The Colorado Revenue Limit: The Economic Effects of TABOR

In November 2005, Colorado residents voted to suspend for five years the state’s self-imposed revenue caps as outlined in the state’s Taxpayer Bill of Rights (TABOR). TABOR, which was passed as a constitutional amendment in 1992, limits the growth rate of revenue to population growth and inflation. The effects of TABOR on government spending and economic growth have been hotly debated in recent years. Proponents attribute much of Colorado’s economic prosperity in the period immediately following adoption of the law to the limit and its effect on government spending and taxes. Opponents of TABOR argue that TABOR-induced reductions in government spending have led to curtailed government services, including those that voters and businesses care more about.

To understand TABOR’s effect on Colorado’s economic health and growth, we compare Colorado with other states, controlling for prior history and economic and demographic characteristics in order to disentangle the effects of TABOR from other factors influencing Colorado’s economic performance.

We begin with a description of TABOR and Referendum C, the measure enacted in November 2005 that suspended TABOR for five years and modified some of TABOR’s requirements. We compare TABOR to tax and expenditure limits (TELs) in other states. TABOR is by many measures the most binding TEL in the country. We also describe how TABOR interacts with other Colorado budget rules. We then describe the mechanism by which TELs might strengthen local and regional economies, and review the extensive empirical literature on both the effect of TELs on taxes and spending and on the effect of taxes on business location and economic growth. The meat of our analysis compares the growth rate of personal income and employment in Colorado with the growth rates in other states in the periods before and after passage of TABOR. While we find some very limited evidence for short-term increases in growth, those were not sustained in the longer term. The lack of a sustained effect holds up after controlling for economic and demographic characteristics of the states. The results of those analyses show that there is little empirical support for the notion that TABOR had a positive effect on Colorado’s economy.