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The 6-percent Cap Works

The Colorado legislature is debating Senate Bill 228, which would eliminate the Arveschoug-Bird Amendment. That Amendment, passed in 1992 at the same time as the Taxpayer’s Bill of Rights, caps the growth of general fund spending at 6 percent per year.

With the 6 percent cap in place, surplus revenue above the limit is transferred into the Highway Users Trust Fund and to capital construction. These are the most productive expenditures the state makes. They expand the productive capacity of the economy and generate higher rates of economic growth. These expenditures are likely to offset underutilization of labor and capital in the construction industry.

In periods of recession the state can invest in highways and capital projects at lower costs because of lower prices for labor and capital in those industries. Given the significant demands for expenditures to maintain our highways system over the next few decades, now is clearly not the time to shortchange these state expenditures.

General funds are likely to be reallocated to other state programs that have a zero or negative impact on economic growth. This is especially true of funds spent for Medicaid and social welfare, which are essentially income transfers and subsidies.

Exacerbating a structural deficit

Eliminating the 6 percent cap on general fund expenditures would exacerbate a structural deficit in the state budget. Surplus revenue above the 6 percent cap tends to emerge in periods of economic growth when revenues increase rapidly, and to disappear in periods of recession and revenue shortfall. Thus, the surplus revenue is best viewed as one-time money that will not always be available.

With the 6 percent cap, surplus revenue is spent on highways and other projects with a finite capital budget. If the cap is removed the funds are likely to be spent for ongoing programs with an annual budget. In effect this expenditure of surplus revenue for ongoing programs is a form of “annualization” that creates a structural deficit in the budget.

With the 6 percent cap earmarking funds for transportation and capital projects there is also less pressure to issue debt. The more that transportation and capital projects are funded from general fund revenues the less need for new debt. When the state does ask citizens to approve new debt for transportation projects, voters are more likely to understand the need for that debt and approve it, as occurred in 2000. If the cap is removed general fund revenues will no longer be earmarked for highways and capital projects, and we should expect the state to finance those expenditures with new debt.

Weakening tax-and-spening limits

SB 228 is only the latest in a series of efforts by the education lobby and other special interests to weaken and eliminate tax-and-spending limits in Colorado.

Referendum C weakened the TABOR limit such that it will not constrain the growth in total state revenue and spending over the next five years. Eliminating the 6 percent cap on the growth in general fund spending means that Colorado would have no effective constraint on the growth of state spending for the foreseeable future.

Of course, unconstrained spending is the objective of these special interests, and if they are successful we should expect Colorado’s fiscal policies to look like they did before 1992 when these limits were enacted. Prior to 1992 state revenue and spending grew more rapidly than personal income. The state had one of the highest income tax burdens in the country. The state was also an underachiever in economic growth.

After tax-and-spending limits were imposed in 1992, state revenue and spending increased less rapidly than personal income. The state reduced tax burdens and created one of the best business tax climates in the country. By the late 1990s the state achieved the second highest rate of economic growth in the country, and low rates of unemployment and poverty.

The lesson is clear: if politicians truly are interested in the poor they should pursue policies to promote economic growth, not policies to retard economic growth — like SB 228.

This article originally appeared in the Denver Daily News, March 24th, 2009.