It’s time for Colorado to come up with a tax reform of its own

Author: Miller Hudson - February 26, 2018 - Updated: February 26, 2018

Miller Hudson

Tax policy is a conversation that makes taxpayers’ eyes glaze over, especially when the politicians responsible for protecting them against runaway confiscation demonstrate a weak comprehension of economic realities. Academic tax debates examine concepts like efficiency, suppression, avoidance and tax fairness. When “sin” taxes grow too onerous, for example, black markets emerge for cigarettes, alcohol and soon, it seems likely in Colorado, marijuana. From a macroeconomic perspective taxes should shear profits from the healthiest sectors of the economy, recognizing this will prove a changing mosaic over time.

Diesel and gasoline taxes provided a sufficient revenue stream to Colorado’s Highway Users Trust Fund (HUTF) for nearly eight decades. But Congressionally mandated improvements in fleet fuel efficiency and conversion to alternative fuels as well as electric vehicles has seriously eroded the purchasing power of the HUTF since TABOR froze petroleum taxes in 1992. While it is admirable that UPS is converting its delivery trucks to natural gas and well heeled environmentalists are zipping up and down the Front Range in their Teslas, why should these vehicles be exempt from transportation taxes?

The Legislature’s ability to make adjustments that would capture a sliver of emerging revenue streams is severely handicapped by TABOR strictures stitched into Colorado’s constitution at the behest of Douglas Bruce, our flawed Moses of tax and spending probity. TABOR enjoys a cadre of zealots who attribute Colorado’s relative economic health to these restrictions while glancing aside as our civic infrastructure visibly crumbles around us. Most taxpayers think of TABOR as a straightforward mechanism requiring voter approval of tax increases, a not entirely crazy proposition. But, in truth, Bruce kept fine-tuning his proposal through three failed election campaigns with intricate provisions that captured his personal animus for both real estate transfer levies and a graduated income tax.

In a classic case of locking the barn door once the horses have fled, the Legislature asked voters to impose a “single subject” rule on all future ballot initiatives making it virtually impossible to unravel TABOR with a single stroke. Legal estimates indicate that at least 28 separate initiatives are now required. A Gordian Knot solution might be to ask voters to remove all tax and spending provisions from the state constitution, but this proposal slays a lot of sacred oxen that have also knitted their own protected status into the Colorado constitution.

It is instructive to consider TABOR as a thirty-year-old solution to economic circumstances prevailing during the 1980s. Email and the Internet were in their infancy. Cell phones were the size and weight of a brick, and social media wasn’t even a glimmer on the futurist horizon. Sales taxes captured revenue from the vast majority of economic transactions that involved a payment of cash for goods. The service economy remained an untaxed fraction that could be ignored. Today this relationship has flipped. Colorado’s economy is now predominantly one of service purchases, while the sale of goods has increasingly fled to frequently untaxed, online vendors. Our fastest growing companies are those that have figured out how to throw tollbooths across the information highway, even though advertisers are paying these fares. Ours is a vastly different economy than it was in 1992 and the state’s tax structure no longer fits our fiscal reality.

The last time it was apparent a profound mismatch between taxes and the economy had emerged in Colorado came in the late 1950s when a burgeoning postwar boom proved a poor fit for a tax scheme crafted during the 1930s. Then Governor Steve McNichols, together with the Legislature, authorized a tax equity study by Reuben Zubrow, an economist at the University of Colorado. His 800-page report provided a road map for the reform and replacement of the state’s existing tax mix during the 1960s. It’s well past time for an update.

It should be possible to find bi-partisan support, provided guardrails are placed on any recommendations – preserving revenue neutrality would be a good place to start. If current supporters of an additional sales tax for transportation reach the ballot this year, total local sales taxes will approach, even exceed 10% in many communities, as we attempt to wring ever more dollars from a shrinking revenue source.  Recently the Colorado Municipal League has promoted an extension of the state sales tax to include services, which could accommodate a boost for transportation while actually reducing the resulting sales tax rate in the bargain. A complex interaction between TABOR and the Gallagher amendment has been systematically impoverishing Colorado’s rural counties and their school districts. This can’t possibly be desirable, much less defensible.

Colorado needs a 21st century Zubrow study. What better time to authorize it than an election year, when its findings can be delivered to a newly elected crop of legislators in 2019?

Miller Hudson

Miller Hudson

Miller Hudson is a public affairs consultant and a former state legislator. He can be reached at mnhwriter@msn.com.