Colorado Shows the Way
The Wall Street Journal offers an editorial today explaining how Colorado's "Taxpayer Bill of Rights" saved that state from the big budget crises that hit most states, including Tennessee. In fact, Coloradoans got $927 million in tax rebates this year while Tennesseans got a $933 million tax increase.

The WSJ comments:

As the nation's governors meet in Boise, Idaho to share tales of woe about a slower economy, it's a good time to ask why some states have bigger budget problems than others. California is a debacle, for example, with a $23 billion deficit and Governor Gray Davis scrounging for revenue. But in Colorado this year, Governor Bill Owens delivered a balanced budget and $927 million in tax rebates.

What gives? Both states rode the 1990s technology boom, both saw large immigration and both enjoyed a wealth of new tax revenue. The main difference is that California spent the fruits of its boom and more, while Colorado didn't. There's a lesson here for voters now listening to politicians pleading to raise taxes.

In Colorado, government spending was restrained by a 1993 constitutional amendment called the Taxpayer Bill of Rights. The law requires voter approval for any tax increases and limits increases in state spending to inflation plus population growth. This meant that even in the fat years, state politicians couldn't spend all of their revenue windfall.

In other words, they couldn't use an economic boom to build a permanently larger government. Per capita general fund expenditures during Governor Owens's four-year tenure grew by a total of just 8%. And Colorado has returned to taxpayers more than $3 billion in surplus revenue in rebates and tax cuts since 1997.

California, by contrast, spent like drunken sailors, if that isn't unfair to shore leave. The state has the most liberal legislature west of Sweden, and Governor Davis never really tried to hold it back. Per capita general fund expenditures in the Davis era have jumped 31%, and now the politicians refuse to give up any of that government in the lean years.

Mr. Davis failed to meet a July 1 deadline for a new budget, and current negotiations in Sacramento involve more than $2 billion in tax hikes, including a 63-cent-a-pack increase in the cigarette tax and a doubling of vehicle licensing fees. Last month Republicans fought off a plan to raise high-income tax brackets to 10% and 11% from 9.3%. But everyone believes tax hikes are certain if Mr. Davis wins re-election in November.

Nationwide, alas, California is more common than Colorado, with states facing a combined $40 billion to $50 billion deficit. The American Legislative Exchange Council's Mid-Year Review on State Budget Policy notes that 15 states have enacted major tax increases in the current legislative season, and 11 more are on the verge. Tax increases by those 26 states total $14 billion; those same states increased spending over the past decade by $125 billion.

Among the worst tax-hike culprits, North Carolina has raised sales and income taxes by $1 billion, having increased spending by $7 billion over the past decade. Kansas saw spending shoot up by more than 33% from 1992 to 2000; now it's raising taxes on sales, cigarettes, computer software and even death (estates). Ohio has enacted $700 million in tax increases to cover up a $10 billion expansion in government since 1990. Tennessee voters have been saved from a new income tax only by a talk-radio revolt, though they're still getting hit with $933 million in new sales levies. New Jersey and Massachusetts voters are just getting hit, period.

All of this naturally has consequences for future economic growth. A forthcoming study by the Cato Institute says that during the 1990s the 10 states with the highest tax burden grew at half the rate of the 10 states with the lowest taxes. Personal income grew by 40% in the low-tax states but only by 25% in the high tax states. Job growth was 28% in the low-tax states, 13% in the high-tax states.

The larger lesson here is that the best defense against future tax hikes is an automatic political restraint on spending. Raising taxes can be made more difficult by requiring a "supermajority" of two-thirds or three-fifths of state legislators to raise taxes, or better yet a state-wide referendum.

A constitutional limitation like Colorado's is probably the best of all. The spending interests will pitch a fit, and Governor Owens tells us that in the early 1990s they predicted Armageddon in his state too. Instead Colorado grew even faster than most of the country, and now it is better prepared to ride out the technology recession.

By the way, the Colorado model is also good politics. Mr. Owens, a Republican in a conservative state, has gaudy approval ratings despite recession and is headed toward a comfortable re-election. Mr. Davis, a Democrat in a liberal state, is heading toward Newt Gingrich-levels of disapproval and is in big re-election trouble, despite a $40 million campaign warchest.