In the short run, the solution to Colorado's fiscal woes is to pass Referenda C and D. In the long run, what Colorado needs is an overhaul of its state and local financing system which I call a revenue shuffle.
The Problems
We need to collect sales taxes at the state level, rather than the local level, to end the counterproductive development incentives this creates, to keep localities from imposing taxes designed to burden people who don't vote upon them, and to discourage businesses from basing their locations based on sales tax avoidance. This also would make sales tax collections easier for government and businesses alike, since businesses would deal with only one government agency for sales tax collections (a business with many locations may have to deal with dozens of jurisdictions and account for sales in each jurisdiction seperately). And, a state level sales tax is a pre-requisite to participating in plans to allow states to tax internet based sales, which are also a threat to this tax base. Furthermore, the state is better equipped to handle fluctuations in revenues from year to year that come with sales taxes, a highly cyclical tax, than local governments, which often provide bread and butter services which are insensistive to economic trends.
We need to increase gas taxes, so that roads are not underfunded due to scarce general fund revenues. If gas taxes reflected the actual cost of maintaining roads, this user's fee would leave Colorado with good roads, which can promote a healthy economy, through a market driven mix of less driving and more maintenance. There is no reason for road maintenance, which can be paid for by the users who make it necessary, to become entangled with the overall general fund budget process.
We also need to cease using property taxes as a way to fund schools. Funding educational services like special education through property taxes is unfair and doesn't work. Experience has also shown, in state after state, including Colorado, that property taxes as a means of funding schools more generally are unfair. The current system leaves some jurisdictions with weak property tax bases chronically underfunded, while other communities receive immense funding since their communities have high property tax bases and few students. In many mountain towns, inequitable tax bases for schools between resorts and worker communities have already prompted calls for some type of revenue sharing. The current system also makes school districts bear the burden of development decisions it has no control over.
The Gallagher Amendment creates bad development incentives that undermines the creation of affordable housing.
TABOR spending limits create a long standing financial crisis when an economic bust temporarily reduces government revenues.
The Numbers
A single comprehensive solution can solve the problems above to a great extent.
Colorado currently collects the following amounts of taxes:
State Income Tax-------$3,972M at a 4.63% flat rate.
State Sales Tax--------$1,849M at a 2.9% rate.
Local Sales Taxes------$1,862M at an average 2.95% rate.
School Property Taxes--$2,048M
Other Property Taxes---$1,366M
About 25% of Colorado's aggregate property valuation is business property now assigned to bear 55% of the total property tax burden. About 75% of Colorado's aggregate property valuation is reisdential property assigned to bear 45% of the total property tax burden.
The gas tax currently brings in about $900 million a year, with no funds currently being contributed for transporation spending from general revenues, but the Department of Transportation needs $1.4 billion a year to maintain state roads in a way that will match growing expenses and traffic.
The Plan
The first four parts of the plan need to be a package deal, as they are intimately intertwined with each other. Each of the last three items can be adopted or rejected on a stand alone basis without doing undue harm to the rest of the package. The only part of the plan which is not revenue neutral at the state level is the gas tax increase.
1. Discontinue local sales taxes (other than a couple of metro district sales taxes) and increase the state sales tax to 5.7% (a reduction of less than 0.1% in average statewide sale taxes rates). This would increase state sales tax revenues by $1,766 million. If a broader sale tax base increased collections, this would be matched by eliminating items such as diapers and toilet paper from the sales tax base.
2. End school property taxes and, instead, fund schools entirely at the state level. This would be funded in part by the sales tax increase and in part by increasing the state's income tax rate from 4.63% to 5.0%, where it was for many years until state legislators implemented TABOR spending limit driven income tax rate cuts. This would also make a statewide program that allows any student to attend any public school regardless of where he or she lives, already in place in theory, work more smoothly.
3. Impose state impact fees, which could not be waived by local governments, on developers of new residential units which would increase a school district's population in order to pay for the cost of building new schools. A back of napkin figure would be about $5,000 per new single family dwelling (a 2,000 house development with about 5,000 new residents would provide about $10 million in impact fees, half for a new 200 student elementary school, and half for additions to middle schools and high schools to reflect new enrollments). This both funds new construction in growing areas and provides an incentive to engage in infill development in places where there is already adequate classroom space, like the Denver Public Schools District.
4. Increase property taxes for the benefit of local governments to make up for lost sales tax revenues by an average of 136%. This would result in an average decrease in total property taxes of 5.4% (saving the average family of four about $184), since increased local government property taxes would be offset by decreased property taxes for schools.
5. Phase out the Gallagher Amendment. Combined with the modest property tax cut resulting from items 1-4 above, this will result on average in a 57% property tax increase for residential property, and an average 57% decrease in business property taxes. This could be phased in gradually, with the residential share of property taxes increasing by 2% per year from the current 45% for fifteen years, at which point any remaining valuation discrepency would be eliminated.
6. Increase the gas tax to 34 cents a gallon (an average family would pay about $72 a year more in gas taxes per car). Note that while the gas tax is regressive that the reduction in the average sale tax level and the increase in the share of taxes coming from income taxes would mitigate this effect by making progressive adjustments to the tax system, leaving the entire tax system distributionally similar to the existing tax system.
7. End TABOR spending limitations and replace them with rainy day fund provisions. While it is not unreasonable to require public approval for changes in tax rates, it is not reasonable to tie state spending to rigid formulas. During economic booms, the state is going to collect more revenue, and during economic busts, when state funds are often urgently needed for social services, the state is going to collect less. Rather the imposing rigid limitations, the state constitution should require the state to save a portion (perhaps 10-20%) of any increase in revenue over a prior year in a rainy day fund which, in turn, can only be spent in years when state tax revenues decline, thus buffering the state's economy. Without a rainy day fund there is a tendency to push for tax increases in bad times that never go away. But, TABOR spending limits artificially ratchet down state spending to bust levels.
The Benefits
While overall tax rates and the overall distribution of taxes between the rich and the poor would be only modestly tweaked, the incentives of the actors in the tax system to engage in rational economic behavior would be greatly increased.
Colorado's schools would be equitably and adequately funded without regard to the local property tax base. A state rainy day fund would make up for the increased revenue fluctuations associated with moving a large share of school revenues from a local property tax base to a state sales tax base.
Colorado's roads would be adequately funded by drivers in proportion to the extent to which they use the roads. The incentive to buy fuel efficient cars would also be increased slightly. Need caused by road use would automatically be matched to the revenue stream.
Local governments would have a single, inexpensive to collect (counties would collect them once for all local governments in their jurisdiction), predictable tax base that matches the tax collections from new developments to the service costs of those developments, leaving development decisions governed by the market, rather than tax policy. This would likely encourage local governments to zone to permit affordable housing and discourage sprawl, while discouraging unproductive competition for business development.
Sales tax compliance for businesses and enforcement by government would be cheaper, consumers would have an easier time understanding the sales tax, and collections of sales taxes from internet sales would be more easily facilitated in the event of an interstate compact on the subject.
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