Colorado residents might be receiving some unexpected tax relief this year: Tax revenues will likely exceed the revenue limit set by Colorado’s Taxpayers Bill of Rights (TABOR) for the first time since the revenue limit returned in fiscal 2011. Part of the reason is that overall state revenues are finally catching up with TABOR’s new higher revenue limit. But it’s also because receipts from marijuana excise taxes are greatly exceeding expectations.
Colorado residents legalized marijuana at the ballot box in 2012 and sales began this January. Current estimates from the Department of Revenue indicate that taxes on the drug will generate over $107 million in revenue this fiscal year – over $40 million more than projected.
Not surprisingly, many Democrats in the state legislature are frustrated that they will have to refund, rather than spend, these extra tax revenues, thanks to the Taxpayers Bill of Rights. But that shows just how effective TABOR is effectively limiting government growth and forcing the legislature to prioritize.
What exactly is Colorado’s Taxpayers Bill of Rights? TABOR was enacted by the state’s voters in 1992, and is considered a flagship fiscal-limit policy. It has three features which make it especially conducive to limiting the growth of government: a low limit for revenue growth, constitutional status, and, most important, a requirement that revenue over the limit be returned to taxpayers. Between 1997 and 2002, Colorado taxpayers received $3.2 billion in tax rebates from the state government. Colorado led the nation in tax relief and economic growth during this time.
However, in the early 2000s, Colorado ran into economic trouble. In addition to the 2001 economic slowdown, Colorado also experienced a severe drought in which all 64 counties were declared federal disaster areas, which had a serious negative impact on Colorado’s tourism and agriculture industries. State revenues plummeted by 15 percent between 2001 and 2003. Making matters worse was the enactment of Amendment 23 in 2000 which required substantial annual increases in K–12 education spending, even when revenues were falling.
Many media outlets and politicians opportunistically blamed TABOR for Colorado’s fiscal pressures, leading to the enactment of Referendum C in November 2005, which suspended TABOR’s revenue limit for five years and allowed the legislature to spend, rather than refund, revenue above TABOR’s targets.
The passage of Referendum C had an impact that was felt well outside the borders of Colorado: It came to be assumed that Colorado taxpayers had rejected TABOR. As such, numerous political efforts to enact similar fiscal limits in other states have fared poorly. But with TABOR back on track and tax relief generated in part by the marijuana excise taxes going to taxpayers, TABOR’s image should be rehabilitated, and other states may warm to the idea.
— Michael J. New is an assistant professor at the University of Michigan – Dearborn and an adjunct scholar at the Cato Institute.