Coloradans Should Vote "No" on Proposition HH to Maintain Fiscal Sanity

"If you don't first succeed, try, try again." Those who are against Colorado's Taxpayer's Bill of Rights (TABOR) are no exception to this rule of thumb. TABOR opponents tried to get rid of TABOR in 2013 and 2019 in the state of Colorado to no avail. What do these opponents have against TABOR? The state of Colorado passed TABOR into 1992 to limit the amount of tax revenue the state can retain and spend. The TABOR formula looks something like this:

Total Spending Limit = Previous Year's Spending + (Previous Year's Spending X Inflation Factor) + (Previous Year's Spending X Population Growth Factor)

As we will explore shortly, I surmise that the TABOR opponents seem to take issue with spending caps hamstringing growth in government spending, which implies as a less flexibility in new government programs. On November 7, the state of Colorado is going to vote on Proposition HH. There are multiple facets to Proposition HH, which do not make it easy to follow. The local NBC 9 News has a good primer (also see video above), as does the Colorado General Assembly (see Figure below as part of that primer) and Ballotpedia.

The first main feature is a reduction in the growth of property taxes. This will entail in a reduction of property taxes for most residential types. More on that in moment. First, I want to point out that there is already something taking place in Colorado related to but independent of Proposition HH: property taxes rates are going to soar. What happened? The value of Colorado homes skyrocketed in value compared to a couple of years ago. In Colorado, the formula used for property taxes is "Property Tax Rate = Actual Value x Assessment Rate x Mill Levy." Looking at the formula and knowing what happened with property values, it should not be a surprise. However, Coloradans were surprised with notices that their property taxes went through the roof. Colorado Public Radio analyzed Colorado Department of Local Affairs (DOLA) data on property valuation to discover that the median Colorado home increased in value by 37 percent.   

What Proposition HH proposes is to reduce the assessment rates on property tax. The reduction in assessment rate does provide some relief to the taxpayer relative to what is the status quo. However, this property tax relief is only part of the Proposition, which is why we cannot look at the property tax relief in isolation. 

The second major component of Proposition HH will be an increase in the spending limit under TABOR. If Proposition HH passes, the spending limit would increase by an additional 1 percent annually until 2032. This would not only boost government spending, but it would shrink the income tax refunds under TABOR. Excess revenue would be distributed to school districts and other local government entities. 

Lower property taxes would likely be offset by higher state taxes, which is especially undesirable if you are a renter who does not pay property tax. The Right-leaning Common Sense Institute (CSI) calculated that Coloradans could save $9.92 billion between now and 2032, whereas state taxes could increase by $9 billion, or a net savings of $0.2 billion. While this does not de facto eliminate TABOR state income tax refunds, it does make it less likely for Colorado's taxpayers to receive these tax refunds.

Proposition HH gives the legislators the opportunity to vote in 2032 whether to extend the tax cut and the spending growth. If the legislature passes the extension, it could mean a tax increase of $20.9 billion between now and 2040 (CSI). The reason for a larger difference between 2032 and 2040 is the compounding nature of adding an additional 1 percent on the spending cap per annum. That is the impact on the statewide level. 

For the median individual, there would be a reduction in taxes of $4,641, whereas there would be an increase in state taxes of $5,119 by 2032. The net impact for the median household? An increase in taxes of $478 per annum (ibid.) if Proposition HH is enacted through 2032. 

It is not only the net tax effect that is worrisome; it is also the spending. The Dean at the CU School of Public Affairs saw this as a "clever strategy" to grow spending levels that are comparable to other states. Since the proposed change is compounding in nature, the amount of spending that would increase would be more grave over time. If Proposition HH passes, that means the spending limit would grow from $170 million in 2024 to $2.2 billion in 2032. If extended, that would mean an additional cap of $5.8 billion by 2040. 

The Left-leaning Bell Policy Center (BPC) brings up two relevant criticisms. One is that the CSI is projecting out too far because it is difficult to make macroeconomic projections, especially out to 2040. I brought up this concern about modeling when discussing climate change as to how difficult it can be. Last year, I tried figuring out if we were in the middle of a recession. While I thought it was likely and I made sure to caveat my prediction, it turns out that the National Bureau of Economic Research did not declare a recession for 2022. I would not take the projections literally so much as I do seriously. Regardless of the exact magnitude of government spending, having a spending cap increase larger than the property tax cut is cause for concern.     

The second criticism from the BPC is that nothing in Proposition HH raises. This is technically true. The second major component on Proposition HH is not a state tax hike, but it is an increase in the spending cap. At the same time, I have to ask myself two questions. The first is how likely it would be politicians, especially in a swing state that has a Democrat majority in both branches of its legislature, is likely to keep government expenditures significantly below the spending cap. The second question is why TABOR came into being in the first place. To reiterate, TABOR limits the amount of revenue the government can retain and spend. TABOR also gives Colorado citizens the power to approve tax increases, which it has not done for state income or sales taxes. When you spend way more money than you have in the long-run, there ends up being debt. Government spending is the major driver in the federal government's fiscal crisis so much so that Fitch's lowered its credit rating for the United States back in August. State government is not immune from the adverse effects of such fiscal irresponsibility. 

Relaxing the spending caps can be problematic since they have been proven as a tool for fiscal discipline and solvency. One study from the European Central Bank shows that spending limits are superior to anti-deficit rules (Benalal et al., 2022). A paper from the International Monetary Fund (IMF) shows that fiscal rules bring about fiscal discipline, especially in election years (Eklou and Joanis, 2019). 

Especially for a swing state drifting towards being a blue state, Colorado has been able to maintain fiscal sanity. That is in large part due to TABOR and the spending caps implemented. The American Legislative Exchange Council (ALEC) released a report in November 2022 showing how Colorado's TABOR became a gold standard of state fiscal rules. If Coloradans vote "Yes" on Proposition HH, their fiscal state will look less like one of stability and more of the fiscal dysfunction that is common with such blue states as Illinois. Especially if extended to 2040, Proposition HH would undo all of the fiscal discipline that TABOR brought to Colorado for the past thirty-plus years. If you live in Colorado, please vote "No" on November 7.