Management & Labor

Optional Illusions

There are some who say that direct democracy is the wave of the future in American government. If I may be excused for paraphrasing John F. Kennedy, let them come to Denver.
by | June 2004

There are some who say that direct democracy is the wave of the future in American government. If I may be excused for paraphrasing John F. Kennedy, let them come to Denver.

I don't expect many of them to do that, of course. Most direct- democracy enthusiasts whom I have met tend to be more interested in stumping for their grand idea than in observing how it actually works in practice. But students of the political process who visit Colorado's capitol these days will have a chance to scrutinize a bizarre situation.

They will find the entire state government struggling to cope with a pair of laws, approved by voter initiative, whose combined effect, if unchanged, will likely be to starve public services and drive the state to the brink of bankruptcy in the next decade. They will see a legislature that has been unable to address the problem because each initiative has a large constituency determined to protect it. And they will notice that meaningful reform has been made extremely difficult by the way the ballot measures have been written into the constitution.

States all over the country have been in fiscal trouble the past couple of years, for a combination of avoidable and unavoidable reasons. Some have spent too much. Some have cut taxes back too far. Some have been more or less innocent victims of a declining revenue base. But no state has gotten into trouble with quite as much flair as Colorado, whose voters gleefully committed their government to spend billions of dollars they refuse to let it have.

At the center of the turmoil is the 1992 constitutional amendment known as the Taxpayer Bill of Rights--TABOR for short. This law has numerous wrinkles and complexities, but its essence is very simple: In any given year, state and local government revenue can exceed the previous year's revenue only by an amount proportional to population growth and inflation, and spending can never go up by more than 6 percent. Any surplus beyond that must be returned to the voters. Exceptions can be made for natural disasters, but not for fiscal disasters--such as the one Colorado has been enduring for three years now.

TABOR does sound like a clever way to keep state spending under control, and this is how Colorado voters have always viewed it. While critics have warned for more than a decade that population on its own is a very poor proxy for public need--tying spending to state income growth would make more sense--most of the electorate has never bought this.

It isn't the population formula by itself, however, that has turned TABOR into such a disaster. It's a problem known as the "ratchet effect." In times of economic contraction, states try not only to avoid increases in spending but also to reduce expenditures in many categories below the previous budgeted level. Colorado has done this the past three years. When conditions improve, the budget can go up by the TABOR-allowed 6 percent, but that means 6 percent above the bottom of the trough, not 6 percent above the benchmark set in more prosperous times. Once a state agency or program sees its budget drop during a few recession years, it will never catch up to where it once was.

For those who believe, with Ronald Reagan, that the way to prevent government from wasting money is to hide its wallet, then you may not see anything wrong with this sequence of events. But you still may want to pause a minute to consider the implications of living in a state where nearly all the major governmental institutions--the universities, the highway system, the health departments--are condemned to a future in which they will never have the resources they had in 1999, regardless of how much their needs may increase.

Uncomfortable as the TABOR straitjacket might be, it became truly dangerous only five years ago, when the voters passed Amendment 23, a second ballot initiative supported by teachers' unions and most liberal Democrats. This measure commits the state to increase K-12 education spending by an amount 1 percent greater than inflation every year for 10 years, and then by at least the inflation rate every year into perpetuity.

In 1999, when Amendment 23 went to the electorate, its supporters insisted the state had plenty of money to pay for it. By 2004, they claimed, Colorado would be looking at a surplus in the neighborhood of $1 billion a year. This prediction turned out to be spectacularly off the mark: Within a couple of years after passage of the amendment, the state began facing a serious fiscal shortfall.

Nevertheless, the legislature was required by law to keep increasing the school budget. In fiscal year 2003, for example, the deficit was $500 million. But the state school budget was up by 11 percent. The obvious result of this combination was a squeeze on every category other than K-12 education. The president of the University of Colorado warned that if nothing was done to change the situation, within a few years the state wouldn't have a public higher education system worthy of the name.

This state of affairs has brought second thoughts to some of TABOR's diehard defenders--most notably Bill Owens, Colorado's Republican governor. Owens was in the legislature when TABOR passed and claims credit for authorship of two of its provisions. As recently as last year, he was vowing to protect it no matter what. "Here in Colorado," he declared, "we will not weaken our taxpayer protections." Last fall, when Arnold Schwarzenegger was elected governor of California, Owens met with him and urged that he consider something like TABOR as an economic reform. If California had had TABOR over the previous decade, Owens told the new governor, it wouldn't be in a state of crisis now.

So it was nothing short of astonishing when Owens launched this year's legislative session by announcing that the time to do something about TABOR had finally arrived. "I wondered if he maybe he'd been a victim of identity theft," wrote Denver Post columnist Diane Carman. But Owens was serious. He said he and other TABOR supporters might be willing to compromise if Democrats would give a little on Amendment 23. Specifically, Owens suggested a moratorium on both laws for a couple of years, till the economy picks up--or perhaps just a simple one-time siphoning of $200 million from each initiative to cover some of the state's urgent expenses.

But the governor stressed that it had to be a deal. If the liberals refused to give on Amendment 23, he and his allies wouldn't support any changes in TABOR. As the legislative session wound down to its conclusion in early May, House and Senate leaders labored to draft a reform proposal that they could agree on and take to the voters this November. But adjournment day, May 5, came and went without any such legislation attracting sufficient support to pass.

There remains the possibility of a special session later this summer to make further efforts at a compromise. But even if no such legislative deal is consummated, the odds are that some brand of budget reform will be on the general election ballot this fall. That is in large part because the business community is demanding it. Among the leading current proponents of a TABOR rewrite are the Denver Metro Chamber of Commerce and the Colorado Forum, an organization of prominent state CEOs.

One of the directors of the forum complained this spring that if TABOR remains on the books as is, the state would be stuck not only with second-class universities but also with obsolete and dangerous highways. A chamber of commerce official put it more succinctly: "Things are falling apart." This echoed an editorial published a few weeks ago in the Colorado Springs Business Journal. "It doesn't take an advanced degree in economics or mathematics," the editorial concluded, "to see the train wreck that is certainly looming."

If some of this scenario sounds familiar to you, it may be because you followed the remarkable events that unfolded this year at the opposite end of the country, in Virginia. That state had no TABOR-like straitjacket to deal with. Nevertheless, as a result of huge tax cuts enacted in the late 1990s, it was facing a combination of budget shortfalls and service cutbacks similar to the one in Colorado. The ultimate political result was a coalition between the Virginia business community and the state's Democratic governor that pushed through a package of revenue increases and budget adjustments over the intense opposition of most Republican legislators, who had promised never to raise taxes and insisted on sticking by that pledge to the bitter end. As far as organized business was concerned, the prospect of declining universities and crumbling infrastructure was frightening enough to make a tax increase look benign by comparison.

I suspect something similar will be happening in quite a few state capitols before the current fiscal challenges are over. There is a lesson here for the anti-tax movement, and particularly for those who wish to enforce drastic tax reduction through direct democracy.

The lesson is this: Anti-tax schemes are easy to sell to voters, and extremely difficult to repeal, but they ultimately drive a wedge through their own coalition of supporters. Cut taxes drastically enough, and in time you will alienate the business support that Republicans need to maintain themselves in power. This is true whether you are in an initiative-and-referendum state such as Colorado, or in one like Virginia, which rarely uses the process.

But there is a more general lesson that may be of even greater importance: Direct democracy, however appealing it may be on its surface, is no way for any state to make long-term fiscal policy. Fiscal decisions require a balancing of alternatives: tax refunds versus higher education funding; investment in public health versus investment in economic development; a new highway system versus a rainy day fund.

These are exactly the decisions that voters presented with ballot initiatives are never required to make. The Colorado electorate wasn't asked to choose between the annual tax refunds of TABOR and the generous school funding of Amendment 23. Against all logic, it was allowed to opt for both. It's no surprise that this is what they did. And it's no surprise that the state is facing a mess as a result.

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