Fiscal rules.

Brannon, Ike

"Can Fiscal Rules Constrain the Size of Government? An Analysis of the 'Crown Jewel' of Tax and Expenditure Limitations," by Paul Eliason and Byron Lutz. Federal Reserve working paper, February 2016.

In the battle to rein in government spending, the Colorado Taxpayer Bill of Rights (TABOR) seemed to be a rare panacea. The rule, passed in the early 1990s, limited the state government's spending growth to the combined rate of inflation and population growth. If revenue increased beyond that rate--which could occur, for instance, if economic growth were to concomitantly boost incomes and tax revenue--then the surplus funds would be returned to taxpayers. The state's apparently salutary budget health in the early 2000s was attributed to TABOR, and then-governor Bill Owens briefly became the poster child for the libertarian small-government crowd.

However, a closer look at Colorado's budget since TABOR's passage reveals that it has not caused the state to behave any differently than similar states, according to a new working paper by Paul Eliason of Duke University and Byron Lutz of the Federal Reserve Board. Instead, the salutary view of TABOR stumbles on two serious problems.

The first is that Colorado can suspend TABOR temporarily.

The state has done this several times, especially in the last decade. It remains a truism that it's impossible for legislation to tie the hands of future lawmakers.

The second problem is that it is unclear what is the counterfactual--that is, what would Colorado have done if there were no TABOR? Simply comparing it to nearby states is deceiving: by dint of its major metropolitan area in Denver and the state's relatively well-educated and wealthy populace, it does not make sense to compare its budgets to neighboring states. Economically speaking, Colorado has little in common with Wyoming, New Mexico, or Utah. Neither does it make sense to compare it to any of the coastal states, which have economies substantially different than Colorado's.

To carry out their analysis, Eliason and Lutz cleverly create a synthetic state--a complex combination of states that have the most in common with Colorado--and compare Colorado to the synthetic state's tax and spending evolution over the years immediately before and after TABOR.

What they find is that there is no discernible difference between Colorado's actual spending patterns and its synthetic, unconstrained cousin. In short, they argue, Colorado did show a modicum of budget restraint at some point, but it didn't last all that long and it merely reflected the preference of the populace, manifested in the government it elected.

The reality is that budget gimmicks are not the answer to controlling government. There is simply no substitute for an informed populace that uses the ballot box to show its preference for limited government.

--Ike Brannon, Cato Institute