democrats to stay in power, but they have also repeatedly indicated they want low taxes and a fiscally restrained state government.

Democratic lawmakers in Colorado understand the tightrope they are walking between progressive policies and voters’ desire for fiscal responsibility. The fact that they ran away from their record on fiscal issues rather than running on their record this election cycle shows they know what their constituents want.

How the expanded Democratic majorities in both state chambers handle these five fiscal policy issues in the upcoming 2023 legislative session will test whether their 2022 pivot was a reelection ploy or a true change of heart.

TABOR

When Democrats took full control of state government in 2019, they immediately moved to abolish TABOR refunds. Under TABOR, if the state collects surplus revenue above the Referendum C limit, it must refund the excess to voters. When the legislature asked voters whether the state can keep all future surpluses to increase government spending with Proposition CC, voters answered with a resounding “No.”

TABOR remains incredibly popular with voters, and politicians from both parties have demonstrated by their actions that they understand this. Since the defeat of Proposition CC in 2019, the legislature has not attempted another repeal of TABOR refunds. In fact, earlier this year, Polis and his allies celebrated and took credit for the very refunds they recently tried to abolish. What politicians lack in honesty toward voters they make up for in cunning.

While Democrats know from their recent experience that winning reelection is not a mandate to undermine or abolish TABOR, that doesn’t mean they won’t try. In a recent briefing on the general fund reserve, Joint Budget Committee (JBC) Chief Legislative Budget & Policy Analyst, Eric Kurtz, said:

“[A]s we were doing this analysis, we thought, ‘Wow, this would be really cool if some change could be made to the way that the TABOR surplus works.’ I don’t know how politically popular this would be to go to the taxpayers and say, ‘Let us retain some of the money so that we don’t spend it [chuckle], but we keep it for a future purpose.’ Something we wanted to throw out as an idea that you all could consider if and when the General Assembly is thinking about making changes to the way that TABOR operates and trying to send something to the voters about that.”

He knows exactly how politically unpopular this idea is. Voters told the legislature just three years ago when they rejected Proposition CC that they have no interest in what he proposes—abolishing TABOR refunds. Yet, JBC staff is already recommending the legislature consider options for the same. JBC Chair Rachel Zenzinger responded with interest, inquiring about the technical mechanics for accomplishing it.

Our Flat Tax

Progressive politicians hate that the state Constitution guarantees the same flat income tax rate for all Coloradans. They prefer to use the tax code to pick winners and losers in the economy and to pit different groups of taxpayers against one another for votes. A flat tax helps to prevent that.

In 1987, Colorado moved from a graduated progressive income tax system to a single flat income tax rate. Under a flat tax, people who earn more pay more in proportion to what they earn. The same tax rate applies to all taxable income. In 1992 citizens adopted TABOR, which among other things, requires a single, flat income tax rate in Colorado.

For years, both lawmakers and interest groups on the Left have been advocating for the state to go back to a progressive income tax system. Rather than treating all taxpayers equally, such a system forces those who earn more to pay a larger percentage of their income in taxes. In 2020, a citizen initiative backed by the progressive Bell Policy Center aimed to abolish the flat tax and begin punishing Coloradans for earning more money. It failed to gather enough signatures to appear on the ballot.

The Left has had a difficult time passing sweeping tax increases in the state because TABOR requires voter approval of tax hikes. Colorado applies the same tax rate to every taxpayer, so raising the income tax rate on anyone means raising it on everyone. To win on the ballot, advocates of big government understand that they need the ability to ask 51 percent of voters whether they can raise taxes on the other 49 percent. A graduated progressive income tax would give them that ability.

While Democrats alone do not have the votes this session to refer a constitutional amendment to voters, they have other ways to move the ball forward. They can introduce legislation, put on committee hearings, and force a vote on the chamber floors. That would allow them to begin making the case for a graduated progressive income tax, paving the ground for a future ballot initiative. Keep an eye out for this tax hike approach.

Tax Loopholes and Giveaways

When Governor Polis first ran for governor in 2018, he promised voters he would reduce special interest tax giveaways and lower taxes for everyone. A report I published earlier this year investigated every change to special tax benefits—what the government calls “tax expenditures”—that Polis signed into law during his first term. It found he increased these kinds of tax giveaways and loopholes during his first term by a net total of about $640 million over 10 years.

The Colorado Supreme Court has ruled that the legislature can increase tax revenues without a vote of the people by reducing tax expenditures. In practice, whether the legislature chooses to use this TABOR loophole depends on the status of another part of TABOR: its cap on state revenue—otherwise known as the Referendum C limit.

If revenue comes in under the Referendum C limit in a particular year, the state can increase taxes by reducing tax expenditures—without the need to ask voters. But when revenue exceeds the limit, cutting tax benefits does not give the government any more money to spend. In surplus years, any added revenue simply increases TABOR refunds. Likewise, a reduction in revenue does not affect the state budget either in such years; it simply reduces TABOR refunds.

That means in surplus years the legislature can redistribute TABOR refunds from all taxpayers to politicians’ favored interest groups via special benefits in the tax code. It doesn’t cost them a dime, and it buys them favor with special interests.

In Polis’s first year as governor, state revenue came in under the Referendum C limit, so he cut tax benefits to increase revenue. That incidentally comported with his campaign pledge. In the final three years of his first term, however, revenue exceeded the cap. So, he changed his approach. He—together with the legislature—created billions of dollars in new tax giveaways, effectively using your TABOR refund to buy votes from special interests.

State economists at Legislative Council Staff project a $2.2 billion surplus (i.e., TABOR refund) for FY2023-24. If the legislature again redistributes your refund to special interests through tax giveaways, that’s a good indication that they have chosen to thumb their nose at voters rather than listen to them.

Fees

Since TABOR requires voter consent on tax increases, the legislature has become notorious for bypassing voters and creating billions of dollars in new fees. Colorado’s activist supreme court has ruled that if the legislature calls new taxes “fees,” they are not subject to the voter-approval requirement under TABOR. If those fees fund state enterprises, they are also exempt from TABOR’s revenue limit. Consequently, from FY1993-94 through FY2020-21, enterprise revenue has increased by 3,652 percent, rising from just $742 million to an astonishing $27.1 billion.

The state legislature has a long record of using fees to sidestep the democratic process and the taxpayer protections in the state constitution. Over the last four years of one-party rule in Colorado, the state has created countless new fees—the road usage fee, the ride-sharing fee, the retail delivery fee, the disaster mitigation fee, the environmental justice fee, and the climate change mitigation fee, just to name a few.

Weary of the legislature evading consent by calling taxes “fees,” voters adopted Proposition 117 in 2020. The measure requires the legislature to seek voter approval for large new fees totaling over $100 million. Just a few months after voters spoke, the legislature found legal loopholes that allowed them to circumvent the will of the people and create $5.4 billion in new fees with Senate Bill 21-260.

Then, in an effort to rebrand themselves during an election year as a party committed to saving Coloradans money, Democrats passed a number of measures in the 2022 session to provide relief by delaying some of the fees they created. This included a “gas fee” established under Senate Bill 21-260. Now, with his reelection secured, Polis’s budget proposal for the coming year would reinstate this and other fees.

In addition to moving forward with the fees they passed previously, watch out for new efforts by the legislature to increase state revenue without voter consent by creating more taxes disguised as fees.

State Spending

Last year, the legislature passed the largest budget in state history—$39.28 billion. That represents a 28 percent increase over Polis’s first term as governor. At $40.68 billion, the 2023 governor’s budget request, would usurp 2022’s budget as the largest in state history. In practice, of course, the governor’s request serves as nothing more than a suggestion; the legislature does what it wants.

Earlier this year—at a time when inflation continued making new record highs each month—the legislature went on a spending spree. The Long Bill and legislative appropriation bill accounted for about $37.8 billion of the FY2022-23 budget, which the legislature adopted in April of this year. In addition, the legislature passed over 200 other bills that together spent an additional $1.5 billion.

This nearly $40 billion in spending only accounts for the current fiscal year, however, legislation can authorize spending for multiple years. Based on Legislative Council Staff fiscal note documents, the legislature approved about $4 billion dollars in new spending in the 2022 session altogether. Next year’s budget will serve as a leading indicator of whether legislators got voters’ message regarding fiscal restraint.

Conclusion

Democrats maintained and even increased their majorities in state government this year while running a PR campaign branding themselves as fiscal conservatives and the party of affordability. To their credit, in the latest session before this year’s election, the legislature paused some of the worst of their economic and tax policies. Their sudden fidelity—at least in rhetoric—to more right-leaning tax and economic policies broke from their record of out-of-control taxes and spending from the previous three years under one-party rule in the state.

Voters have consistently shown by their positions on ballot issues for decades that they want to live in a relatively low-tax state under a government that exercises fiscal responsibility and asks voters before imposing new taxes and fees. Their votes this November have also indicated that they trust the Democratic party to listen to them on these issues. The 2023 legislative session will reveal whether that trust was well-paced and how much Democrats care about the democratic will of the people when it comes to fiscal and economic issues.

Ben Murrey is fiscal policy director at the Independence Institute, a free market think tank in Denver.

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