Colorado Cap Helps State Spend More
Less-than-expected tax revenue has lead Colorado to spend less money. $700 million less. Colorado had planned to spend $13.8 billion this year, but has reduced spending to $13.1 billion. Tennessee, meanwhile, increased taxes by nearly $1 billion to deal with a similar shortfall. Why the difference in approach? Simple: Colorado has a constitutional provision called the Taxpayers Bill of Rights that prohibits tax increases without the consent of voters, while Tennessee does not. Thus, government in Colorado has learned how to economize and prioritize; while Tennessee's has not.

Check out the chart that goes with the Denver Post story. Since the 1993-94 fiscal year, Colorado has increased state spending by 72 percent, from $7.6 billion to $13.1 billion. (It would have been 81 percent if the legislature's $13.8 billion spending plan had been sustained by revenue.) During the same period of time, Tennessee increased spending by 56 percent.

But here’s the irony: Colorado cut taxes during that period of time. Tennessee raised taxes.

Colorado was able to increase government spending by a greater percentage than Tennessee because, unlike Tennessee, it has a mechanism that restrains the growth of spending. That's not an oxymoron. The reality is, Colorado's Taxpayers Bill of Rights - which limits revenue growth to the combined rate of inflation and population growth and returns excess revenue via tax cuts - helped Colorado's economy grow faster.

From 1993 through 2000, Colorado's gross state product – the measure of the state’s total economic output – rose 79.4 percent (from $93.6 billion to $167.9 billion), according to the U.S. Department of Commerce’s Bureau of Economic Analysis. Tennessee’s rose just 48.9%, (from $119.7 billion to $178.3 billion). While Tennessee's economy grew in those eight years, Colorado's grew much faster. Tennessee’s economy went from being 28 percent larger than Colorado’s to being just 6 percent larger.

From 1993 through 2001, Colorado's total personal income grew 84.3 percent, compared to 54.3 percent in Tennessee. Total personal income is an aggregate measure for the state and is one measure of the growth of the overall economy. Because some of that increase reflects growth in population, a better measure of real economic performance is per capita income - and there Tennessee also lags Colorado. In 1993, Coloradoans' per capita income was $22,196, or $2,655 higher than Tennessee's that same year. By 2001, per capita income in Colorado had risen 50.8 percent to $33,470, while in Tennessee it had risen just 38.1 percent to $26,988. Tennesseans' per capita income now lags that of Coloradoans by $6,482.

Another way to put it: Colorado's citizens have seen their incomes rise by an additional $3,827 per capita more than have the people of Tennessee since 1993 – the year Colorado enacted a policy of tax restraint and Tennessee did not.

Colorado's Taxpayers Bill of Rights, which took effect in 1993, created an environment of stable taxes and, indeed, tax cuts when revenue exceeds the generous TABOR limit. As a result, Colorado's economy boomed. That economic boom is reflected not only in its income statistics, but also in its population growth from 1993 through 2001 - 32.4 percent, compared to Tennessee's 15.9 percent.

All of that economic growth resulted in more money for the government to spending, even as Coloradoans' taxes were cut. Why? Because low taxes spur higher economic growth.

As I explained in this post, Colorado was able to increase per-capita state spending by 139 percent from 1990 to 2000, the third-largest increase among all 50 states, even though its TABOR amendment restrained the growth of revenues available for spending. But Tennessee, with no effective cap on revenues, taxes or spending, increased per-capita spending by 76 percent from 1990-2000.

Tennessee pursued a strategy of increasing taxes to fund more government spending in the 1990s, and routinely exceeded its weak constitutional spending cap. But because higher taxes reduce economic growth, the state actually brought in less revenue than it might have under a lower-tax/higher growth strategy. In 1990, Colorado's government spent $2,504 per capita and Tennessee spent $3,753 - 50 percent more than Colorado. By the end of the decade, Tennessee was spending $6,593 per capita, just 10 percent more than Colorado, which had increased spending to $5,992 per capita. Even though Tennessee raised taxes repeatedly during the 1990s in order to spend more, Colorado was able to raise spending faster by taxing less.

The lesson of Colorado is clear and undeniable: By restraining spending and taxes, with a Taxpayers Bill of Rights modeled after Colorado's, Tennessee could actually create a future in which taxes would be guaranteed to remain low yet state government would actually have more money to spend, all within a system that would put a premium on accountability and prioritization.

Gov.-elect Bredesen, are you listening?