By Jeff Austin, Legislative Advocate, MMA
Of all the ballot initiatives that are fought nationwide, tax initiatives seem to be more often identified with an individual person than are other initiatives. From legalizing marijuana to physician assisted suicide, no matter how dedicated the proponent might be, he or she seems doomed to obscurity, unless fighting for lower taxes.
We have witnessed this ourselves in Maine. Who was the leading proponent of the Bear Baiting referendum? I don’t know either. Now, who was the leading proponent of the tax cap? Most Mainers could identify Carol Palesky but probably not identify her organization, the Maine Taxpayers Action Network.
The architect of California’s Proposition 13, upon which Ms. Palesky’s proposal was based, was an anti-tax activist named Howard Jarvis. Howard Jarvis’ efforts have spawned many tax cutting activists around the country like Carol Palesky. The most notable of these disciples is a man named Douglas Bruce.
Mr. Bruce successfully pushed Colorado’s “Taxpayer Bill Of Rights” or “TABOR” in 1992. It was also known as the Bruce Amendment. His success in 1992 followed three preceding losses at the ballot box in 1986, 1988 and 1990. Fred Holden a policy analyst affiliated with various western think tanks, recently called Colorado’s TABOR “the strictest tax and spending limitation of the 50 states.” Accordingly, Mr. Bruce has now inspired a legion of followers himself.
Maine may face a TABOR election next year. A new political action committee has been formed which is dedicated to enacting a TABOR style proposal. The organization is out collecting signatures now to place their proposal on the November, 2005 ballot. The principal officer of this PAC is Mary Adams. Each application for a citizen initiative must include the names of five other Maine voters. Others identified on the petition include outspoken Palesky Tax Cap supporter Jack Wibby, long-time observer of Brunswick doings, Pem Schaeffer, and Gray selectman Gary Foster. While no official links exist, the Maine Heritage Policy Center appears to be involved in the effort as well. The rallying cry of this collective is sure to be “Colorado!”
If TABOR is presented to Maine voters, it will ultimately be judged not for its proponents but by its provisions. This article will explain what the Colorado TABOR does and how it compares to the TABOR proposed in Maine.
Principles of TABOR
One of the leading proponents of TABOR is Professor Barry Poulon, a Colorado economics professor. He has written extensively on TABOR and advises states seeking to implement TABOR restrictions. He has identified six hallmarks of what he believes are effective tax and expenditure limitations. The initiative should:
1) Be based in the constitution rather than statute;
2) Require voter approval for increased taxes, debt or fees;
3) Impose a stringent limit on the revenue such as population growth rather than income growth;
4) Apply to a broad base of revenue and/or expenditures.
5) Require immediate refunds to taxpayers of surplus revenue above the limit.
6) Be linked to other budget rules such as balanced budget requirements and budget stabilization funds.
Constitutional v. Statutory
Proponents quickly identify the constitutional limit as imperative. The focus here is on state spending. State legislatures cannot be bound by statute, only by constitutional limits. Thus, statutory limits are merely advisory with respect to the state. Others believe that the “moral authority” of a citizen-initiated statute does impact legislative behavior.
Municipal government is bound by state statute. The constitutional issue is largely irrelevant with respect to towns. Certainly, if the limit is only statutory the legislature could release towns from the restriction, where they can’t release towns from constitutional limits.
The Colorado TABOR is a constitutional amendment; the proposal for Maine is statutory. Maine does not permit constitutional amendments to be enacted through the citizen-initiative process. To enact a constitutional amendment in Maine, the state legislature must enact a measure by a 2/3 vote to send it to the voters, who must then approve it by a simple majority. Because it is a constitutional amendment, Colorado’s TABOR is legally more restrictive than the proposal in Maine with respect to limits on state spending.
Colorado’s TABOR requires voter approval for changes in tax policy (expanded tax base, increased rates, new taxes) that cause increases in revenue. The procedure to enact an increase requires the taxing authority to request (either by ordinance or resolution) a referendum question. Ironically, tax policy changes that cut revenues do not require voter approval. The theory seemingly being that representative democracy only fails when it raises revenue not when it cuts it.
The proposal for Maine is more stringent. It requires a 2/3 supermajority vote by the taxing authority, state or local, in order to put a revenue increase out to referendum. The referendum vote by the people requires a simple majority. While this combination of both legislative supermajorities and voter approval is rare, it is not unique. Most states have an either/or approach, while a few states, such as Washington, have both.
It is also important to note that both the Colorado and Maine TABOR define a tax increase broadly. Maine’s definition may even be broader than Colorado’s. Section 1992(2) of the Maine TABOR identifies five separate categories of legislative action that require voter approval. One of them (Section 1992(2)(B)) states, “Increases the rate or expands the base of an existing tax.” What “expands the base” means is unclear.
In the property tax world it could either mean expanding the base in big ways such as extending the tax to hospitals or stocks and bonds; or, it could mean expanding the base in the small ways, such as new construction of a residential deck or garage. This language is not taken from Colorado so we cannot look there for guidance.
If the language is interpreted to require public approval for every “small” expansion of the base, then this is exceedingly restrictive. Most towns make assessing changes every year to account for routine construction activity. If the intent of the bill is to require voter approval for each such expansion, then the Maine proposal has gone far beyond Colorado.
Furthermore, the provisions of section 1992(2)(D) of the Maine TABOR proposal are also troubling. This subsection requires voter approval for the reduction of any existing tax break. There seems to be a fairly widespread belief that too many special interests have secured for themselves special tax breaks (exemptions) and that any meaningful comprehensive tax reform would review and likely eliminate some of those exemptions. It may not be good public policy to put up too many barriers to meaningful reform.
Some other important issues are similarly unclear. For example, is the creation of a Tax Increment Financing District (TIF) a tax policy change that would have to go through the legislative supermajority-plus voter approval process?
The cost of these elections is a problem. There are two basic costs, the cost of actually having people vote and the cost of the required notice about the election. The voting costs in Colorado have not proven to be too significant a burden on local government because TABOR-related votes generally occur at regularly scheduled elections.
However, both the TABOR in Colorado and the one proposed in Maine require that state and local governments prepare and mail to each registered voter in their voting jurisdiction a notice packet, which must include:
1) Voting information such as date and place;
2) Budget data for the previous four fiscal years;
3) Revenue estimates for the next four fiscal years if the measure passes;
4) Budget estimates for the next four fiscal years if the measure passes;
5) A 500 word summary in favor of the measure, and,
6) A 500 word summary in opposition to the measure.
This is a fairly substantial mailing and completely out of the ordinary for Maine. Costs from this aspect of TABOR in Colorado are burdensome. In Colorado, the Courts have held that this extensive notice package is not required if the subject of the referendum is a proposal to merely keep excess revenues rather than a proposal to affirmatively increase a tax rate. The vast majority of local referendums are of this type. It is not clear if the Maine TABOR would be similarly interpreted.
The Colorado TABOR voter approval requirement does not apply to fee increases. Fees can go up without voter approval. However, the spending of fee revenue is included in the Colorado limit. As such, increasing fees is not a loophole Colorado municipalities have used to evade TABOR. Rather it reflects the common sense idea that raising fees is a rather ministerial function unlike tax policy changes.
The Maine proposal goes beyond Colorado. Not only is fee spending included in the limit, but fee increases must be approved by voters. This is especially tough for Maine since many municipal fees are actually set by the state legislature and not at the local level. Thus, an increase in most fees collected by town clerks, for example, would require a state legislative supermajority and a statewide referendum. This would appear to be excessive.
There are essentially two measuring sticks for any state government spending limitation system – inflation, plus either population growth or income growth. Income growth is typically higher than population growth. For that reason, most TABOR proponents strongly favor using population rather than income as the growth factor. Both the state spending cap in Colorado and the one proposed in Maine use inflation plus population growth.
On the local level, each uses inflation plus student population growth for schools. For municipalities, Colorado uses inflation plus net new real property construction (construction less demolition) and net new taxable property (net exemption conversions). This “growth” factor may be negative such that expenditures must be cut.
The proposal in Maine offers two municipal growth factors, but the lower of the two must be used. The first growth factor is the net change in total assessed value. It is not entirely clear what this means. What “value" is used? Is it a town’s actual assessed value, a town’s state equalized value, or just net new construction similar to Colorado’s growth factor? The second Maine growth factor is inflation plus net town population growth. For most, but not all, Maine communities, the latter population-based calculation will result in a lower, more restrictive limit.
Many of Maine’s rural communities are losing population, particularly in northern and western Maine. Accordingly the Maine TABOR spending limit could be zero or even negative for municipalities in these places. The most recent (2002-03) inflation factor used by the state is 2.3%. If a town’s population decrease is –2.3% or less, the town will have an obligation to cut. The range of population growth for Maine municipalities for the most recent year (2002) was from a low of –13.6% (Chester) to a high of 17.26% (Burlington) (Source: Maine Vital Records).
An analysis of Portland, Bangor, Greenville and Falmouth demonstrates that the Maine limit using population is generally much more restrictive than the Colorado limit using net property value. Ignoring the relative inflation factors, the difference between Colorado’s “net property” growth factor and Maine’s “net population” growth factor (for calendar year 2002) is as follows:
Municipality Property Pop.
Portland 0.6% 0.08%
Bangor 1.0% - 0.34%
Greenville 0.1% -1.38%
Falmouth 2.4% 2.62%
Only for Falmouth is the Maine population factor higher than the Colorado valuation factor.
However, some communities would be bound by the valuation limit and not the population limit. Communities that have one or two disproportionately large property taxpayers might be faced with a situation where the net property value in town falls, and falls dramatically, due to an economic event such as a closure. In this case, the assessed value limitation system may be the more restrictive one for Maine TABOR purposes. For example East Millinocket has had three consecutive years of loss in its state determined equalized property tax value: in 2004 the valuation dropped 13.2%; in 2003, the drop was 2.8%; and in 2002, it was 2.5%.
While we don’t know the exact population number for East Millinocket in these years, the State Planning Office has estimated that population in that town will fall by approximately 1.5% per year from 2000-2005. Accordingly, it would have been permitted to at least keep its budget steady during the period above if the inflation plus population limit were available. However, since the proposed Maine TABOR uses a “lower of” standard, East Millinocket would have had to cut its budget equal to the valuation losses above. This results in pretty significant cutting in 2004 following on two years of real cuts.
Thus, both Colorado and Maine are similar in their choice of spending caps, except for municipalities, where the Maine TABOR proposal is much more restrictive.
Scope of Spending Covered
Colorado’s TABOR as originally proposed applied to all spending. However, Colorado voters recently enacted a constitutional amendment that increases state spending on education. This amendment also exempted some state revenue that is to be spent on education from the TABOR limits.
The Maine proposal applies its limit on the state level to appropriations from the general fund, the highway fund and other quasi-governmental agencies and other special revenue funds. For municipalities the limitation applies to “spending.”
The principle advanced is that all spending must be covered and not just the spending generated by certain revenue sources. Otherwise, non-restricted revenue sources will grow. Professor Poulon believes that California’s constitutional based spending limit (the Gann Amendment) was largely ineffective due to its failure to cover the spending of fee-based revenues.
Standard Exceptions to Spending Limit
Both the Maine and Colorado TABOR have exceptions to the spending limit for certain categories of revenue or expenditure. For example, each excludes money received as a gift from the spending limit. Thus, gifts to fire departments that are spent on equipment are not counted against the town growth cap. Maine’s is slightly more restrictive in that it only excludes “gift” money if it was restricted to a particular expenditure. Colorado has no such limitation. Other exceptions include federal money (e.g., homeland security grants) pension issues, revenues from property sales and lawsuit issues.
Debt. According to the Colorado Municipal League, preexisting debt payments, if voter approved, are not included in the TABOR spending limits. Similarly, any new debt, if approved by voters, is also not included.
The Maine TABOR does not appear to have any language directed at bonded debt. This is potentially very troubling. If bond revenues are not excluded from the spending limit, the provision would appear to be aimed at killing borrowing in Maine. For example, the money borrowed to construct a building or repair roads could totally “eat up” for a few years the allowable growth. Thus, if borrowing occurs, no other spending increases, even inflationary increases, in existing programs would be possible.
Similarly, even if the spending of the bond revenue is excluded, if the debt service payments are not excluded then borrowing is going to be very difficult as well. It appears that both the spending of bond revenues and tax increases necessary to pay the bonded debt, would have to be approved by the override mechanism of a 2/3 vote by the legislative body, followed by a majority vote of the electorate.
Lottery. TABOR in Colorado did not mention state lottery revenues specifically. Accordingly, the Colorado legislature excluded lottery revenues from the limits and the Supreme Court upheld that exclusion. The Maine proposal also does not mention lottery revenue. It defines revenues as “taxes and fees” which clearly excludes lottery receipts. Maine’s definition goes on to say that “money received from the sale of goods or services” is included to the extent that the state profits from these sales. So, proponents may attempt to have the state lottery included as a “good or service” in which case lottery profits that currently go into the general fund will be included in the spending limits. This would appear to be a stretch.
Automatic Refund/Voter Override
Colorado mandates a refund to taxpayers of any cash revenues received by the government in excess of the spending growth allowance. These excess funds (surplus) must be returned to taxpayers the following fiscal year. The government may keep the surplus if the voters approve keeping it. The process for voter approval is the same as for increasing taxes. While the State of Colorado has had several surplus years, the option of overriding the automatic refund and allowing the state to keep the surplus has only gone to the voters a few times. It has never succeeded.
At the local level it is a much different story. Many of the immediate service needs of a growing population are met at the local level, not the state level. Public safety, public education and public works, parks and recreation programs and libraries are primarily locally funded. Overrides, (called “de-Brucing”) are rather commonplace at the local level in Colorado.
According to the Colorado Municipal League (CML) more than 400 override votes that allow municipal government to keep and spend revenues which are in excess of the TABOR limit have been held. Oftentimes these surplus revenues are generated not by taxes but as a result of fees, particularly construction related fees.
An astonishing 88% of them have passed. Many of the failures were reworked, re-presented and then approved. Another 235 actual tax rate increase referendums have been held and over half of them passed. Another 600 overrides took place at the county and “special district” level. The only pattern identified by the CML in local overrides is that the largest municipalities seem to have the most trouble achieving the override.
It is important to note that a single “de-Brucing” may cover multiple years. So it is not uncommon for many communities to have effectively exempted themselves from the “surplus revenue” aspect of TABOR.
Maine’s TABOR has a similar state-level refund override system. However, excess revenues in either the general fund or highway fund are split between taxpayer refunds (80% of the surplus) and a “rainy day” fund (20%).
Towns may also create a rainy day fund, but the fund may not exceed 10% of the previous year’s appropriation. Surplus funds must be used to reduce the following year’s property tax commitment. Towns may not reduce other local fees with the surplus.
Colorado has hit hard economic times and government revenues have dropped. Colorado lacks a meaningful rainy day fund and many proponents of TABOR believe it was a mistake to exclude such a fund that could have moderated the impact tough economic periods have on state revenues. Some other types of provisions that proponents like are constitutional balanced budget amendments. Cross state comparisons in this area is very difficult because of the different systems from one state to another.
From the municipal perspective, it would appear that the proposed Maine TABOR is generally more restrictive than the Colorado TABOR. And again, proponents of the Colorado TABOR have characterized it as the most restrictive in the country.
The reasons the Maine proposal is more restrictive from the municipal perspective are: (1) it requires a supermajority vote of the legislative body to send a tax/spending issue to the voters; (2) the spending limit takes a “lower of” approach; (3) some of the language surrounding debt and “base expansion” could be interpreted in ways that are exceedingly restrictive; and (4) fee adjustments require voter approval.
What is perhaps most surprising is that this is all being done in spite of the clear Colorado experience. During the past robust period in Colorado, TABOR remained popular. Even still, voters at the local level overwhelmingly supported protecting and expanding municipal services. There is no reason to believe that Maine voters, with our long tradition of home rule and recent overwhelming rejection of the anti-municipal Palesky cap, would be any less supportive of municipal services than are Colorado voters.