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Refunding the Surplus: Welfare, Whiskey, and Car Keys

Opinion Editorial
February 29, 2000

By Linda Gorman

Author P.J. O’Rourke says that “giving money and power to government is like giving whiskey and car keys to teenage boys.”  With proposals to spend millions on everything from treating the “disease” of obesity to funding 12 day care centers that will determine the “best” way to raise pre-schoolers littering the current legislative session, it is clearly past time for Colorado’s government to take the cure and start a healthy program of diet and exercise.  We’ve got MADD to dry out the teenagers.  Now we need TADS–Taxpayers Against Drunken Spending–to dry out state government.

In 1997, census data show that Colorado citizens paid an average of 35% of their income in taxes.  On a per capita basis, this means that for every man, woman, and child in the state, $6,521 was sent to the federal government and $3,078 was sent to the state.  Just what, exactly, does government provide for the average family of four that is worth $40,000 a year?

The existing income tax system is also unfair.  Nationally, the top-earning 5% of taxpayers, slightly more than 5 million people many of whom bear high risk and work unbelievable hours to make their businesses succeed, earn 26% of the income.  They pay 43% of all income taxes.  In contrast, the bottom 50% of the income distribution, roughly 53 million people, earns 16% of all income and pays just 6% of all income taxes.[1]

Politicians with an instinct for maximizing their own advantage encourage class warfare by exhorting those who pay little or no tax to support programs that soak the “rich.”  We hear that tax cuts hurt the poor, who pay no tax, merely because they benefit the “rich,” and that only inhumane monsters would consider cutting government in the face of numberless social ills.  As a result of unfair tax policies, a majority of citizens can now demand more government services knowing that someone else will get the bill.  This invites irresponsibility.

In Colorado, the political maneuvering surrounding the tax refunds mandated by the TABOR amendment has showcased the local version of playing fast and lose with other people’s money.  First we were told that the surplus was too small to be worth anything.  When this was shown to be “incorrect,” we got Referendum B.

In 1998, the state’s entire political establishment, along with chambers of commerce, teachers, the denizens of “higher education,” the League of Women Voters and every other group used to feeding at the government trough, turned out to convince voters that it needed a raise of $200,000,000 to save the usual suspects, roads and education, from collapse.  Voters, who tend to have a different view of the value of their money than the political class, disagreed.  They nixed Referendum B with no discernable effect on either road repair or the state’s educational institutions.

In a paper for the Independence Institute, CU Professor Barry Poulson described how the legislature managed to recast refunding the surplus as an income transfer program.[2]  The TABOR Amendment intended that any surplus revenue be refunded to the taxpayers who paid it.  In 1998-99, individual income taxes generated 69% of the state surplus.  Sales and corporate income taxes generated 15% and 3%, respectively.

What did the legislature do?  It developed a complicated hierarchy of refunds that had little or nothing to do with who paid the tax.  The first $50 million of any surplus was devoted to Earned Income Tax Credits.  Earned income tax credits are lump sum cash welfare payments to those who work, file tax returns, and make less than a specified minimum.  Expending the surplus on the EITC was a backdoor way to expand welfare spending.

Business personal property taxes were refunded after that, followed by exempting certain dividends, interest, and capital gains from taxation.  Then capital gains taxes on the sale of Colorado assets were forgiven.  The rest, 81% of the entire surplus, was distributed as sales tax refunds that had little to do with the total income tax one had actually paid.  Having taken care of the interests of the local investor class, the legislature opted to buy votes by spreading the money around.  Instead of giving the money back to those who had paid too much, it turned the surplus into just another program that takes money from one group and gives it to another.

This will always happen whenever government gets to dispense money.  The only way to stop it is to eliminate the surplus by keeping greedy bureaucratic fingers out of your pocket in the first place.  Professor Poulson figures that lowering state income taxes to 4 1/2% would do the trick.  It is worth a try.  There is, after all, a whole lot more to lose.

[[1]]  “Newest Data Show High-Income Taxpayers Earning and Paying More,” Tax Bites, Tax Foundation, Washington, D.C.  Calculations based on Federal individual tax return data.  See http://www.taxfoundation.org/propincome.html as of 23 February 2000.
[2] Barry W. Poulson.  20 September 1999.  Rent Seeking and Surplus Expenditures  in Colorado, Independence Institute Issue Paper 10-99, Independence Institute, Golden, Colorado.  https://i2i.org/SuptDocs/Tax&Spend/RentSeeking.htm.

Linda Gorman is a Senior Fellow with the Independence Institute, a free-market think tank in Golden, Colorado, https://i2i.org. This article originally appeared in the Colorado Daily (Boulder), for which Linda Gorman is a regular columnist.

This article, from the Independence Institute staff, fellows and research network, is offered for your use at no charge. Independence Feature Syndicate articles are published for educational purposes only, and the authors speak for themselves. Nothing written here is to be construed as necessarily representing the views of the Independence Institute or as an attempt to influence any election or legislative action.
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