Posted by
Rocky Mountain Foundation on Sunday, January 24, 2010 7:41:16 PM
A Billion Reasons Why Colorado Taxpayers Need Protection
By Mark Hillman*
In his State of the State speech a year ago, Governor Ritter complained of a "constitutional and statutory straightjacket that makes modern, sensible and value-based budgeting an impossibility."
Although it's accurate to observe that Colorado's budget is a complex system of spending limits and spending mandates, Gov. Ritter specifically identified only one provision — the Taxpayers Bill of Rights, widely known as TABOR — to be changed. There was no mention of troublesome spending mandates that make budgeting most difficult during tough economic times. These mandates "protect" spending on certain items while sacrificing other items without allowing for any coherent policy debate.
That's ironic because, while lawmakers chafe at any restriction on their plenary power to tax and spend, Ritter and the current legislature in just three years have done more to carve gaping loopholes in TABOR — aided and abetted by the state supreme court — than did two governors and hundreds of legislators in the first 14 years after TABOR's adoption by voters.
Ritter and the Democrat-controlled legislature have increased property taxes by more than $234 million a year, vehicle licensing "fees" by $250 million a year (a figure that will soon exceed $650 million a year), hospital patient "fees" by $600 million a year, and other sales and income taxes by nearly $50 million a year. All told, Ritter and the legislature have managed to increase the cost of taxes and fees by more than $1 billion a year and, incredibly, not once triggered Colorado's constitutional requirement that tax increases be submitted to a vote of the people. This tally does not include suspension of the senior citizen property tax exemption which collected another $90 million a year; that measure included a provision to allow the legislature to reduce the exemption without a public vote.
Taxpayer protections — even when written into the state constitution, as is the case with TABOR — are targets for continual political and legal assault by forces in and near government. TABOR enjoyed grudging deference for some 14 years after it passed in 1992. Lawmakers occasionally asked voters to make exceptions to TABOR's limits but largely adhered to its spending limits and its requirement that neither those limits nor any "tax policy change directly causing a net revenue gain" may be enacted without a public vote.
The 2006 election changed that by empowering, for the first time since TABOR was added to the state constitution, a Democrat governor and Democrat majorities in both the state Senate and House of Representatives. The handful of elected Democrats who remembered why voters enacted TABOR were no longer in office, and the new majorities were largely hostile to TABOR's objective of restraining government growth.
In 2007, Gov. Ritter and the Democrats changed the school finance act to allow local school districts to collect more property tax revenues and reduce the state's share of K-12 education funding. Previously, even many Democrats acknowledged that TABOR required such a change to be presented to the voters. This time, however, Democrats commandeered the political will to pass such a law and constructed a legal argument which, although rejected by a lower court, ultimately prevailed in the Colorado Supreme Court. As a result, Coloradans will pay an extra $210 million this year in property taxes — and nearly $3.8 billion extra over 10 years.
Thus emboldened, the 2009 legislature smashed another of TABOR's prohibitions by eliminating, under the guise of "budget reform," the general fund spending limit without a public vote. Although Colorado Revised Statutes specifically referred to this provision as a "limitation" on the general fund, Democrats and their attorneys argued that it was instead an "allocation strategy" and, therefore, not subject to TABOR's prohibition against weakening existing spending limits. In the process, they eviscerated a large source of state transportation funding, instead paving the way for spending on social welfare entitlements, higher education, and corrections to grow by more than one-third.
An even greater subterfuge, however, is the onslaught of taxes masquerading as fees. Generally, taxes — which are subject to TABOR and therefore require voter authorization — are collected broadly and can be spent for any purpose. Fees, however, have long been understood to cover the cost of a regulatory function or of administration, e.g., licensing or registration, upon which the fee is assessed.
Gov. Ritter and Democrat legislators make no pretense that the largest of their fee increases merely cover administrative expenses. Ritter, in particular, has adopted a much more liberal definition of "fees," suggesting the primary criterion necessary for a tax to be labeled a fee is a "direct relationship" between the payer of the fee and a government activity funded by the fee. That's how he justified the $250 billion increase to vehicle licensing fees to pay for road and bridge repairs, telling KOA radio's Mike Rosen, "[T]here really is a direct relationship between highway usage and infrastructure." Under this loose construction, however, it seems obvious that a new "fee" on gasoline could be imposed just as easily and without a public vote so long as fee revenues were dedicated exclusively to highway construction or repair.
The most egregious fee increase — a $600 million tax on hospital services — was dubbed, ironically, the Health Care Affordability Act. Although the fee will be assessed on "outpatient and inpatient services" and therefore ultimately paid by patients or their insurers, those patients receive no direct benefit in return.
Most hospitals dutifully lined up in support because the fees they collect surreptitiously from patients will be used by the state to obtain federal matching funds to increase payments to — guess who? — hospitals. Revenues also will be used to expand government-subsidized health programs to include people with incomes as high as 450 percent of the federal poverty level. Ritter and the bill's Democrat sponsors implied that these funds amounted to free money, falling into state coffers like manna from heaven at no cost to anyone. Ironically, the legislation specifically prohibits hospitals from itemizing this charge when billing patients.
Together these two fees when fully implemented are projected to raise a combined $850 million a year. All other previously-existing state fees are projected to generate just over $1.6 billion in 2009-10, illustrating how this new, expansive definition of "fee" threatens to become the exception that swallows the rule. The state's general fund, filled mostly by income and sales taxes, is estimated at $6.757 billion for 2009-10, so these two fees alone have the potential to offset a more than 12 percent decrease in the general fund.
With fees of this magnitude, voters may never be asked to approve another genuine tax.
In November 1992 immediately after voters adopted TABOR, the legislature's legal counsel issued guidelines, based on statutes and court rulings, to distinguish taxes from fees. If a levy is "a pecuniary charge upon persons or property," is "imposed by legislative authority" and raises revenue for a general "public purpose," then it is more likely a tax than a fee. Both of the fees above seem to meet those criteria.
Next, legal counsel's guidelines defined a fee as "a charge which is made to defray the cost of a product, service, or regulation … and which is not made primarily for the purpose of raising revenue for general purposes."
Proponents of the vehicle or hospital fees didn't suggest that licensing or administration costs had increased, and the license fee, now labeled a "road fee" and a "bridge fee" on vehicle registration papers, merely contributes to the general cost of road and bridge maintenance. Meanwhile, the hospital fee, as explained earlier, leverages federal funds, only some of which are returned to hospitals. The benefit to patients, whose costs will increase to pay the fee, is even more tenuous.
Other key questions that lawmakers were advised to consider when separating taxes from fees include:
• "Is there any evidence that the people who voted for (TABOR) intended that a vote would be required for future increases in the charge" in question?
• "Will voting on increases in (this) charge 'reasonably restrain most the growth of government?"
• "How much revenue is generated by the charge? (The less revenue generated, the less likely it is a tax.)"
• How broadly based is the charge? (The fewer people who pay the charge, the less likely it is a tax.)"
The answers to all of these questions as they relate to the vehicle and hospital fees, suggest that these fees would have been more truthfully identified as taxes, except that the legislature didn't want to risk the chance that voters would not approve them.
It should be noted that during the economic downturn of 2001-2004, Republicans also supported increasing fees. With rare exceptions those changes simply increased fees to cover the full cost of administering specific licensing, registration or regulation rather than continue the practice of subsidizing those costs with general fund tax revenues.
To these taxes masquerading as fees, Ritter and the legislature exploited another loophole in TABOR that the Colorado Supreme Court went out of its way to construct in Mesa vs. Colorado, which authorized the aforementioned property tax hike. The court's liberal majority opined, "[W]e find that a 'tax policy change directly causing a net tax revenue gain' only requires voter approval when the revenue gain exceeds" the state or local district's overall TABOR spending limit, not when it increases revenue derived from the tax at issue. That is, the court signaled that when tax revenues fall short of the TABOR spending limit, the legislature may increase existing tax rates or eliminate tax exemptions to raise enough revenue to reach the TABOR spending limit.
In its 2009-10 budget, the legislature used this loophole to raise nearly $40 million in taxes by raising taxes on cigarettes and eliminating a tax exemption on income from capital gains. Liberal policy groups like the Colorado Fiscal Policy Institute have urged the governor and legislature to convene a special session to address the 2009-10 budget shortfall by using this loophole to raise taxes even further.
As a candidate for governor in 2006, Ritter used his support of Referendum C to create a key contrast with his Republican opponent. He pledged in his first State of the State address to restore funding for transportation and higher education and to provide every Coloradan with affordable health insurance.
Although Democrats rarely campaign against TABOR, they clearly viewed their first monopoly on the executive and legislative branches as their opportunity to expand social welfare entitlement programs. However, even after Ref C passed, providing $3.6 billion in additional tax revenues earmarked primarily for education and health care, spending on budget items never mentioned in Ref C actually grew faster than those that were specifically designated to benefit from this windfall.
When the economy soured in the summer and fall of 2008, Democrats ignored warnings that their 2008-09 budget was based on economic projections that weren't likely to be realized. They postponed corrective action to until the fiscal year was more than half over, turning to accounting gimmicks and depleting reserves as their primary budget-balancing strategies. For 2009-10, they relied on federal "economic stimulus" funds, more accounting gimmicks, suspended the senior citizen property tax exemption — and still came up $249 million short.
In August, Gov. Ritter unveiled measures to close the $320 million deficit as Democrat lawmakers warned of dire fiscal decisions in the coming months or years. Meanwhile, Coloradans are receiving their new property tax valuation notices and renewing their vehicle license plates, encountering not just the higher fees but harsh late-payment penalties as well. The mood of the people isn't exactly "understanding."
Although Ritter and Democrats expected to build a legacy of restoring social welfare entitlements and increasing funding for K-12 and higher education, they may be instead igniting the next round of taxpayer protections.
As a result of surreptitious tax hikes, expansive fees and a supreme court unwilling to uphold the letter of the law, Colorado taxpayers and voters might warm to new measurers that:
- Create specific limits on the legislature's ability to increase fees except to cover the direct costs of regulation, registration and licensing.
- Close the loophole, created by the Colorado Supreme Court in Mesa County vs. Colorado, which suggested that the legislature can raise taxes without a vote so long as those new tax revenues do not exceed TABOR's remaining spending limitations.
- Halt Ritter's property tax hike and reverse the Supreme Court's deliberate evisceration of the TABOR requirement that any "tax policy change directly causing a net revenue increase" cannot be enacted except with voter approval.
Voters haven't been so skeptical of their government since the 1970s. Last November by a 54-46 percent margin, Colorado voters rejected Amendment 59, a change to TABOR that was backed by more than $2 million, a cadre of high-profile political leaders, and every major newspaper.
Wouldn't it be ironic if the legacy of Governor Ritter and the Democrat legislature isn't rebuilding social welfare entitlement programs but instead igniting the next round of taxpayer protections?
* Mark Hillman is a former Colorado State Senator and State Treasurer who currently serves as the Republican National Committeeman for Colorado. He is a Senior Fellow at The Rocky Mountain Foundation. He can be contacted at mh80807@yahoo.com.
i. Constitution of the State of Colorado, Article X, Section 20 (a.k.a. Taxpayers Bill of Rights).
ii. Senate Bill 2007-199, Colorado General Assembly,
www.leg.state.co.us.
iii. Memorandum: Updated Projections for the Property Tax Impact of Senate Bill 07-199, Colorado Legislative Council Staff, Jan. 7, 2008.
iv. Colorado Revised Statutes, section 24-75-201.1 (1) (a) (II) through (VII).
v. Colorado Legislative Council Staff Fiscal Note, Senate Bill 2009-228, April 24, 2009, Colorado General Assembly, www.leg.state.co.us.
vi. Press release: "Governor Signs Historic Healthcare Affordability Act", Office of Governor Bill Ritter, Jr., April 21, 2009.
vii. House Bill 2009-1293, Colorado General Assembly, www.leg.state.co.us
viii. Colorado Legislative Council Staff Fiscal Note, House Bill 2009-1293, Colorado General Assembly,
http://www.leg.state.co.us.
ix. House Bill 2009-1293, Colorado General Assembly, www.leg.state.co.us.
x. Focus Colorado: Economic and Revenue Forecast, 2008-2012, Colorado Legislative Council Staff, June 22, 2009, p. 7.
xi. Office of Legislative Legal Services, Colorado General Assembly
xii. Mesa County Board of County Commissioners vs. State of Colorado, Colorado Supreme Court, March 16, 2008, majority opinion by Mullarkey, J., p. 25.
xiii. Revenue Options: The Other Side of the Ledger, Colorado Fiscal Policy Institute, August,2009 http://www.cclponline.org/pubfiles/RevOptionsFactSheet091409_FINAL.pdf.
xiv. Issue Backgrounder: State Budget Scrutiny Reveals Ref C Shuffle by Mark Hillman and Amy Oliver, Independence Institute, August 2007.