The US Federal government faces a serious debt problem, with recently surpassing $36 trillion. To even casual observers, this is clearly a spending problem, not a revenue problem. To address it, we need reforms to rein in spending and to bind the hands of our elected officials, curbing profligate spending.

Fortunately, we have 50 individual states, and as Justice Brandeis wrote in 1932, any one of them could, “if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” Colorado, with its 1992 amendment to Colorado State Constitution known as the Taxpayers Bill of Rights (TABOR), provides such an experiment. As states and the nation grapple with ballooning budgets, Colorado’s successes and limitations offer valuable lessons.

At its core, TABOR codifies limits on both taxation and spending. It has been so successful that, for the fourth straight year, the State of Colorado announced that they would be refunding taxpayers, this time to the tune of $1.7 billion. 

TABOR is not, however, a panacea to government overreach. While TABOR limits how much Colorado taxes and spends, it does not limit the state regulatory code, which has grown uninhibited. Defenders of a free society must take a multi-pronged approach to limiting government. 

TABOR Then and Now 

TABOR constrains revenue growth to the growth of the previous year’s revenue plus the sum of “inflation plus the percentage change in state population in the prior calendar year.” For example, from 2022 to 2023, the inflation rate was 5.2 percent and the state’s population grew by 0.6 percent. As a result, the state’s revenues were allowed to grow by 5.7 percent under TABOR. The State is not allowed to spend more than this money and, if they collect more, they must refund the surplus to the people. TTABOR also prohibits the creation of new taxes of any type unless approved by voters. This rule also applies to local governments, so the state cannot grow government by way of unfunded mandates on local governments. 

Proponents will argue that such a law curtails the state government and limits its ability to meddle with the affairs of private citizens. This amounts to a “starve the beast” approach to political constraints supported by economists Gary Becker, Ed Lazear, and Kevin Murphy and Milton Friedman. Opponents will contend that it limits the ability of the state to make “major new investments in public services” and to adjust the state tax code considering changing demographics. 

Despite major demographic changes in Colorado, however, TABOR has remained popular among Coloradans. The latest Colorado Political Climate Survey from UC Boulder found that 54 percent of Coloradans held a favorable view of TABOR in 2023 despite numerous attempts at removing and overturning TABOR. A major part of this popularity comes from the refund mechanism. 

TABOR, however, does not cover all aspects of fiscal policy. Specifically, there are exemptions to federal funds and federal spending mandates applied to Colorado. This enabled Colorado to be among the first states to expand Medicaid under Obamacare and, as of 2022, 30 percent of Colorado state expenditures are financed by transfers from the federal government. It also exempts unfunded liabilities for retirement benefits for public employees and debt service on bonds to state and local entities. This has allowed the state of Colorado and its component units (such as public higher education) to amass $7.2 billion in debt as well as $17 billion in unfunded pension liabilities. 

TABOR has also been weakened over time. In 2000, Colorado voters approved Amendment 23, which exempted education spending and the State Education Fund from TABOR’s revenue limits. Later, in 2005, voters passed Referendum C, which suspended TABOR from 2006 to 2010.

This suspension allowed the state to retain all revenue collected up to a certain cap, referred to as the “Referendum C cap.” This cap is based on the highest revenue level during the 2006-2010 period, specifically 2007-2008, adjusted annually by inflation and population growth. Any revenue exceeding this cap still requires refunds to taxpayers. These exemptions have enabled the state to increase spending without needing voter approval under TABOR’s usual constraints. The image below shows the state revenue subject to TABOR and the TABOR limit with both the original “TABOR Limit Base” and the Referendum C Cap. 

The result of Referendum C is that the State of Colorado can collect significantly more revenue than they otherwise would have been able to under the original TABOR constraint. As more exemptions and changes are made to TABOR, the weaker it becomes. 

Just look at California, which enacted two of the strongest constitutional tax and expenditure limits during the Taxpayer Revolts of the late 1970s. By the 1990s, voters approved so many exemptions and amendments that these limits were no longer worth the paper they were printed on, and California’s government spending grew unabated. 

Suffice to say, TABOR helps keep government constrained in the Centennial State and could help taxpayers in other states as well. The ALEC Fiscal Rules Project shows how much a TABOR amendment in all 50 states could restrain spending (all else remaining equal). If voters in other states had approved a TABOR amendment in 1992, taxpayers would have saved on average $65,000, or $2,000 per year. 

Why and How Government Works Around Constraints 

By constraining total spending, the goal of TABOR is to limit the government’s ability to meddle with markets. As Thomas Sowell writes, “[Politicians] are trying to solve their own problems—of which getting elected and re-elected are number one and number two. Whatever is number three is far behind.” The easiest and most surefire way to get re-elected is to promise concentrated benefits (such as road repair or expanding certain tax deductions for specific people or businesses) to key interest groups that could sway an election while dispersing the costs of those promises among the disparate population. By limiting taxing and spending, TABOR attempts to reduce the ability of politicians to make such promises. 

However, politicians, just like entrepreneurs, are creative. Unlike entrepreneurs, however, creativity on the part of politicians rarely benefits the people. Taxing and spending are not the only powers that politicians have at their disposal; they can also regulate. As Richard Wagner argues in his 2012 book, Deficits, Debt, and Democracy, these regulations can be used as a substitute for taxing and spending, allowing politicians to achieve the same result as increased spending without actually spending (or collecting) any money. 

Colorado has done so in the form of for “state government enterprises.” This exception has existed since TABOR was approved by voters in 1992 and allows state government entities to apply for “enterprise status.” This allows a public entity to be exempt from TABOR, collect revenue through user fees, and still receive up to 10 percent of its annual revenue from taxpayer dollars. State enterprises range from public infrastructure projects, higher education funding, to state Medicaid funding. The description from the state notes, “Enterprise status shifts the responsibility of paying for a government-provided product or service away from the state to the users who benefit from the product or service.” 

From the perspective of the users paying for these services, there is little difference between “paying higher taxes” and “paying a user fee.” From a budget perspective, however, there is a world of difference. Under TABOR, the Colorado state government would want to avoid collecting and spending money when it can achieve the same result through regulation. By mandating that users pay for these services, the state legislature gets to enjoy the benefit of providing the services offered by enterprise funds without dealing with a TABOR limit. 

As of the latest data, total Colorado state government enterprise revenue totaled $23.3 billion, with over 30 state government entities received enterprise status. Prior to 2020, the legislature retained the power to create new enterprises, but now a new enterprise must be approved by voters if its projected or actual revenue exceeds $100 million in its first five years. Although this places a check on the state enterprise exception, it is still costing Coloradans billions in taxes and user fees. 

In fact, Colorado is the most regulated state in the Rocky Mountain region and the twelfth most-regulated state in the country. Their declining freedom score in “Freedom of the 50 States” is largely due to the growth of state regulations. 

In contrast, Missouri (which has its own fiscal rule, the Hancock Amendment) is ranked 33rd most-regulated state in the country. Even with some concerns about regulatory backsliding, it remains significantly less regulated than Colorado. That is because in addition to a fiscal rule, Missouri also has the Administrative Procedures Act, which requires the periodic review of rules by state agencies. A similar constraint would be helpful to Colorado. 

Starving the Beast: A Review 

The “starve the beast” approach of limiting government is, itself, limited in its applicability. As Bill Niskanen observed in 2002, it has largely failed. While Niskanen was specifically writing about the reduction in tax revenue and the belief that reduced revenues would impel politicians to reduce their spending in light of fewer dollars, the result has been increased deficits and an ever-increasing total federal debt. In a way, TABOR goes further than simply “reducing revenue” but also curtails spending. This is superior to simply “reducing revenues” and hoping that a reduction in spending will follow. As such, the successes of TABOR in curtailing the Colorado government should be celebrated and emulated by other states. 

The rise of regulations and mandates as substitutes for spending and taxation belies a simple truism: politicians, like entrepreneurs, are clever and “good behavior” cannot possibly be legislated. We should not just seek to starve the beast of resources. We need to starve the beast of responsibility. Rather than turn to government, as citizens are increasingly wont to do, we need to understand that private markets are much more powerful at solving society’s ills than they are commonly understood to be. Until this happens, politicians will find ways to serve their citizens, even in the face of laws such as TABOR. 

Lessons for the Nation

Colorado’s experiment demonstrates that constitutional spending constraints can curb the fiscal growth of government and return surplus revenues to taxpayers. However, TABOR’s exemptions and the unchecked growth of federal and state mandates reveal that fiscal reforms are not enough to limit the overall growth of government. Limiting taxation and spending alone cannot address the broader challenges posed by regulatory expansion and unfunded liabilities.

The federal government’s debt crisis cannot be resolved by taxing more. Spending constraints like those in TABOR—combined with efforts to address regulatory overreach and unfunded mandates—offer a viable path forward. As states like Colorado show, the principles of fiscal responsibility resonate with citizens. It’s time to apply these lessons nationwide to avert an unsustainable fiscal future.