How did we get in this mess

Filed under: Opinion |

Editor’s note: In December, the University of Denver announced the formation of the Colorado Economic Futures Panel to analyze the state’s fiscal situation and provide a platform for informed discussion and possible solutions. Sixteen business and civic leaders from across the state comprise the panel, including Dick Celeste, president of Colorado College. This is the second of a series of columns that the panel plans to submit until early April, when the panel expects to complete the first phase of its work.

Over the past four years, Colorado’s fiscal outlook changed from sizable surpluses and large projected refunds to taxpayers under the TABOR amendment to sharp budget cuts in the face of impending deficits. How did this happen? Will “tweaking” TABOR prevent future fiscal crisis? Here are some of the things our panel has learned about the state’s fiscal situation.

What caused it? The most important factors seem to be:

A steep economic decline: The recession and the aftermath of the terrorist attacks hit three key Colorado industries-tourism, telecommunications and technology-especially hard. The state suffered the largest job loss since the Great Depression of the 1930s.

A more volatile tax base: Through the 1990s the state government increasingly relied on more volatile revenue sources, principally the income tax. When the state economy turned down and stock prices fell, state tax collections, particularly those from income taxes on capital gains, dropped sharply.

Tax cuts: In the late 1990s, Colorado’s government regularly collected much more revenue than could be spent under the TABOR spending limitation. Rather than collecting money only to return it the next year and not foreseeing the severity of the coming economic downturn, legislation was enacted that cut sales and income taxes and sped up the process for refunding excess revenues.

Inflexibilities in the budget: Large uncontrollable or mandated items such as Medicaid or expenditures for school finance required under Amendment 23 forced drastic cuts in other areas such as higher education, social services and maintenance of existing infrastructure such as highways or buildings.

The unanticipated sharp economic downturn affected governments at all levels almost everywhere in the nation. The federal government’s budget position swung from large surplus to large deficit. Many states such as California faced record deficits. Nor was it unprecedented for Colorado. The state was forced to cut budgets during earlier economic downturns such as that in the 1980s.

What about TABOR? TABOR had no effect as far as cutting state expenditures during the past three years. The cuts were dictated by insufficient revenue to fund even the level of spending allowed by the amendment. In fact, TABOR may have moderated the severity of the cuts by limiting spending growth during the 1990s. However, now that the economy has begun to improve and revenues are once again growing, TABOR’s “ratchet effect” prevents the state government from restoring, without voter approval, the cuts made earlier.

Our inability to restore cuts would be less serious if budgets were inflated by wasteful spending on ill-thought-out programs as often happens during flush periods like the 1990s. But, because of TABOR, Colorado’s spending did not grow with income during the 1990s. Since TABOR’s enactment Colorado’s average income has grown from a level in the mid-range of all states to one in the top 10, while its per capita state spending remained near the bottom. Colorado became a relatively wealthy state but continued to spend more like a moderate income state.

While adjustments to TABOR may alleviate some short-term problems, there are still ongoing problems that our governments must deal with. How much we spend is a choice; presumably citizens are not unhappy with overall spending levels. While maintaining Colorado’s historically restrained level of spending, it would be prudent to consider measures that give elected representatives more flexibility to deal with fluctuations in tax receipts as well as unexpected financial demands. We might also examine ways to permit investment of tax dollars in our future, for example in higher education, or to increase spending in areas such as children’s health, where small outlays today avoid the necessity of much larger expenditures later on.

Bill Kendall, a member of the Colorado Economic Futures Panel, is president of the Center for Business & Economic Forecasting in Denver.