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June 24, 2005




PAUL GIGOT: It's the next big thing in grassroots American politics. Across the nation, in at least 20 states, there is growing support for putting a cap on runaway state spending and tax increases. Supporters from Alaska to South Carolina are pushing for legislation called the Taxpayer Bill of Rights -- or TABOR -- which limits spending and forces state governments to give back surplus tax revenue. That's what has happened in six of the last nine years in Colorado, where, thanks to TABOR, the average family has received about three thousand dollars in tax refunds. Colorado is the national model, so we sent Correspondent Celeste Ford to prepare this briefing.

CELESTE FORD: FORD: Colorado is known for its quality of life, from the scenery to the sense of opportunity found in one of our fastest growing states.

JERRY SCREWS: We have a good quality of life here. Utopia is impossible, but we really have a good situation the way it is.

CELESTE FORD: Residents also enjoy one of the nation's lowest tax rates. Much of the credit goes to a law that makes sure state government does not tax or spend too much. It's called the Taxpayers' Bill of Rights, or TABOR. Because of a strict funding formula, the budget cannot go up more than the inflation rate plus the rate of population growth. And if government needs more money, voters have to approve all tax increases.

GOVERNOR OWENS: It kept us throughout the 1990's from overspending like California did, so when our recession hit, it was actually more modest because of TABOR.

CELESTE FORD: Republican Governor Bill Owens says TABOR earned its reputation as the gold standard among fiscal conservatives.

CELESTE FORD: What's been the greatest benefit of TABOR to the state?

GOVERNOR OWENS: We've had to be more efficient than some of my colleagues in other states, because I've had to govern under a pretty tight reign.

CELESTE FORD: Governor Owens' reign has been so tight the state courts were forced to eliminate one out of eight jobs. State funding for higher education is down 21 percent in four years, and there is less highway construction. Most expenditures have been cut. The governor says as the economy recovers from the recession and the state takes in more tax revenues, it should be able to restore services. But there is an unanticipated problem with TABOR.

GOVERNOR OWENS: As we recover, we're not allowed to recover quickly enough to continue to meet state needs.

CELESTE FORD: Another factor is the way Colorado voted to fund K-12 education. To protect the schools from the TABOR spending limits, Amendment 23 was passed. It guarantees annual increases for education, even when revenues are down, leaving less money for everything else.

JON CALDARA (INDEPENDENCE INSTITUTE): The squeeze that we've seen in the General Fund, which is only one small part of the entire budget, has not been caused by TABOR. It's been caused by Amendment 23.

CELESTE FORD: The director of the Independence Institute, a Colorado think tank, says TABOR is not the culprit. Service cuts could be avoided through greater efficiencies.

CELESTE FORD: You're making it sound like TABOR's been scapegoated.

JON CALDARA: TABOR has been scapegoated. There's no question about it. TABOR has saved Colorado's fiscal fanny.

CELESTE FORD: Colorado is trying to get more money for services by using a provision within the TABOR law. In a referendum this November, voters will decide whether the state should be allowed to keep a surplus of more than three billion dollars anticipated during the next five year, and make a one-time increase in the spending cap. If passed, the state would keep the money instead of refunding it to taxpayers. The director of the Bell Policy Center, which is pushing the referendum, says the tax law must be more flexible.

FORD: What will happen if Referendum C does not pass?

WADE BUCHANAN (BELL POLICY CENTER): Big picture, we will try to do what it is important for government to do with less and less and less money every year. And at some point, things are going to start to give.

CELESTE FORD: Colorado's Taxpayer's Bill of Rights was the first of its kind. Today the state still has the strictest limits on spending in the nation. Any attempt to change the law here is loaded with symbolism.

JON CALDARA: Many other states are looking at the Taxpayer Bill of Rights. I think there's a sense that if we can make TABOR look bad in Colorado -- if only we can make it look like a failure -- we can put out the fires that are burning all over the country as more and more tax activist and politicians say, you know, we need what Colorado already has.

CELESTE FORD: The referendum has a broad case of support, including college students.

CELESTE FORD: Is it fair to expect taxpayers to forego their tax refund? Do them under TABOR so that you'll pay less in tuition.

JOE NEGUSE (CU-BOULDER STUDENT BODY PRESIDENT): Well, it's not just about me paying less in tuition. It may be their kid in 15 years. It may be their mom getting Medicaid. It's about the whole mosaic of how the state runs and what the state provides to its citizens. And that's why when you talk about TABOR it's so confusing, because these are services that everyone uses.

CELESTE FORD: And business leaders also want a chance in TABOR.

TOM CLARK (Denver Metro Chamber of Commerce): The business community always likes low taxes, but not to the point that the key investments can no longer be made in the things that make business thrive -- a highly educated workforce, great public facilities and good roadways.

WADE BUCHANAN: What's going on here with TABOR is really a battle between two fundamentally different views. On the one side are the forces behind TABOR who have believed that government really needs to be a smaller and smaller part of what we do. And on the other side are folks who say government has a role to play -- has an effective role to play, has an important role to play. Whether government can be an effective partner, that's really what's going on. Those are the sorts of challenges.


PAUL GIGOT: Jason, you heard the debate in our background piece. Has TABOR been a success or a failure in Colorado?

JASON RILEY: Well, the way I would measure the success or failure of these tax spending limits is to compare Colorado's situation to states where they have no such limits. In California, for instance -- which does not have tax and spending limits -- the state ran up debts around 38 billion dollars. Colorado was not faced with that sort of dilemma, because they had limits in place that did not allow the government to grow -- and grow and grow in the good years, and no cushion for the bad years. So the merit of a TABOR is how it affects your state during the recession, during the bad times, and how it limits how far you have to fall when things aren't going as well. And in that sense, Colorado has faired very well, and I think it's because of TABOR's policy.

PAUL GIGOT: It also affects the relative cost burdens. Colorado has an average tax burden per capita, of about 15 hundred dollars. It's forty-eighth among the 50 states. California, about 24 hundred dollars per capita.

STEVEN MOORE: That's exactly why, Paul, this Taxpayer Bill of Rights issue has become the hottest political issue around the country. It's because a lot of people are looking at what's happened in Colorado, and they're holding it up as a model and saying we want to have something like Colorado has. What's going on the states and localities right now is they're awash in revenue, the economy's doing well, they're seeing 10 to 12 percent increase in their revenues, Americans are getting more and more upset about their -- especially their property taxes going up. And this is sort of a revolt, like we saw back in the late 1970s with Proposition Thirteen, against out-of-control government spending at the state and local level.

PAUL GIGOT: Well, before we get to that, let's talk about the other state. Let's talk about Colorado for a second, because we have Governor Owens, who is a big supporter of TABOR, now saying well, we need to re-think it. What do you think of his argument that during recessions what happens is the revenue falls off and creates and new and lower baseline. And therefore, you can't get back to meet the needs of a growing, fast-growing state and population like Colorado. What's your response to that?

STEVEN MOORE: What he wants to do is call for a five-year time-out on TABOR, to say take the straight jacket off the state for five years. That's way too long, Paul. I think if you do that, they'll never put the straight jacket back on. So yes, you should probably tweak the system so that when the state goes into recession they can have a little bit more spending, but to call for a five-year time out, that's like saying a five-year time out on the Ten Commandments. I mean, this is something that you want the states to comply with, you don't want to have them have essentially a way around the restraint.

PAUL GIGOT: But you will concede that it does need to be tweaked some, is that what you're saying?

STEVEN MOORE: Yeah, when revenues are down, you should allow them to spend a little bit more money, but not for five years.

DAN HENNINGER: But what needs to be tweaked as well on the up side, Governor Owens and some of these other Republican governors have said we have these fundamental needs -- education spending, we have Medicaid spending that we have to meet, we have roads that we have to build. Well, why can't the public sector rationalize its agencies the same way the private sector always has to do now in the down times. When there's a down time, the states don't do that. They simply say this baseline is there. We can't change it. We can't do lay-offs. I mean, we saw in the piece, they said they were trying to lay off one of eight workers in one of the Colorado agencies.

STEVEN MOORE: You know, you're exactly right. Because the pattern of the last 20 years in states is, they spend like there's no tomorrow during the good times, then the bad times come along and they say, we've got to raise taxes, we don't have any more revenue. Then the good times come ... And this basically sort of smoothes that out and says, look, when you have the good times and revenues are way up, you're not going to be able to spend every penny, but you're going to give rebates to people. And I'll bet there are a lot of people around the country watching the show that say, three thousand dollars in rebates? I'll take that!

JASON RILEY: And that is the natural inclination of government, to spend. And to promise more than it can deliver, because it has the power to tax. So it spends, it promises, it spends. When it needs more money it continues to tax. And if there's nothing put in place to stop it from doing that, it will follow its natural inclinations.

PAUL GIGOT: There was an economist, a famous economist -- at least to some of us -- by the name of Mancur Olsen, who is now dead. But he argued that the problem with democracy is, even though it may be the best system, but that over time they become kind of corrupted with special interests, which have an intense focus and an intense desire to maintain spending or maintain programs. Meanwhile, the average taxpayer has a much less intense focus, so there's nothing that protects him. The idea of the tax limitation amendment is that it can put some kind of broader restraint on behalf of the average person who goes to work every day and can't pay attention to what the lobbyists in the state capitals are doing.

JASON RILEY: It's not just a matter of budgets. I think these surpluses -- whether in the state budgets or social security -- are a moral issue. People agree to pay taxes for an express purpose, but when the tax payments come in and there's a surplus, you cannot justify moving that money off into other unintended accounts. So there's a kind of moral compact between taxpayers and the state that gets violated when they spend these surpluses like that.

STEVEN MOORE: And what some states are doing is, they're essentially saying, look, if you're going to raise our taxes it's going to take more than 50 percent. You have to have a two-thirds majority. Other states are saying, if you're going to have a tax increase you actually have to go to the people and have a referendum on the tax increase. If we'd had that in Virginia where I live, we wouldn't have had this enormous tax increase last year because the Virginia citizens would have voted it down.

PAUL GIGOT: I think one of Owens' political mistakes, too, is he's trying to shift, he's trying to change TABOR without trying to change the other part that's built out of the constitution, which is the guarantee of a certain amount of education spending. He ought to try to trade one off over the other, because otherwise he's going to get rid of the tax limitations part of it, and the spending keeps going up.

Steve, you're saying this is going around the country. Where is it happening? How widespread is it? Where is it going to be the hottest debates in the next few years?

STEVEN MOORE: The biggest state to keep an eye on, Paul, is Ohio, where they're hoping to have a referendum on the ballot in November of 2005.

PAUL GIGOT: Of this year?

STEVEN MOORE: Yes. And then there's a weakened version of this in California. California really started this 25 years ago with Proposition Thirteen. They're going to try to give more power to the governor to keep control of the budget, so people should keep an eye particularly on California and Ohio.

PAUL GIGOT: But the California TABOR is weaker than the one in Colorado?

STEVEN MOORE: No doubt about it.

STEVEN MOORE: In fact, it's ironic that even this weakened version of -- a fairly weak Taxpayer Bill of Rights in California -- still has the spending constituencies and the government employees squealing.

JASON RILEY: The merits of the California -- it's better than what California has now. In other words, the excess revenue that comes in beyond what the state will be able to spend if this amendment passes, would be put into a rainy day fund. And then, when revenues dropped off, it would be able to fill the gap with this excess money. In Colorado, they rebate that money. In California they would put it into a rainy day fund. So it's better than nothing, but it's not, I think, as good as what Colorado has.

PAUL GIGOT: Jason, you've written about Ohio, reported on the debate there. And this debate over TABOR is a debate between the Republicans in that state.

JASON RILEY: It certainly is. You have a very conservative, fiscal conservative -- I mean Ken Blackwell, who wants to be governor. And the power that be in the state, the Republican powers that be, that are behind Taft, Governor Taft. Frankly, [OVERLAP OBSCURES] and developers, but those are the two that are clashing on this, so ...

PAUL GIGOT: We'll see how it ...

JASON RILEY: The voters will decide.

PAUL GIGOT: We'll see how it turns out this year. All right, thank you all. Next subject.