Colorado’s plan to avoid a water shortage needs money. Is a tax on sports betting the answer?

This story was originally published on Sept. 26, 2019. 

In November, Colorado voters will decide whether to legalize and tax sports betting to help pay for a long-unfunded plan designed to protect the state from future water shortages.  

If voters say yes to Prop. DD, gamblers would end up shouldering some of the costs to pay for the Colorado Water Plan, a 2015 water management manifesto estimated to cost about $100 million per year to put into action. Demand for the Colorado River is projected to exceed supply by mid-century due to climate change, legal rights to use more water than is available, and population growth. Water shortages in Colorado could harm aquatic ecosystems, stunt recreation and hobble industry, especially agriculture.

Despite the stakes, the Colorado Water Plan remains mostly unfunded. And that a tax on gambling is seen by some as the best option to pay for water management speaks to just how hard it has been to come up with the needed money. 

“It wouldn’t have been my first choice,” said Kathleen Curry, a former independent state representative from Gunnison and member of the Upper Gunnison River Water Conservancy District. “Linking the two means that we’ve linked the baggage with the gambling to something completely unrelated, which is trying to manage our water resources.” 

Curry’s concern is that some people gamble due to financial stress or addiction. But she and other supporters also feel the water plan needs money, regardless of where it comes from. The proposed tax on net proceeds that casinos and other companies earn on sports betting is estimated to generate an average of $16 million per year, and as much as $29 million, according to the nonpartisan Legislative Council. In the best-case scenario, that would cover roughly a third of the annual estimated cost of the water plan — not enough, but a needed start, supporters say. 

“Money, water and wins by the Broncos are scarce, but DD helps link the three in a way that funds, protects and keeps Colorado the state we know and love, with healthy rivers, clean drinking water and abundant recreation,” Brian Jackson, senior manager of western water at the Environmental Defense Fund, said in a statement. 

Still, the connection between gambling and water management is a leap. And the reliance on the few to pay for the needs of the many is something some backers are still wrestling with. As Curry, who supports Prop. DD, put it:

“There is nothing else really on the horizon,” she said. “It’s better than nothing.” 

So how did we get here? 

A void of political leadership on the issue combined with state budget constraints has for four years left the Colorado Water Plan largely sitting on the shelf. All the while a 19-year drought lingered. The region became drier. And the federal government threatened to step in with mandatory water cuts.

The Colorado Water Plan was created in 2015 to help prevent water shortages and meet obligations to other states under the 1922 Colorado River Compact. The plan calls for new projects and programs aimed at conserving and storing water, ranging from paying farmers to irrigate less to damming rivers to build reservoirs. 

The price tag of the water plan, although elusive, is estimated at $3 billion, or $100 million per year, for the next 30 years.

Where all that money will come from has never been clear. 

Lawmakers are still patching up a K-12 budget crippled by the Great Recession, and are constantly searching for ways to pay for other high-priority needs such as transportation. The 1992 Taxpayer Bill of Rights, or TABOR, prohibits lawmakers from raising taxes without permission from voters. 

Utility fees and severance taxes on oil and gas production are the traditional sources of water funding, but in 2016, the year after the state drafted the water plan, severance tax revenue nose-dived. Oil prices tanked. And the state lost a lawsuit that meant oil and gas companies could deduct more from their state taxes. What was left was the lowest effective severance tax rate of nine Western states, according to the nonpartisan Legislative Council. 

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For years, Democratic lawmakers and former Gov. John Hickenlooper, a former oil and gas geologist whose administration wrote the water plan, sought to reform severance taxes so the state could reap more revenue. But neither Hickenlooper nor lawmakers took steps to enact broad changes. 

And now, some believe any attempt to get more money from the oil and gas industry is a nonstarter. Democrats used up any goodwill they had in the statehouse when they passed Senate Bill 181, a controversial law that tightened oil and gas regulations. That law drew pushback from the industry and Republican lawmakers, who threatened recalls and started reading bills at length to gum up the legislative works. Even if there were an appetite for the legislative battle, it’s not clear it would be a political winner. In 2008, voters rejected an effort to eliminate severance tax credits and exemptions by a 17-point margin.

This past legislative session, Democratic Gov. Jared Polis recommended spending $30 million in one-time money from the General Fund to kick the water plan into gear. But that request conflicted with his other budget priorities, namely $175 million to provide parents with a free, all-day kindergarten program. Budget writers were all but forced to cull the water-plan funding request, approving only $10 million of it.

That money, combined with another $17.5 million in one-time funds from a revolving loan fund for water project grants, set a record for the amount of money lawmakers invested in the water plan. But a one-time infusion of not-quite $30 million in grants and loans is a long way from $100 million a year.

Turning to a “sin” tax

At the end of the 2019 legislative session, House Majority Leader Alec Garnett, from Denver, introduced a bill to legalize sports betting and use a tax to pay for another incremental chunk of the water plan. This measure passed with broad, bipartisan support. 

Sen. Kerry Donovan, a Democrat from Vail who helped write the law that referred the measure to the ballot, said that a narrow tax is far more appetizing to Colorado voters than a broad one. Last year, voters soundly rejected an income tax to pay for K-12 schools and a sales tax to pay for transportation projects. 

“There is not a willingness at this time for the citizens of Colorado to tax themselves on a broad basis even for things that are clearly for the public good,” Donovan said. 

Since 1992, when voters passed TABOR, only three out of 15 proposed tax increases have passed, according to an analysis of an archive of ballot measures by The Colorado Independent. Those taxes included a 2004 tax on tobacco, a 2006 measure to eliminate tax benefits for businesses that pay undocumented workers, and a 2013 tax on marijuana sales. 

Critics say the sports betting tax is regressive in that lower-income people would end up paying a disproportionately larger share of it. Despite the lack of recent studies on sports betting, the theory goes that the less money one has, the more tempting gambling is.

Scott Wasserman, president of the Bell Policy Center in Denver, a left-leaning think-tank, said he plans to vote for the measure. But, he said, the need for Prop. DD is symptomatic of a larger fiscal dysfunction in which important state programs lack funding, mostly due to TABOR spending limits and restrictions. 

“I worry that we keep pursuing regressive forms of taxation to fund really important needs. But at the end of the day you need to balance that with a sustainable water system,” Wasserman said. “Colorado needs a water plan.” 

Cindy Medina, an Alamosa Riverkeeper, which is associated with the national water advocacy group Waterkeeper Alliance, said she voted to endorse Prop. DD during a meeting with water managers with the Rio Grande Basin Roundtable this month. But, she said, she wished she abstained from voting. 

“I think that it’s an odd source of funding,” Medina said after the vote. “We’re taxing a vulnerable population possibly dealing with issues of addiction.” 

Supporters of the tax see it as an analog to the lottery tax passed in 1992 (the same year as TABOR) that pays for parks and open space, dubbing this measure “GOCO 2.0,” a reference to the Great Outdoors Colorado program. 

This is the message a public relations campaign is taking to voters this fall. A political committee set up to support the measure, Yes on Proposition DD, released two TV ads last week. The committee reported raising $433,700, almost all of which from casinos, a sports betting company and other businesses, according to the latest filings with the Colorado secretary of state. An advocacy arm of the Environmental Defense Fund donated $10,000. 

On Monday, in a news release, a coalition of environmental groups announced their support for the measure. The organizations include American Rivers, Business for Water Stewardship, Colorado Water Trust, Conservation Colorado, Trout Unlimited, and Western Resource Advocates. 

How much money and for what? 

Thanks to last year’s Supreme Court ruling, Colorado could become the 19th state, not including DC, where sports betting is legal, according to the National Conference of State Legislatures.

Many states see it as a cash cow, but gambling revenues are often underwhelming. Several states that have legalized and taxed sports betting recently have seen revenues fall short of projections, according to an analysis by the Associated Press. 

Prop. DD legalizes betting on professional and collegiate games beginning in 2020. There would be no limits on how much a person could bet on a game. There are some restrictions, such as real-time betting on collegiate games. High school games and certain video game gambling would also be prohibited. Colorado already allows limited stakes gambling — under $100 — in the towns of Black Hawk, Central and Cripple Creek. 

The ballot measure allows the state to collect a 10% tax on net proceeds earned by casinos and sports betting companies. Of the estimated $16 million in estimated revenue, about 6% of the revenue would go into a fund to compensate businesses and counties, for example, that lose profits or revenue due to the law. Another estimated $130,000 per year will go toward gambling addiction services.

More than 90% of the revenue will go into a fund managed by the Colorado Water Conservation Board to implement the water plan and comply with the Colorado River Compact. 

The law creates limits for how the money can be spent. This includes paying farmers to irrigate less, or more generally, programs aimed at curbing water use through “demand management.” How much the state should pay farmers to maintain a river’s ecological health or because the Colorado River compact calls for water to be sent downstream and stored in Lake Powell has not been determined. 

A separate law, SB-212, spells out even more potential projects, including building reservoirs and recharging aquifers. 

Reservoirs are a controversial part of the water plan, which is another reason some environmental groups are uneasy about the tax. Gary Wockner, an environmental advocate fighting Denver Water’s plan to expand the Gross Reservoir near Walker Ranch in Boulder County, has set up a committee to oppose the measure. It’s called Coloradans for Climate Justice. He believes fossil fuel companies should pay for the damage to water supply systems caused by climate change, which is exacerbating water woes.

Observers are watching how the tax unfolds to gauge whether voters might have an appetite for another water funding measure in 2020. But pitching a tax to pay for water projects two years in a row is a gamble. 

The Bell Policy Center’s Wasserman urged caution with that strategy. 

“This gets to this issues of taxpayers constantly being skeptical of how the government spends money,” he said. “Later, voters might say, ‘didn’t I already give you money for that?’”