This document originally appeared in the April 1, 2014 edition of State Tax Today.
March has been a rough month for Colorado's Taxpayer Bill of Rights. At the beginning of the month, the U.S. Court of Appeals for the Tenth Circuit held in Kerr v. Hickenlooper, No. 12-1455 (10th Cir. 2014), that current members of the General Assembly have standing to challenge the strict taxing and spending limitation provision in federal court.
More recently, lawmakers were reportedly surprised to learn that under an obscure TABOR provision, the state may have to refund the state's marijuana tax revenue for this year, despite voter approval of the underlying measure.
Although it is still way too early to talk about TABOR's demise, both events, especially when combined with funding problems that arose following last year's flooding, could spark a movement to rein in some of TABOR's harsher limitations.
The Legal Fight
In May 2011 various groups and state lawmakers filed suit in the U.S. District Court for the District of Colorado arguing that TABOR violated the U.S. Constitution's guarantee clause, under which the federal government guarantees every state a republican form of government. The court limited the appropriate plaintiffs to current lawmakers and held they had standing to sue and that the political question doctrine did not bar their claims. The state appealed to the Tenth Circuit, which affirmed March 7.
The Tenth Circuit wrote that it offered no judgment on the substantive question of whether TABOR, which prohibits any tax increases without voter approval and contains additional state and local government spending restraints, violates the federal guarantee clause. It said current lawmakers have standing to challenge TABOR because they allege having suffered a particularized injury not shared by the public generally. The court concluded that unlike other plaintiffs that were found to lack standing, the Hickenlooper plaintiffs alleged that TABOR deprives them of the ability to cast meaningful votes on the core government function of taxing and spending.
The court rejected the state's argument that there was no particularized injury until the plaintiffs could show an actual statute precluded by TABOR, saying the lawmakers "sufficiently alleged an injury to the 'plain, direct and adequate interest of maintaining the effectiveness of their votes.'"
The Tenth Circuit also declined to reject the case based on the political question doctrine, which excludes from judicial review matters that "revolve around policy choice and value determinations." The court found that none of the six Baker v. Carr factors for determining whether a matter is a non-justiciable political question applied to the lawmakers' suit, concluding the suit could proceed in district court on the substantive claim. Gov. John Hickenlooper (D) has petitioned the court for an extension to file a petition for an en banc hearing.
A few weeks later, lawmakers learned that the state may have to refund a large portion of revenue generated by Proposition AA, an adult-use marijuana provision approved by voters last year. Article X, section 20(b) and (c), which has never been invoked since TABOR's enactment in 1992, requires the state to refund taxes if the revenue exceeds estimates in the Proposition AA blue book ($67 million for fiscal 2014). The most recent Colorado Legislative Council forecasts $54.7 million in revenue for fiscal 2014, but Legislative Council Chief Economist Natalie Mullis said observers have little confidence in the marijuana numbers, which could end up being very different. (Prior coverage: State Tax Notes, Mar. 24, 2014, p. 687.)
The provision may also be triggered if overall spending in a fiscal year exceeds the Proposition AA blue book estimate of $12.08 billion. The most recent fiscal 2014 spending estimate is $133 million higher than that, which would trigger a refund. According to a draft report released March 12 by the Joint Budget Committee, guidance from the Office of Legislative Legal Services states that the refund would be limited to the amount of revenue from taxing marijuana. However, because that section has never been triggered, it is unclear what the refund amount would be -- it could end up being the $133 million estimated overage, Mullis said.
The final word regarding what to refund could be made in an attorney general opinion, a supreme court advisory opinion, or legislative action. If the refund is triggered, the legislature would have to either develop a refund mechanism or ask voters to approve letting the state keep the revenue.
News of the second potential refund situation apparently caught some Colorado lawmakers off guard. A key component of TABOR is that tax increases must have voter approval. Because Proposition AA was approved by voters, most lawmakers, including some on the Joint Budget Committee, assumed it was in the clear. At a March 18 hearing, committee vice chair Sen. Pat Steadman (D) called the situation frustrating, saying, "Voters are getting what they bargained for in voting for Proposition AA . . . and yet it all may be obviated by the other provisions in TABOR."
TABOR's possible effect on marijuana taxation isn't the first surprise for Coloradans. After last year's widespread flooding destroyed approximately 2,000 homes and washed out hundreds of miles of roads, local governments were dismayed to find that TABOR spending limitations affected their ability to receive state funds for recovery projects.1
TABOR's emergency provisions require governments to set aside a set percentage of revenue for emergency reserves and authorize the General Assembly to temporarily enact emergency taxes by a two-thirds majority. In a letter to the legislative Flood Disaster Study Committee, local entities, including the Colorado Municipal League and the state's school board association, wrote that ambiguities in the emergency provisions hindered their response to the flood. They requested changes to TABOR that would pronounce that federal grants do not apply to state spending limits, state that grants to local governments for disaster mitigation damages are excluded from local spending limits, and clarify restoration of emergency reserves.
Falling Out of Favor?
Should lawmakers succeed in Hickenlooper, it's possible that TABOR would be struck down in its entirety -- but not anytime soon. Not only is the initial standing question far from resolved, but the merits have not been addressed. And although the Tenth Circuit found the plaintiffs' claim compelling enough to support a finding of standing, that's a far cry from finding that TABOR limits the legislature's power so radically as to render Colorado a non-republican form of government. There's a dearth of U.S. Supreme Court precedent applying the guarantee clause, which makes it difficult to predict how the district court might rule.
A letter from the state to the Tenth Circuit -- submitted after oral arguments -- cited the successful passage of Proposition AA as "an example of the legislature's continuing authority and ability, under TABOR, to operate in the area of taxation, when it so chooses." Yet lawmakers are finding that TABOR may potentially thwart marijuana tax collection, despite voter approval. It seems Proposition AA wasn't the best example the state could have cited.
Colorado's TABOR may not be so bad as to render the state's government unconstitutional but it definitely makes state operations extremely difficult. Lawmakers are elected to make difficult choices, and TABOR removes from the table several reasonable approaches and prevents the sort of flexibility that governments need to function.
TABOR has been cited for hindering education and other necessary state programs, and the economic growth touted by TABOR proponents is mixed at best.2 It is unclear whether the hiccups of the last six months will ultimately lead to TABOR reform, but back-to-back events like those mentioned above are the kinds of things that build momentum for change. A decision like that would not be without precedent in Colorado -- in 2005 voters approved Referendum C, which suspended the spending cap for five years.
The recent TABOR problems could lead to reform but are highly unlikely to result in repeal. Rep. Lois Court (D) said the requirement to vote on taxes remains "pretty entrenched" with Coloradans, joking that "some think it's in the U.S. Constitution." Despite that taxpayer sentiment, the flooding and marijuana situations have helped lawmakers and some in the business community realize that aspects of TABOR are problematic -- but that realization has yet to coalesce into a call for reform.
1 John Fryar, "Local Governments Say TABOR Blocks Ability to Fund Flood Relief," Longmont Times-Call, Nov. 1, 2013.
2See Iris J. Lav and Erica Williams, "A Formula for Decline: Lessons From Colorado for States Considering TABOR," Center on Budget and Policy Priorities (Mar. 15, 2010); and Therese J. McGuire and Kim S. Rueben, "The Colorado Revenue Limit: The Economic Effects of TABOR," Economic Policy Institute (Mar. 2006).
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