Tax expert: Coloroado prosperity doesn't mean more money for services

Thursday, May 26, 2016 9:27 PM

Colorado's economy is booming, but state funding for roads and education don't reflect that, tax policy expert Carol Hedges told a small audience at the Pine River Library on May 19. There are reasons for the discrepancy, which she called the Colorado conundrum, but they are complicated.

The Taxpayers Bill of Rights Amendment (TABOR) passed by state voters in 1992 is just part of it, Hedges said.

Library Director Shelley Walchak said she first saw Hedges speak at a library conference in Colorado Springs. "I think TABOR is such an important thing for us to understand" that she invited Hedges to speak in Bayfield.

Hedges is from the non-partisan Colorado Fiscal Policy Institute. She described how TABOR and other budget controls interact to put Colorado toward the bottom among states for funding K-12 education, higher education, and roads. She described the consequences without saying whether any of these things are good or bad.

"One of the things we've learned after years of talking about this is it needs a little context," she said. "It's tax policy that's in the (state) constitution, how it interacts with a lot of other things." She used the analogy of a grove of aspen trees. They appear to be individual trees, but underground they are all connected by a maze of roots and are actually one organism. The groves are very resilient because of this connection, she said.

"We are connected like aspens in a grove. We look like we are all individuals, but we are all connected," she said. "Colorado has one of the best economies in the country," the seventh fastest growth from the third quarter of 2014 to 2015. Colorado has the 13th highest median household income among states, and the unemployment rate is 3.2 percent, although she acknowledged the prosperity is not distributed evenly around the state.

"But we are struggling with a lot of things like how we fund schools, our transportation system, higher education that we can afford," she said.

The state's current fiscal year budget is $25 billion, which sounds like a lot. But 32 percent ($8 billion) of that is federal money that must be used for designated purposes such as Medicaid, roads, and clean water; another 30 percent is cash funds, revenue from things like vehicle licences and hunting and fishing licenses that must be used for related things.

The legislature controls 38 percent, around $9.6 million, of this year's budget, Hedges said. Revenue for that comes 29 percent from sales, use, and excise taxes, 61 percent from individual income taxes, seven percent from corporate taxes (which is only Schedule C corporations), and three percent other sources, she said.

State revenue goes up and down with the economy, while case loads increase whether or not money is available, she said. "Kids turn five no matter what and start kindergarten," she said. "A lot of things that the public sector does are counter-cyclical. Demand goes up when the economy is down," such as Medicaid, which has both state and federal funding. K-12 schools and Medicaid are the largest spending categories in the share of the budget that legislators can control.

Seniors and the disabled are a disproportionate share of Medicaid spending, so they will be affected by budget cuts to Medicaid, Hedges said. Seventy percent of people on Medicaid are from working families, she said, and many other families are eligible but don't want to be on Medicaid.

Per pupil funding for public schools has gone down year by year, while the state versus local share of school funding has flipped since the 1980s. The state share is now 66 percent statewide, although it varies by district. In the Bayfield district, the local share is 23 percent and the state is 77 percent, Hedges said. For Durango 9-R it's 29 percent local and 71 percent state. She didn't have a breakdown for Ignacio.

"When you are a school district very dependent on state aid, the more constrained the pay is at the state level, the more constrained you are as a school district," she said.

Hedges cited the Gallagher Amendment, passed by voters in 1982, for the growing share of K-12 funding from the state. It dictates the statewide ratio of property taxes paid by residential versus commercial properties. Because of residential growth since then, the residential assessment rate for property taxes has declined from 21 percent to less than 8 percent, so less school money is generated locally despite population growth.

Colorado is 48th in state funding for its public colleges and universities, Hedges said, ahead of only Vermont and New Hampshire, which only have one university apiece. As state funding has gone down, tuition and college debt have gone up. Higher education "is a necessity these days, but we price it like a luxury," she said. Money paid on college debt is money that doesn't go into the local economy, she said.

"Colorado has the 49th smallest government in the country based on general fund money compared to state gross product (the economy), Hedges said. Texas is 50th. Colorado is 45th in state taxes as a percentage of every thousand dollars earned by state residents, she continued. "It's not just how we slice the pie, but how big the pie is."

Hedges listed state general fund spending categories and noted that transportation isn't one of them. That's all from gas tax, one of the cash funds. The state gas tax was last raised in 1991 and is 22¢ per gallon. Because of inflation in highway materials and labor, that's only worth 11¢ now, she said and asked, "How many of you drive a car that gets worse gas mileage than in 1991? Anyone?" Apparently not. So gas tax revenue doesn't increase with the number of vehicles on the highways.

Hedges actually spent relatively little time discussing TABOR. It prohibits any increase in a tax rate or any new tax without voter approval. It also prohibits certain types of taxes without voter approval, such as the graduated income tax that the state had in the 1980s. With a graduated income tax, the state could lower its sales tax rate (2.9 percent) and free up capacity for local communities to raise their sales tax without running up the total sales tax rate too high. Sales tax is a primary revenue source for towns.

TABOR also dictates how any tax increase ballot question must be worded, so the first thing voters see is how much taxes will be raised rather than any benefits that might come from the tax increase, Hedges said.

TABOR also limits how much revenue can increase from one year to the next for any level of government. Revenue beyond that amount must be refunded to taxpayers. The limit is based on the Consumer Price Index plus population growth, but the CPI measures consumer goods rather than the sort of things the public sector buys.

"It sounds so good to let government grow by the rate of inflation," Hedges said. "Government as a percent of the economy has shrunk since 1999. That was the intent."

"We are giving money back at some of the lowest tax rates in the country," she said. "One of the fastest growing parts of our population is the aging. They spend less (thus less sales tax) and need more services. The other is school age kids." Both of those age groups are more expensive to the state than middle-aged residents, she said.

Hedges noted there will be important state ballot issues facing voters in November, such as a state increase in the minimum wage, alcohol sales in grocery stores, one to create a single payer health care system in Colorado, and one called Colorado Priorities (Prop. 117) to let the state keep and spend money in excess of the TABOR limit. "This is one we really care about," Hedges said. "We are circulating petitions to get it on the ballot."

She concluded, "Please vote! All the way to the bottom of the ballot. Skip the top of the ticket if you are disillusioned, but at the bottom will be some important issues. ... There are so many people who are disgusted with what's happening in our political system that they don't vote. ... If you vote and lose, you can bitch all you want. But if you don't vote, you are letting someone else run your community."