The next step for Massachusetts tax reformers TABORing in the tax-cut field by Michael New

from NewsLink, Vol. 7, No. 4, Summer 2003 One of the biggest surprises to come out of the 2002 election was the strong showing of Massachusetts’ Question 1, which proposed abolishing the state income tax. Falling less than five percentage points short of a majority, the strong showing for Question 1 will likely inspire Massachusetts tax cutters to sponsor a similar anti-tax initiative in 2004. Some are proposing the abolition of the state’s excise tax. While the initiative process is a good way to broaden the tax policy debate, it is unfortunate that tax reformers are falling into many of the same strategic pitfalls in which their predecessors fell 25 years ago. After all, evidence indicates that legislatures often respond to these narrow tax limitations by raising other, less visible taxes to compensate for the revenue shortfall. A textbook example of this phenomena occurred 25 years ago after the passage of California’s Proposition 13. Proposition 13 did an outstanding job at providing needed short-term tax relief for homeowners. Unfortunately, however, since expenditures were not restrained, spending continued to rise and other taxes were increased. For instance, in the years following the passage of Proposition 13, California raised the income tax, the sales tax, and taxes on beer, wine, and cigarettes. During the early 1990s, Governor Pete Wilson even proposed increasing taxes on snacks. This vicious cycle of spending and taxing is the root cause of California’s current fiscal mess. However, the past decade is proof that there are superior strategies for limiting the size of government. In fact, broader limitations on total expenditures and total revenues have been quietly enjoying a great deal of success in recent years, Colorado’s Taxpayer Bill of Rights (TABOR), which was passed by a citizen initiative in 1992 is the best example of such a limit. TABOR possesses two features that have generated tax relief for Colorado residents. First, TABOR places a tight cap on all state expenditures, limiting increases to the inflation rate plus population growth. Second, it mandates immediate refunds of all surplus revenues. As a result, when the state collects revenues above the limit set by TABOR, Colorado taxpayers are entitled to a rebate. Overall, between 1997 and 2002, Colorado has reduced taxes more than any other state, issuing annual tax rebates that have totaled more than $3.2 billion. These tax reductions have been a boon to Colorado’s economy. Between 1995 and 2002 total personal income grew by over 61% in Colorado as compared to only 44% nationwide. Similarly between 1995 and 2001 Colorado’s Gross State Product grew by over 59%, while nationally the rate of growth was just over 38%. Overall, Colorado ranked second only to Nevada in both gross state product growth and personal income growth during this time span. BHI’s State Competitiveness Report 2001 ranked Colorado sixth in terms of its ability to sustain a high level of per capita income and economic growth. In addition to strengthening the economy, TABOR has also forced Colorado residents to see the costs inherent in government programs. In other states, residents often support higher government spending because they can see the benefits of a particular program, but remain blissfully unaware of the costs that they, and other taxpayers, will be forced to bear. However, in Colorado the annual tax rebates bring these tradeoffs clearly into focus. In every year from 1993 to 1999, there was a proposal on the ballot either to raise taxes or to increase spending in excess of the TABOR limit. Knowing these initiatives would markedly reduce the size of their annual tax rebate, voters soundly defeated each of these measures. In 2000 a spending increase for Colorado schools did pass. Nonetheless, Colorado taxpayers still received over $900 million in tax rebates from the fiscal 2000 surplus. An approach similar to TABOR would likely enjoy more political success in Massachusetts than a proposal to abolish the state income tax. Reasonable people can disagree about the extent to which state services would have to be reduced if the income tax were abolished. However, such grandiose proposals are very easy for public sector unions and other opponents to demonize and caricature. Conversely, a tight expenditure limit would not require drastic short-term budget cuts. Additionally, this approach has actually enjoyed some success in Massachusetts. In 1986 Massachusetts voters enacted an expenditure limit. But because the income limits are unrealistically high, the 1986 voter approved tax cap has not constrained budgetary growth. Additionally, the FY 2003 budget signed by Governor Swift included a budget cap that will limit annual expenditure increases to two percent plus the rate of inflation. This is an important first step. However, this limit is statutory, not constitutional. Furthermore, it lacks provisions that would result in tax relief during times of surplus. Last year the Beacon Hill Institute drafted an even more restrictive tax cap that would limit the growth of government. (See NewsLink, Summer 2002). What’s needed today is the leadership to educate the public about the benefits of limits like TABOR. Now, all of this is not to say that narrow tax reductions are of no use. Indeed, both California’s Proposition 13 and Massachusetts’ Proposition 2 1/2 continue to be successful in limiting property taxes in their respective states. They highlight the local preferences for either more services or lower taxes. Last year’s strong showing of support of Question 1 proves that the anti-tax strain in Massachusetts is alive and well. In fact, the strong showing for Question 1 will probably make Governor Romney and the legislature more hesitant to propose tax increases in the future notwithstanding the current pressure to increase fees. Still, if Massachusetts’ voters are serious about placing a long- term limit on the size of government, they should consider proposing a broad spending limit modeled after Colorado’s Taxpayer Bill of Rights. Michael J. New is an Adjunct Scholar at the Cato Institute in Washington D.C. and a Post-Doctoral Fellow at the Harvard-MIT Data Center.

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