New CBPP Report: I-1033’s Problematic Measure of Inflation

Initiative 1033 proposes to limit revenue collections at the state, county, and city levels according to a formula based on the rate of population growth plus inflation. A key feature of Colorado’s TABOR amendment, this formula is deeply flawed because it fails to keep pace with the costs of providing essential public services such as health care and education. Under I-1033, the inflation component of this formula would limit revenue growth according to the “implicit price deflator for personal consumption expenditures” (IPD).

A new analysis from the Center on Budget and Policy Priorities shows that using the IPD to restrict revenue growth would do great harm to basic public structures in Washington. The report explains that the IPD only reflects changes in costs faced by consumers; it does not reflect the ongoing costs of providing state and local public services. The costs of education, for example, rise faster than the general rate of inflation. Education accounts for only two percent of expenditures for the typical consumer. For the state government, however, K-12 and higher education account for 53 percent of expenditures in Washington. As a result, restricting state and local revenues to growth in the IPD would lead to severe cuts in education and other core public services.

The CBPP report also shows that the IPD is even more restrictive than the measure of inflation that was used in Colorado under the TABOR amendment. Under TABOR, state and local spending was restricted to the rate of inflation as measured by the Denver Consumer Price Index (CPI). The graph below shows that from 1993 to 2005 – the period in which TABOR was in effect – the CPI grew at an annual rate of 3.4 percent while the IPD averaged 2.2 percent.

Yet even under the faster-growing CPI, TABOR lead to devastating cuts in education, health care, and other vital services in Colorado, prompting voters to suspend the amendment in 2005. According the CBPP report, “if Colorado had been operating under an I-1033-style IPD-based formula, the state would have had to cut services by an additional 10 percent beyond what the state enacted under the actual CPI-based formula.”

The view the entire report, click here.