Like most states, Colorado and Texas do not have legislative or gubernatorial elections in 2019. Still, their voters are facing tricky, and potentially far-reaching, tax policy questions at the ballot box this November. In Colorado, voters will decide whether to revise the state’s Taxpayer Bill of Rights (TABOR). In Texas, overzealous anti-tax political maneuvering may inadvertently repeal the state’s business franchise tax, a major source of revenue.
Colorado: After nearly 30 years, will voters defang TABOR?
Colorado voters approved TABOR—up there with Proposition 13 as one of the nation’s most famous fiscal ballot initiatives—in 1992. Since then, TABOR has so thoroughly dominated Colorado politics that the local NPR station put together an entire podcast on it.
TABOR made two big changes: 1) It required voter approval for all tax increases in Colorado (state and local); and 2) it established a revenue cap (based on population and inflation growth) and mandated all excess revenues be refunded to taxpayers.
If approved, Proposition CC would eliminate the revenue cap, end the refunds, and let Colorado keep the surplus revenue—but require the state spend it on public schools, higher education, and transportation. Proposition CC would not alter the voter-approval requirement for all tax increases in Colorado.
The existing revenue cap is incredibly complex and consequential for Colorado budget makers. I don’t have space to explain it all (interested readers and Colorado voters should check out this 2006 report) but, in short, TABOR imposes one of the most binding tax limits in the country. Further, the cap ignores myriad factors that affect tax and spending decisions and severely hampers policymakers ability to raise revenue and fund services. Every tax and spending decision in the state must account for TABOR.
The refunds are nearly as complex. While Colorado has delivered TABOR-mandated refunds only eight times since 1992, the legislature has enacted 21 different ways to do it (and repealed 18 of them). Currently, the money goes—in order-- to property tax relief for seniors, an income tax rate cut, and finally a sales tax rebate. Refund amounts for households typically range from a couple of dollars to a few hundred dollars depending on the filer’s income level.
Colorado voters previously curtailed TABOR in a 2005 ballot initiative (Referendum C) that suspended the revenue cap for five years and made the cap’s growth formula more generous. Referendum C gave Colorado more room to budget—just two of the eight TABOR-mandated refunds were triggered after 2005—but TABOR still looms over every fiscal decision. Removing the cap would dramatically change how the state plans for its fiscal future.
Texas: Just how much do Texans hate income taxes? Do they hate all income taxes?
On Election Day, Texas voters will have their chance to reject a state income tax.
I’ll forgive astute TaxVox readers if they’re a little confused. Texas does not have an individual income tax. And nobody is proposing one.
However, Texas does levy a franchise tax (essentially a hybrid corporate income tax and gross receipts tax), which according to the state comptroller will raise $8.2 billion over the 2020-2021 biennium, or nearly 7 percent of the state’s general fund revenue.
This dynamic, plus some sloppy and rushed legislative drafting, is how a largely political vote against an individual income tax might inadvertently repeal the state’s franchise tax and blow a huge hole in the state’s budget. Here’s how we got here.
Enacting an individual income tax in Texas is quite difficult—but not difficult enough for some anti-tax legislators. Currently, in the unlikely event that the legislature wanted to enact an individual income tax, the Texas constitution requires both houses to pass legislation with simple majorities and for voters to then approve the tax in a referendum.
Proposition 4 would amend the Texas constitution and outright prohibit an income tax. Thus, enacting the tax would require a constitutional amendment that could only be passed with a two-thirds supermajority vote of the legislature and then a majority of Texas voters.
That all seems straightforward enough. And some believe voters will approve the amendment with 90 percent support. But there is a hitch.
The proposition reads:
“The constitutional amendment prohibiting the imposition of an individual income tax, including a tax on an individual’s share of partnership and unincorporated association income.”
While the proposition uses “individual” the Texas constitution uses the phrase “natural persons.” This is not mere semantics. Texas defines “natural person” as “a human being or the estate of a human being,” but the definition of “person” includes corporations. (The term “individual” is not defined.)
As the state’s Legislative Budget Board warned, prohibiting a tax on “individuals” might prohibit the state’s franchise tax.
Apparently, this was not some cynical trick. If anything, both sides seem to agree the measure is mostly symbolic politics. (The fact the governor wants to put the franchise tax “in a coffin” might raise eyebrows, though.)
Legislators tried to clean up the mess with subsequent legislation that defined “individuals” as natural persons. But as one Texas policy advocate noted, “There’s going to be somebody who is going to challenge it.”
Supporters put this proposition on the ballot to prevent even the possibility of change, but their rush to lock things in could conceivably upend Texas’s entire tax system.
