Landslide victory for TABOR in Colorado – If Milei’s victory was the best global election news of 2023, the defeat of Proposition HH was the best domestic election news of the year. Pro-spending lobbies have repeatedly tried to get rid of the TABOR spending cap.
Now for the three worst developments of 2023. And they are all related. Simply stated, I’m very worried about deterioration of global economic liberty and the failure to address festering problems.
Slouching toward fiscal crisis in the United States – Politicians in the United States generally care more about buying votes than in preserving or enhancing the economic well-being of citizens. Given demographic changes, that’s very bad news for the future.
I’ve repeatedly written about Switzerland’s spending cap, known as the “debt brake,” which has limited annual spending growth to an average of just 2.2 percent over the past two decades.
Today, let’s look at more pro-TABOR evidence. Americans for Tax Reform has a “Sustainable Budget Project” to monitor and track state budgets. Here’s their chart showing the results for Colorado.
As you can see, Colorado government spending between 2013 and 2022 was below population plus inflation.
And that’s true when looking at the money that Colorado collected and spent (“state funds budget), and also when looking at total spending (“all funds budget”), which includes spending financed by the federal government.
None of this, however, means that TABOR is perfect.
Vance Ginn just wrote an article on strengthening Colorado’s spending cap for National Review. Here are some highlights.
TABOR recently had its 30th birthday. Voters approved the constitutional amendment in 1992, establishing the strongest tax and expenditure limit in the country. It’s been the gold standard for a sound spending limit ever since. …When adopted, the limit covered about two-thirds of state spending. It requires voter approval for tax increases and mandates refunds to taxpayers if tax revenue exceeds the limit. …Unfortunately, courts and politicians have eroded the strength of TABOR over time, primarily because of politicians’ lack of fiscal restraint. The result has been that TABOR now covers less than half of state spending… The…Sustainable Colorado Budget..will help reinforce the original intent of TABOR, by broadening the spending limit to all state funds. The plan would limit nearly two-thirds of state spending each year, as when voters first adopted TABOR. Doing so will result in larger surpluses to reduce income-tax rates yearly until they’re zero.
Several times in recent years (2013, 2019, 2023), proponents of good fiscal policy have had to fight against referendums to weaken TABOR. As Vance wrote, it’s time to go on offense and push to make the spending cap even more effective.
Since I care about policies rather than politicians, yesterday’s most important election was a referendum that took place in Colorado.
The big-spending lobbies once again tried to weaken the state’s spending cap, known as TABOR, or the Taxpayer Bill of Rights.
Yet even though Colorado voters lean to the left, they overwhelmingly rejected Proposition HH. Here are the results.
I underlined the most important part of the above description because the anti-TABOR crowd tried to deceive voters by portraying Prop HH as a measure to lower property taxes.
As I wrote last month, “Will Colorado voters be tricked by Proposition HH? Will they be distracted by the shiny bauble of lower property taxes while politicians grab a greater amount of income tax revenue?”
Fortunately, the voters saw through the ruse.
Here’s how Nick Coltrain and Seth Klamann of the Denver Postdescribed the outcome.
Colorado’s wide-ranging Proposition HH, a property tax relief and education-funding measure pressed by the state’s Democratic leaders, went down in defeat Tuesday night as voters were rejecting it by 20 percentage points. More than 60% of voters rejected Proposition HH…voters in all but a handful of counties were on track to reject the major policy proposal put forth by Gov. Jared Polis and legislative Democrats… It was the second time in four years that voters rebuffed an attempt by state Democrats to raise spending limits under the Taxpayer’s Bill of Rights, or TABOR. …Proposition HH marked the latest defeat as Democrats attempted to leverage their trifecta in state government to hold onto more tax money. On the 2019 ballot, they ran Proposition CC, which proposed to retain all taxes collected beyond the TABOR cap, ending refunds, in a bid to shore up the budget. Voters rejected Prop. CC.
In 2019, voters in Colorado voted down an initiative that would have weakened the Taxpayer Bill of Rights.
For 2023, Colorado will once again have the spotlight.
That’s because the pro-spending lobbies and their allied politicians have not given up on their campaign to gut TABOR.
As far as they are concerned, the $8 billion-plus that has been refunded to taxpayers is money that should have been used to finance bigger government.
They hate that there is an annual spending cap that limits the growth of government. So the fact that they lost in 2019 (and in 2013 as well) isn’t stopping them from putting another proposition on the ballot.
The newest anti-TABOR initiative is called Proposition HH and the Wall Street Journaleditorialized last month about this bait-and-switch scheme.
Coloradans enjoy relatively low taxes for a blue state, but their luck may not last. Democrats in Denver are backing a measure that would blow through the state’s spending cap… The coming tax hazard is known as Proposition HH… It proposes two policy changes that work in opposite directions. The first would curb property-tax growth modestly by lowering the assessment rate. That would save about $4,600 for an average homeowner through 2032… The kicker is the second part. The same ballot measure would raise the amount the state can spend by about 25% a year… That change would cost each household about $5,100 over nine years, swallowing the savings from the property-tax cut. The changes could cost taxpayers an estimated net $21 billion through 2040. …Colorado Democrats have spent years trying to lift the spending cap, and the property-tax mirage is their latest gambit. …public unions, which want the no-limits spending of other Democratic-controlled states.
In a column for Forbes, Patrick Gleason expands on these concerns.
…the most consequential measure appearing on the November 2023 ballot…is found in Colorado, where voters will be asked whether they want to weaken the nation’s strongest tax and expenditure limit… Proposition HH…would weaken the state’s Taxpayer’s Bill of Rights (TABOR) by permitting the state to keep surplus revenue that would otherwise have to be returned to taxpayers. …Rather than sell HH as an initiative to end TABOR refunds moving forward so that government, not taxpayers, has more money to spend, Proposition HH backers have instead branded it as a property tax relief measure. …Opponents of HH have been pointing out that the measure would translate into forfeiture of TABOR refunds and ultimately lead to a much higher overall tax state burden in the future. …Proposition HH would raise the TABOR spending limit by a cumulative $12.5 billion over the first decade, around $65 billion over two decades.
Will Colorado voters be tricked by Proposition HH? Will they be distracted by the shiny bauble of lower property taxes while politicians grab a greater amount of income tax revenue?
P.S. If I was including ballot initiatives from other nations, Chile’s rejection of a statist constitution would have been 2022’s most important result. And Switzerland’s rejection of “universal basic income” would have been the most important result of 2016.
I’ve referred to Colorado’s spending cap as a “role model” and the “gold standard,” and I lavished even more praise on the Taxpayer Bill of Rights in this clip from a recent interview with Penn Pfiffner of the TABOR Foundation.
If you don’t have a couple of minutes to watch the video, all you need to know is that balanced budget requirements are mostly ineffective.
Or, if you want to be pessimistic, such rules actually give politicians an excuse to raise taxes.
What makes TABOR so successful is that it is designed to control the variable that really matters, which is the growth of government.
TABOR basically tells politicians they can increase spending every year, but no faster than population plus inflation.
And Colorado definitely has out-performed other states economically, as measured by the growth of per-capita income.
This is the approach we need in Washington. Heck, even international bureaucracies have acknowledged that spending caps are the only effective fiscal rule.
It is also worth noting that the German government recently endorsed that approach for Europe, which is a positive development since the European Union’s anti-deficit rules obviously have not been effective.
So I’ll be very curious to see whether any 2024 presidential candidates decide to embrace this approach (whether they are sincere is a different issue, needless to say).
P.S. The international version of TABOR is the Swiss Debt Brake.
P.P.S. I also recommend this video about spending caps.
In this clip from my appearance on Let People Prosper, I explain those spending caps are the gold standard for fiscal rules.
It should go without saying that spending caps are good only if they actually constrain the size of government, just as speed limits in school zones are good only if they protect children from reckless drivers.
Which is why I favor spending caps that comply with my Golden Rule.
As you might suspect, politicians generally don’t want any constraint their ability to spend money (and buy votes).
But sometimes they do the right thing. Or at least propose the right thing.
In an article for the Hill, Aris Folley and Mychael Schnell explain that Republicans are offering to give Biden more borrowing authority if Biden agrees to spending caps for the “discretionary” part of the budget.
Here are the relevant excerpts.
House Republicans on Wednesday passed a bill to raise the borrowing limit and implement sweeping spending cuts… The bill would raise the debt ceiling by $1.5 trillion or through the end of next March, whichever happens first, in exchange for a wide range of Republican proposals to decrease government spending that, according to the Congressional Budget Office (CBO), amount to $4.8 trillion. The bill would cap federal funding hashed during the annual appropriations process at fiscal 2022 levels, while also limiting spending growth to 1 percent every year over the next decade.
The good news is that Republicans are talking about spending caps. This is a welcome change of pace after the profligacy of the Trump years.
The bad news is that the GOP plan presumably has very little likelihood of getting approved.
And even if Biden and Senate Democrats somehow agree to the spending cap, it only applies to discretionary spending. That’s better than nothing, but entitlements are America’s big fiscal problem.
In other words, I’m not brimming with optimism. But let’s not make the perfect the enemy of the good. Politicians are talking about spending caps today, so maybe there’s a chance of getting real results at some point in the not-too-distant future.
The Center for Freedom and Prosperity has a video on spending caps that focuses on international evidence, such as Switzerland’s debt brake.
Here’s a video from the American Legislative Exchange Council that that looks at a successful domestic spending cap – Colorado’s Taxpayer Bill of Rights.
Here’s the short and simple explanation of how the Taxpayer Bill of Rights (TABOR) constrains spending.
Under the constitutional provision, state tax revenue cannot grow faster than population plus inflation. Any revenues above that amount have to be returned to taxpayers.
And since the state has a requirement for a balanced budget, that means that spending also can only grow as fast as population plus inflation.
Has TABOR been successful?
Colorado has out-performed other states, as measured by the growth of personal income, which presumably is a key variable.
Another key variable is the amount of money that TABOR has returned to taxpayers. Here are some excerpts from a new study, authored by Professor Barry Paulson and published by the American Legislative Exchange Council.
This year, the Colorado General Assembly announced a taxpayer rebate of $3.6 billion in surplus revenue. …These rebates are mandated by TABOR, a fiscal rule that limits the growth of revenue and spending at all levels of government and requires that surplus revenue be rebated to taxpayers. …It is important to understand why TABOR has been successful and resilient. TABOR is designed to limit the rate of growth in state revenue and spending to the sum of inflation plus the rate of growth in population while allowing a majority of voters to increase the revenue and spending limit when needed. This prevents many new taxes increases. If the state government collects more tax dollars than TABOR allows, the money is returned to taxpayers as a TABOR refund. …As a result, the state has not incurred deficits or accumulated debt as much as other states, like California. …tax rebates…totaling $8.2 billion since TABOR passed in 1992, has strengthened Colorado citizens confidence in the TABOR Amendment over the years.
The last sentence is key. TABOR has resulted in $8.2 billion in tax rebates. More important, it has prevented Colorado politicians from spending $8.2 billion.
Taxpayers seem to understand that TABOR is a very important protection against over-taxing and over-spending.
Here are some excerpts from a column by Ben Murrey of Colorado’s Independence Institute.
Every time voters speak on key issues related to TABOR, they send the same unambiguous message: “Leave TABOR alone and let us keep our money!” …In 2019 after voters gave Democrats unified control over state government, legislators thanked them by sending Proposition CC–which would have permanently ended TABOR refunds–to the November ballot, where Coloradans soundly rejected it. …In 2020, voters had the choice between two competing citizen-led ballot initiatives. One would have raised taxes and repealed TABOR’s requirement that Colorado maintains the same income tax rate for all taxpayers. The other, put on the ballot by my organization, Independence Institute, reduced the state’s income tax rate from 4.63 to 4.55 percent. The latter passed with a wide margin. The former failed even to gather enough signatures to appear on the ballot. …Fast forward to 2022. …Initiative 63 would have taken TABOR refunds from taxpayers and given the money back to the state to spend on public education. Like the tax increase measure from 2020, the initiative failed even to make the ballot. Conversely, Independence Institute worked to put Proposition 121 on the ballot. The measure won with more than a 30-point margin and lowered the state income tax rate from 4.55 to 4.4 percent, saving taxpayers over $400 million per year.
Colorado voters don’t always reject tax increases. At the local level, such measures often are approved.
But Murrey’s article shows that voters want to preserve TABOR and don’t want to give state politicians a blank check for more taxes and more spending.
Needless to say, a TABOR-style spending cap would be very helpful in other states. And at the national level as well.
P.S. The ALEC study looked at 30 years of evidence. There’s also a study that looked at the first 20 years of evidence.
And both of these themes can be found in a comprehensive new report issued by the Maine Policy Institute.
The report provides lawmakers with a detailed analysis of the state’s fiscal status and it shows specific spending reforms that would save money and create “fiscal space” for pro-growth tax reforms.
I realize that readers from most places won’t care very much about some of the Maine-specific data, but the report contains some charts that teach a very important lesson that can be applied in other states, as well as in Washington and other national capitals.
Consider, for instance, this chart showing that Maine is getting in trouble because spending in recent years is growing significantly faster than inflation.
The same is true in Washington, except the problem is far worse.
In other words, governments at all levels and in almost all places have a hard time complying with fiscal policy’s Golden Rule.
That being said, spending caps are a universal solution to this universal problem. Let’s look at Figure 10 from the report, which shows how a TABOR-style spending cap would have produced very good results for Maine.
Once again, we can take this information and apply it very broadly.
A spending cap is the smart and effective way of dealing with irresponsible fiscal policy at all levels of government.
For instance, Switzerland is well know for its spending cap, known as the debt brake. This approach has yielded very good results for the nation’s finances, but less well know is the fact that many subnational governments in Switzerland’s federalist system have their own versions of a spending cap.
The bottom line is that good fiscal policy is universally applicable. And spending restraint is a necessary precondition for that to happen.
P.S. Some people ask whether a balanced budget amendment would be better than a spending cap. This question gives me an excuse to share one more chart from the study. As you can see from Figure 9, annual tax revenues are very unstable. Sometimes they grow rapidly, sometimes they grow slowly, and sometimes they actually shrink (and the same thing is true in Washington).
This means that a balanced budget requirement is very difficult to enforce and often does not produce good results. During boom years, when revenue is rapidly increasing, politicians have too much leeway to increase spending. And during downturns, when revenue if stagnant or falling, politicians claim that spending restraint would be too difficult and they raise taxes instead.
If Republicans do as well as expected in next Tuesday’s mid-term elections, especially with regard to gubernatorial and state legislative contests, I expect that more states will enact and expand on school choice in 2023.
But I also want great news for taxpayers, and that’s why I’m hoping that we also will see progress on fiscal policy. To be more specific, I want to see more states copy Colorado’s very successful spending cap.
Known as the Taxpayer Bill of Rights (TABOR), it basically limits the growth of annual tax revenue to the growth of population-plus-inflation. Any revenue above that amount automatically must be returned to taxpayers.
And since the state also has a balanced-budget requirement, that means spending can only increase as fast as population-plus-inflation as well. A very simple concept.
Has TABOR been successful? Has it produced better fiscal policy and more economic prosperity?
The answer is yes. In a column for National Review, Jonathan Williams and Nick Stark say it is the “gold standard” for state fiscal policy.
TABOR is a state constitutional amendment that limits the amount of revenue Colorado lawmakers can retain and spend to a reasonable formula of population plus inflation growth. If the state government collects more tax revenue than TABOR allows, the money is returned to taxpayers as a refund. Just this year, Colorado taxpayers will receive nearly $4 billion in TABOR refund checks. If any government in Colorado intends to spend surplus revenue, increase taxes or fees, or increase debt, it must submit the proposed measure to the ballot and win the approval of a majority of voters. …Following the low-tax-plus-limited-government formula, Colorado developed into one of the most competitive business climates in the nation in the years following TABOR’s adoption. During the past three decades, Colorado has been one of the most competitive and fastest-growing economies in the nation. …Even in the face of this tremendous economic-success story, the tax-and-spend crowd have spent a tremendous amount of resources trying to demonize TABOR, often attempting to find work-arounds or suing to have TABOR declared unconstitutional. Why? In short, because it is an effective limit on the growth of government, and it restricts the wild spending increases that fund their constituencies — who generally favor big government. …Other states trying to implement meaningful checks and balances on the inexorable government-growth machine…should follow Colorado’s example.
Courtesy of Jon Caldera, here’s some of Colorado’s fiscal history, which began with a flat tax in the 1980s and then culminated with TABOR in the 1990s.
Colorado used to have a progressive income tax where people and companies would pay a higher tax rate the more money they earned. Thanks to the Independence Institute…and…economist Barry Poulson, the legislature was convinced to switch from the progressive tax to a flat one in the mid-1980s. Poulson urged that the new tax rate be 4.5% so that it would bring in the same amount of revenue as the system it was replacing. …So, of course, the legislature set the new rate at 5% to create a fine windfall, which it did. Even so, the flat income tax did what it was predicted to do. It lit the engine of Colorado’s economy. When productive people and their companies are looking to locate, they are attracted to states with low and stable tax policy. The flat tax began the Colorado boom. That boom resulted in massive tax receipts to the state. So much so that the legislature quickly felt the growing pressure of a tax rebellion. …So, we then passed the Taxpayer’s Bill of Rights in 1992. The combination of our flat tax and TABOR attracted more and more businesses and jobs to Colorado. So much so that in the late 1990s the state had to refund some $3.2 billion of surplus tax revenue to taxpayers. …The combination of our flat-rate income tax and TABOR has made for a sustainable gold rush which has turned Colorado into one of the most economically vibrant states in the country with one of the lowest unemployment rates.
I’ll close by explaining why folks on the left also should support TABOR-style spending caps.
But another reason is that it may be politically beneficial. Check out these excerpts from a column in the Denver Post by Scott Gessler.
TABOR requires a vote of the people to raise taxes, incur debt, or spend excess government funds. Practically, it makes all three much harder. So Democrats hate TABOR. …conservatives love TABOR. They rarely support tax increases or additional borrowing, and for them TABOR imposes fiscal discipline and forces government to live within its means. And Colorado has avoided the ongoing fiscal crises that have plagued other states like Illinois or California. Plus, it’s hard to argue against the public’s right to vote on taxes and debt. …But what about Republicans? They’re the ones who have paid the political price. …Today, voters can oppose Republicans and support Democrats, with little fear taxes will go up. …So expect the continued irony, as Democrats attack TABOR with a unified voice, while Republicans usually support it, yet lose political strength.
Since I care about policy rather than partisanship, I hope lots of Democrats read this article and then embrace spending caps. If they don’t want to copy Colorado, they can opt for the Swiss version of a spending cap. So long as they choose something real, it will work.
Since Americans are not as sensible as the Swiss, I’m generally not a fan of direct democracy in the United States.
Simply stated, I don’t like untrammeled majoritarianism, which occurs when 51 percent of voters can pillage 49 percent of voters.
But I’ll admit that the level of my angst fluctuates depending on whether voters make wise choices. With that in mind, here are the six ballot initiatives that I’ll be closely watching on election day.
1. Proposed Amendment to the 1970 Illinois Constitution
The most important ballot initiative is the proposal by the hypocritical governor of Illinois to undo the state’s flat tax. I’ve already dedicated an entire column to this issue, so I’ll simply add some additional analysis from a Wall Street Journaleditorial.
Illinois voters will decide next month whether to enact a progressive income tax, paving the way for a new top rate of 7.99%. …The Prairie State currently ranks 36th worst in overall tax burden because its flat individual rate of 4.95% offsets very high property and other taxes. …its proposed slate of new individual income tax rates, along with a corporate tax hike tied to the same ballot measure, would drop the state’s rank overall to 47th. That would move Illinois into Dante’s ninth ring of tax hell, ahead of only New Jersey, New York and California. …Iowa and Missouri have…slashed their top rates in recent years rather than jacking them up as Illinois Democrats intend. Kentucky lawmakers in 2018 replaced their progressive income tax with a flat rate of 5%. Heading in the opposite direction of neighboring states could push many of Illinois’s overburdened families and businesses across the border.
2. Arizona Proposition 208
There’s a class-warfare proposal to dramatically increase the top income tax rate in Arizona.
Once again, the editors at the Wall Street Journal have spot-on analysis.
Arizona has long been a refuge for Americans seeking relief from high-tax California and states in the Northeast. But a tax referendum on the ballot Nov. 3 would whack job creators and make people rethink retirement in Scottsdale or a business move to Tucson. …The current top rate of 4.5% would rise to 8%, which would move the state to the 10th highest income-tax rate in the country, from 11th lowest today… Arizona would move closer to California (13.3% top rate) than Nevada (no income tax). …about half of the targets would be small businesses that pay taxes at the individual rate… They employ a huge chunk of Arizona workers, and the added tax costs would trickle down in lower pay and fewer jobs. …One definition of fiscal insanity would be to raise state taxes when the Biden Democrats may soon raise federal tax rates to heights not seen since the 1970s.
3. California Proposition 16
In California, politicians want the state to have to power to engage in racial and sexual discrimination. In pursuit of that goal, they are asking voters to repeal Proposition 209, adopted by voters in 1996.
Gail Heriot, a law professor who also serves on the U.S. Civil Rights Commission, explains why this is a bad idea in a column for Real Clear Politics.
California’s deep-blue legislature has been itching to repeal Proposition 209 for years. …Proposition 209 amended California’s constitution to prohibit the state from engaging in preferential treatment based on race or sex. It was a rebuke to the identity politics obsessions of state and local governments. …By approving Proposition 209 by a wide margin, they aimed to end the race and sex spoils system. …The best reason for retaining Proposition 209 is…that the initiative has been good for Californians — of all races…the number of under-represented minority students in academic jeopardy collapsed. …in the years immediately following Proposition 209, it had three effects on under-represented minorities in the UC system. It increased (1) graduation rates, (2) GPAs, and (3) the number of science or engineering majors.
4. California Proposition 15
Since we just discussed one bad California proposition, we may as well mention another.
There’s also a scheme to (again) raise taxes. The Wall Street Journalopines on this misguided initiative.
Sooner or later California’s public unions had to hit up the hoi polloi to pay for their pensions after soaking what’s left of the state’s millionaire class, and here they come. On Nov. 3, Californians will vote on a “split roll” ballot initiative (Prop. 15) that seeks to enact the biggest tax hike in state history. …Under current law, tax rates on residential and commercial property are capped at 1% of their assessed value—i.e., the purchase price—and can increase by no more than 2% annually. …This is the only balm in California’s oppressive tax climate and acts as a modest restraint on the government spending ratchet. Unions know that attempting to repeal this entirely would spur a homeowner revolt, so they are targeting businesses. …Facebook CEO Mark Zuckerberg is Prop. 15’s second biggest donor. Perhaps he’s trying to atone for his wealth, but as the NAACP and minority business groups explained in a letter to him in August: “Unlike Facebook, restaurants, dry cleaners, nail salons and other small businesses can’t operate right now and many may never open again. The last thing they need is a billionaire pushing higher taxes on them under the false flag of social justice.” …Prop. 15 would raise property taxes by $8.5 billion to $12.5 billion a year by 2025.
5. Colorado Proposition 117
Proponents of fiscal responsibility in Colorado want to strengthen TABOR (or, to be more accurate, stop the erosion of TABOR) by requiring a public vote for non-trivial efforts to increase government revenue.
Proposition 117..would add a new TABOR-like provision to state law, requiring the state government to get voter permission before it creates major new “enterprises,” which are partially funded by fees. Colorado voters already have authority over tax increases and rarely approve them. The state Supreme Court has held that a fee is different from a tax because it is reasonably connected to a specific purpose. And in the years that TABOR has been in effect, lawmakers have used them as a way to raise money without raising taxes. Critics see fees as an end-run around TABOR’s spending limits.
6. Colorado Proposition 116
Sticking with Colorado, there’s also a proposal to lower the state’s flat tax.
This initiative would cut the state’s income tax rate from 4.63 percent to 4.55 percent. …This change would reduce the state government’s revenue by an estimated $170 million in the next fiscal year. Supporters argue it would boost businesses and consumer spending, while opponents say it would weaken government services and social supports already severely cut by the downturn. The measure was originally intended to counter a progressive tax measure that failed to make the ballot.
Honorable Mention
There are many other ballot initiatives. Here are some that I care about, even if they were not important enough to be featured.
Proposition 22 to penalize the gig economy in California. Also a bad idea. [Oops, got this backwards. Prop 22 would undo the legislation that penalizes the gig economy.]
Initiatives to legalize marijuana in Arizona, Montana, New Jersey, and South Dakota. The libertarian side of me is very supportive, but the fiscal side of me doesn’t like the fact that one of the motives is a desire to collect more tax revenue.
Ranked-choice voting in Alaska and Massachusetts. This is a system that requires voters rank all candidates and awards victory to whoever has the strongest support across all ballots. It is assumed that the impact will be more centrist candidates and more civil elections. I don’t have strong views, but it’s worth noting that Australia uses this approach and it’s one of my favorite nations.
Time for my annual column highlighting the “Best” and “Worst” policy developments of the year, a tradition I sort of started in 2012 and definitely did in 2013, 2014, 2015, 2016, 2017, and 2018.
I’m trying to be a glass-half-full kind of guy, so we’ll start with the best policy developments for 2019.
Boris Johnson’s landslide victory – I was in London for the recent U.K. election and was pleasantly surprised when Boris Johnson won a surprising landslide. That’s not a policy development, of course, but it’s first on my list because it presumably will lead to a genuine Brexit. And when the United Kingdom escapes the sinking ship of the dirigiste European Union, I have some hopes for pro-market policies.
TABOR wins in Colorado – Without question, the best fiscal system for a jurisdiction is a spending cap that fulfills my Golden Rule. Colorado’s constitution has such a policy, known as TABOR (the Taxpayer Bill of Rights). Pro-spending lobbies put an initiative on the ballot to eviscerate the provision, but voters wisely rejected the measure this past November by a nearly 10-point margin.
Macroeconomic strength – A strong economy also isn’t a policy, but it’s partially the result of good tax reforms and much-needed regulatory easing. This has pushed up the value of stocks (though I worry we may be experiencing a bubble), but I’m much happier that it’s led to a tight labor market and increased wages for lower-skilled workers.
Now let’s look at the worst developments of 2019.
An ever-increasing burden of government spending – The federal government is far too big, and it keeps growing in size. Entitlements are the main problem, but Trump added to the mess by capitulating to another budget deal that increases the burden of discretionary spending.
Missed opportunity on China trade – Because he foolishly focused on the bilateral trade deficit, Trump missed a great opportunity to pressure China to eliminate (or at least reduce) various cronyist policies that actually do distort and undermine trade.
Repeal of the Cadillac tax – I never imagined I would be in a position of stating that it was a mistake to repeal a tax increase, but the recent repeal of the tax on high-end health plans is such bad policy in terms of health care (contributing to third-party payer) that it more than offsets my long-standing desire to deprive Washington of revenue.
I’ll close by noting my most-read and least-read columns of the year.
We’ll start with the popular items.
My most-read column from 2019 discussed a very impressive (and very understandable) example of tax avoidance from France.
In second place was my piece that lauded a columnist for the New York Times who admitted gun control is foolish policy.
Winning the bronze medal was my column from last week celebrating the dissolution of the Soviet Union.
By the way, my most-read article in 2019 was actually a quiz about political philosophy I shared back in 2015. Those must be popular items, because other quizzes (from 2014 and 2013) were actually the third-most and fourth-most popular columns for the year.
And here are the biggest duds.
The column with the least clicks (perhaps because it was only posted a couple of days ago) revolved around the technical issues of economic sanctions, extraterritoriality, and the strength of the dollar.
The second-worst-performing column was from late November and discussed the International Monetary Fund’s cheerleading for higher taxes in Japan.
Next on the list is my discussion from a few days ago about how Washington imposes policies that encourage households to make short-sighted financial choices.
P.S. About 80 percent of readers are from the United States, and that’s been relatively constant over the years. But it’s been interesting (at least to me) to observe where other readers reside. In the very beginning, Canada provided the second-biggest group of readers, but then the United Kingdom took over for several years, only to be dethroned by Australia in 2017 and 2018. For 2019, though, the United Kingdom reclaimed second place, presumably because I kept writingabout Brexit. If we go by readers as a share of the population, I’m actually most popular in small tax havens.
And we have good evidence for this approach, as I explain in this FreedomWorks discussion.
I also discuss tax competition in the interview, as well as other topics. You can watch the entire discussion by clicking here.
But I’m sharing the part about spending caps because it fits perfectly with some new research from Veronique de Rugy and Jack Salmon of the Mercatus Center.
They point out that America faces a grim fiscal future, but suggest that fiscal rules may be part of the solution.
…the federal budget process as it exists today has proven inadequate…it is a great way to enable politicians to do what they want to do (cater to interest groups) while avoiding what they don’t want to do (living within their means). …The negative consequence emerging from this chaos and the resulting failure to follow budget rules is an unremitting expansion of the size and scope of government… With countries around the world experiencing growing debt-to-GDP ratios, resultant stagnation in economic growth, and, in extreme cases, default on debts, academics have been paying an increasing amount of attention to the potential of rules toward restraining unsustainable deficit spending. …The good news is that the evidence suggests that these fiscal rules are broadly effective at restraining deficit spending. …The bad news is that not all fiscal rules are effective in restraining government profligacy and curtailing debt growth.
The authors are right. Some fiscal rules don’t work very well.
Spending caps, by contrast, have a decent track record.
The Mercatus study looks at Hong Kong.
Hong Kong…might actually represent the gold standard of good fiscal policy. …Hong Kong’s Financial Secretary, Mr. John Tsang, explained, “Our commitment to small government demands strong fiscal discipline. . . . It is my responsibility to keep expenditure growth commensurate with growth in our GDP.” …in Hong Kong it’s actually a constitutional requirement: Article 107 requires that the government should strive to achieve a fiscal balance, avoid deficit, and more importantly, make sure government spending doesn’t grow faster than the growth of the economy. …Hong Kong’s spending-to-GDP ratio has fluctuated between 14 and 20 percent since the 1990s, its debt as a share of GDP is zero, social welfare spending remains steady at less than 3 percent of GDP.
Now let’s look at what the authors wrote about Switzerland.
Swiss politicians are not allowed to increase spending faster than average revenue growth over a multiyear period (as calculated by the Swiss Federal Department of Finance), which confines spending growth to a rate no higher than the rate of inflation plus population growth. The Swiss debt brake rule is significant in that it appeals to economists and policymakers on both sides of the aisle. Advocates for fiscal restraint support this rule because it is effectively a spending cap, while social democrats support the rule as it allows for deficit spending during recessionary periods. …There’s no arguing with the results: Annual spending growth fell from an average of 4.3 percent to 2.5 percent since the rule was implemented. Also, in 10 out of the past 14 years, Switzerland has had budget surpluses, while deficits have remained rare and small… At the same time, the Swiss debt-to-GDP ratio has fallen from almost 60 percent in 2003 to around 42 percent in 2017.
Here’s Figure 1 from the study, which shows a big drop in Swiss government debt. I’ve augmented the chart with OECD data to focus on something even more important – which is that the burden of spending (which started very low by European standards) has declined since the debt brake was implemented.
Last but not least, let’s look at the Danish example.
In 2014 Denmark implemented The Budget Act to ensure more efficient management of public expenditures. The act is aimed at ensuring a balance or surplus on the general government balance sheet, as well as appropriate expenditure management at all levels of government. In practice, the rule sets a limit of 0.5 percent of GDP on the structural budget deficit. Policymakers decided that managing fiscal policy on the basis of a balanced structural budget would lead to an appropriate fiscal position in the long term. They also designed the system to take discretion out of their own hands by making the cuts automatic. In addition to structural deficit rules, the Budget Act introduces four-year rolling expenditure ceilings. These ceilings set legally binding limits for spending at all levels of government and for each program. If one program spends under its cap, any money not spent cannot be reallocated to another program.
I guess this is time for a triple-amen.
Here’s Figure 2 from the study, which I’ve also augmented to highlight the most important success of Denmark’s policy of spending restraint.
The economic case for spending caps is ironclad.
The problem is that it’s an uphill climb from a political perspective.
Politicians prefer legislative spending caps. After all (as we saw in 2013, 2015, 2018, and this year), those can be evaded with a simple majority, so long as there’s a profligate president who approves higher spending levels.
If you want proof for that assertion, check out states such as Illinois, California, and New Jersey. They all have provisions to limit red ink, yet there is more spending (and more debt) every year. There are also anti-deficit rules in nations such as Greece, France, and Italy, and those countries are not exactly paragons of fiscal discipline.
That’s why I’m a big fan of the “debt brake” in Switzerland’s constitution and Article 107 in Hong Kong’s constitution.
And it’s also why the 49 other states, assuming they want an effective fiscal rule, should look at Colorado’s Taxpayer Bill of Rights (TABOR) as a role model.
Colorado’s Independence Institute has a very informative study on how TABOR works and the degree to which it has been effective. Here’s a good description of the system.
Colorado voters adopted The Taxpayer’s Bill of Rights in 1992. TABOR allows government spending to grow each year at the rate of inflation-plus-population. Government can increase faster whenever voters consent. Likewise, tax rates can be increased whenever voters consent. …The Taxpayer’s Bill of Rights requires that excess government revenues be refunded to taxpayers, unless taxpayers vote to let the government keep the revenue.
And here are the headline results.
Cumulatively, TABOR refunds have been over $800 per Coloradan, or $3,200 for a family of four. …If Colorado government had continued growing at the same high rate (8.56% compound annual rate) as in 1983-92, the average Coloradan would have paid an additional $442 taxes in 2012. The cumulative two-decade savings per Coloradan are $6,173—or more than $24,000 for a family of four.
However, the study notes that TABOR was most effective during its first 10 years. It was less effective in its second decade because voters acquiesced to a “TABOR time-out” as part of referendum C in 2005.
The final decade included the largest tax increase in Colorado history, enacted as Referendum C in 2005. Decade-2 was also marked by increasing efforts to evade TABOR by defining nearly 60% of the state budget as “exempt” from TABOR. …Rapid government growth resumed in Decade-2, mainly because of Referendum C.
This chart from the study shows that outcomes were much better during the first decade of TABOR.
But a weakened TABOR is better than nothing. Here’s the conclusion of the report.
The Taxpayer’s Bill of Rights Amendment has worked well to achieve its stated intention to “slow government growth.” Although government has still continued to grow significantly faster than the rate of population-plus-inflation, the Taxpayer’s Bill of Rights did partially dampen excess government growth. …In terms of economic vitality, Colorado’s Decade-1 was best for Colorado. Unlike in the pre-TABOR decade, or in TABOR Decade-2 with its record increase in taxes and spending, because of Referendum C. Colorado’s first TABOR decade saw the state economy far outperform the national economy.
But keep in mind that the economic gains occurred in the first decade.
The bottom line is that spending caps are like speed limits in school zones. If they’re set too high, that defeats the purpose.
And in Colorado, the vote for Referendum C allowed a spending surge that made a mockery of TABOR.
But only temporarily, which is why that period was known as the “TABOR time-out.” The rules once again limit spending growth to population plus inflation.
Needless to say, the political crowd hates having their hands tied. Which is why the pro-spending lobbies are agitating to once again gut TABOR. Here’s a clip from a local news report that does a good job of describing the current fight.
The battle actually started a couple of years ago. Here are some excerpts from a 2016 report by the Associated Press.
By 2030, Colorado’s population will grow from 5 million to 7 million people, thanks in part to a strong and diverse economy, the state’s famed Rocky Mountain quality of life, and its constitutionally-mandated low taxes. …The state’s Democratic governor, John Hickenlooper, is trying to find ways to squeeze more revenue for roads from the budget, while Republicans don’t want to tamper with the fabled 1992 constitutional amendment known as TABOR that keeps a tight limit on those taxes. …Under TABOR, voters must approve any state and local tax hike. Democrats are still stung by a resounding defeat of a 2013 ballot initiative to raise $1 billion for schools.
I’m amused by the fact that the above passage starts by noting the state has a “strong” economy. Too bad the reporter didn’t put 2 and 2 together and recognize that TABOR deserves some of the credit.
Likewise, this next passage cites a leftist who acknowledges growth in the state, but pretends that it’s exogenous, like the weather.
Liberals think that’s a recipe for disaster, especially in a growing state. “What we have to stop doing is pitting necessary priorities like roads against other necessary priorities like schools and colleges,” said Tim Hoover, spokesman for the Colorado Fiscal Institute, which favors dismantling the amendment. “TABOR forces us to do that.” So far the low-tax crowd is winning. Even Hickenlooper acknowledges there isn’t a popular appetite to raise taxes, and his hopes of changing the classification of an arcane fee in the budget to free up revenue are opposed by Republicans… Republicans say the real problem is growing Medicaid spending. Colorado, which expanded the program under the Affordable Care Act, is spending about $2.5 billion on the health care plan.
Note that TABOR critics object to various interest groups having to compete for money.
But that’s exactly why a spending limit is so desirable. Politicians are forced to abide by the rules that apply to every household and business in the state. In other words, they have to (gasp!) prioritize.
Let’s conclude by reviewing some passages from a pro-TABOR column published last week in the Steamboat newspaper.
Colorado’s has grown by nearly two-thirds since 1992, one of the fastest increases in the country. If you are part of the more than two million new residents who have arrived over this time, there are a few things you should know…the Taxpayer’s Bill of Rights is responsible for much of the state’s economic success, which likely drew you here in the first place. Between 1992 and 2016, median household income in Colorado grew by 30 percent, adjusted for inflation. …TABOR helped end years of economic stagnation and laid the groundwork for the state’s future success by keeping resources in the hands of Colorado residents who could put them to their highest valued use and checking overzealous government spending. …Its requirement that excess revenues must be refunded to taxpayers has also resulted in more than $2 billion being returned to the private economy… TABOR has empowered voters to reject roughly a dozen advocacy-backed tax hike proposals.
My favorite part is when they cite critics, who confirm that TABOR is successful.
A Denver Posteditorial last year complained, “TABOR’s powerful check on government spending in reality has been a padlock on the purse-strings of the General Assembly.” The check on spending is exactly the point, and it still allows spending to grow in-line with inflation and population growth. If government wants more money, all it has to do is ask. Requiring consent is hardly a “padlock.”
Amen. We could use some more padlocks in the rest of the country. TABOR should be nationally emulated, not locally emasculated.
P.S. Enjoy this amusing video from the Independence Institute. It shows politicians in a group therapy session about TABOR.
P.P.S. By the way, there is a spending cap in Washington, though it only applies to a small portion of the budget (appropriated outlays). Sadly, that very modest example of fiscal restraint has not been very effective. The group therapy session in Washington, otherwise known as Congress, voted to bust those spending caps in 2013, 2015, and earlier this year. Sort of D.C.’s lather-rinse-repeat version of Referendum C.
And earlier this month, I discussed another good IMF study that showed how deficit and debt rules in Europe have been a failure.
In hopes of teaching American lawmakers about this international evidence, the Cato Institute put together a forum on Capitol Hill to highlight the specific reforms that have been successful.
I moderated the panel and began by pointing out that there are many examples of nations that have enjoyed good results thanks to multi-year periods of spending restraint.
But the problem, I suggested, is that it is very difficult to convince politicians to sustain good policy on a long-run basis. The gains of good policy (such as what was achieved in the 1990s) can quickly be erased by a spending binge (such as what happened during the Bush years).
Unless, of course, there’s some sort of constraint on the desire to spend money. And the panelists discussed the three most successful examples of reforms that constrain the growth of government.
We started with a presentation by Daniel Freihofer from the Swiss Embassy. He talked about Switzerland’s “Debt Brake,” which actually is a spending cap.
It’s remarkable how well Switzerland has performed while most other European nations have suffered downward spirals of more spending-more taxes-more debt. Here’s a chart I put together on what’s happened to spending in Switzerland ever since 85 percent of voters imposed the Debt Brake early last decade.
By the way, Herr Freihofer said during the Q&A session that support for the Debt Brake is now probably about 95 percent, so Swiss voters obviously understand that the policy has been very successful.
Our second speaker was Clement Leung, Hong Kong’s Commissioner to the United States. He talked about Article 107 and other rules from Hong Kong’s Basic Law (their constitution) that limit the temptation to over-tax and over-spend.
And if you want to see some of the positive results of these rules in Hong Kong, here’s some of what Commissioner Leung presented.
By the way, the burden of government spending in Hong Kong averages about 18 percent of economic output. That’s the most impressive result. And Commissioner Leung explained that there’s a commitment to keep the burden of spending below 20 percent of GDP.
The final panelist was Jonathan Williams from the American Legislative Exchange Council, and he talked about Colorado’s Taxpayer Bill of Rights, popularly known as TABOR.
Jonathan talked about how the pro-spending lobbies keep attacking TABOR, and he mentioned that they narrowly succeeded in getting a five-year suspension of the law back in 2005. But Colorado voters generally understand they have a good policy.
The most recent attempt to enable more spending came in the form of an increase in the state’s flat tax back in 2013 and voters rejected it by a stunning 66-34 margin (almost as impressive as the recent vote against tax hikes in Michigan) even though Jonathan said advocates outspent opponents by a 289-1 margin.
Here’s a slide from his presentation showing what happened during other attempts to enable more spending.
By the way, Jonathan also mentioned that Colorado’s voters are about to get a TABOR-mandated tax cut because taxes on marijuana are pushing revenues above the limit. Talk about a win-win situation!
To wrap up, one of the big lessons from all the presentations is that governments generally get in trouble because they can’t resist over-spending when the economy is doing well and generating lots of tax revenue.
I fully agree, and I’ve previously explained this is why Alberta got in fiscal trouble, and also why California suffers a boom-bust budgetary cycle.
The way you solve this problem is not with a balanced budget requirement (which often serves as the justification for tax hikes), but some sort of spending limitation rule.
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