Legislature faces prospect of cutting spending plans, according to economic forecasts presented Thursday
Inflation and rising interest rates aimed at reining in consumer costs are slowing and stagnating Colorado’s economy, according to two economic and fiscal revenue forecasts presented to the Legislature’s Joint Budget Committee Thursday.
The Governor’s Office of State Planning and Budgeting has warned that the risk of a recession over the next 18 months has increased since June to 50%. And nonpartisan Colorado Legislative Council staff said there are a host of economic risks, including the fallout from the war in Ukraine and the effects of even greater monetary policy tightening by the Federal Reserve.
“A recession could be a real possibility that you could face,” said David Hansen, senior economist on the Legislative Council staff. “We don’t want to shy away from saying that.”
The upside is that the state’s job market remains strong, with unemployment hovering around 3% and two job openings available for every unemployed Colorado worker from March through July. And the governor’s office expects the state’s economy to “rebound by the end of 2023 and return to historic growth in 2024” as inflation declines.
“We think the monetary policy circumstances we find ourselves in now will reduce the amount of demand for labour,” said Bryce Cooke, OSPB’s chief economist, who said he s expects the unemployment rate to hit 3.9% in 2023. “But we don’t think it will get to the point where it’s a one-to-one ratio (unemployed and jobs open).”
Despite the headwinds, tax revenues are still expected to increase by hundreds of millions of dollars over the next few years.
“Colorado’s economy is strong and will continue to grow in the months ahead,” Gov. Jared Polis said in a written statement.
It is expected to unveil its budget for the 2023-24 fiscal year, which will come into effect on July 1, 2023, in the coming weeks.
But the reality for state budget writers on the JBC is that while they should have $1 billion more to spend in the 2023-24 fiscal year, according to Legislative Council staff, about 90% of this increase is expected to be consumed by the General Assembly’s existing funding plans.
In other words, state lawmakers will have just $85 million to allocate to new initiatives when they meet in January after two years of unprecedented spending fueled by a stronger-than-expected economy and billions in federal aid dollars. The news dropped some jaws – quite literally – among the six members of JBC on Thursday.
This does not fully take into account the effects of inflation on the cost of governance, which could effectively mean that the budget will have to decrease.
“I think we’re in the red before we even start the race,” said Sen. Chris Hansen, a Democrat from Denver and the JBC’s new chairman.
State Sen. Bob Rankin, a Republican from Carbondale who sits on the JBC, worries about the prospect of not being able to raise state employees’ salaries as a result.
The Taxpayer Bill of Rights, the 1992 constitutional amendment passed by Colorado voters, limits increases in government growth and spending each year to rates of inflation and population growth. But the inflation rate used to determine the ceiling comes from the previous calendar year, which is six months before the start of each fiscal year.
Given the high rates of inflation, some JBC members have complained that the TABOR cap is lagging and thus constraining the budget, a problem that worsens over time as inflation continues to rise. increase.
The TABOR ceiling for the 2022-23 fiscal year, which started on July 1, was set using an inflation rate of 3.5% while the inflation rate for calendar year 2021 in the region Denver-Aurora-Lakewood is closer to 8%. Although the TABOR ceiling for FY 2023-24 reflects this higher rate, it is only based on the TABOR ceiling set using the 3.5% rate.
And because of inflation, the state is expected to collect billions of dollars in tax revenue above the TABOR ceiling over the next three fiscal years, according to two economic forecasts presented to the JBC on Thursday. This money, however, will have to be returned to taxpayers, so it cannot be used to combat the effects of inflation on the government.
Legislative Council staff forecast revenues above the TABOR cap to be $3.63 billion in the current 2022-23 fiscal year, $2.28 billion in the 2023-24 fiscal year, and $1.9 billion for fiscal year 2024-25.
The forecast from the Governor’s Office of State Planning and Budgeting was much less rosy. The Polis administration projects the revenue cap will be breached by $1.9 billion in the current 2022-23 fiscal year, $685 million in the 2023-24 fiscal year, and $742 million. dollars in fiscal year 2024-25.
“On the surface, things look great,” said Sen. Rachel Zenzinger, an Arvada Democrat who sits on the JBC. “We have to deal with what is below the surface.”
To further complicate the situation, two measures on the November ballot could reduce the TABOR cap surplus by hundreds of millions of dollars over the next few years, or even eliminate the surplus entirely.
Proposition 121 would cut Colorado’s tax rate to 4.4% from 4.55%, a reduction estimated to reduce state tax revenue by $412.6 million in fiscal year 2023-24 . Proposition 123 would set aside up to 0.1% of taxable income each year for affordable housing, which is expected to reduce revenue by $145 million in the current fiscal year and $290 million in fiscal years 2023 -2024 and following.
According to OSPB’s tax revenue forecast, the excess TABOR cap would effectively be eliminated by the passage of Proposals 121 and 123. In the event of a mild recession and lower tax revenues than OSPB’s forecast, 121 and 123, if passed, could go beyond eliminating the TABOR surplus and forcing Parliament to reduce the size of its budget.
More TABOR refunds coming in April
The majority of Colorado taxpayers have already received TABOR refund checks — $750 for single filers and $1,500 for joint filers — for the previous fiscal year. But they can expect even more money in April.
The amount of money taxpayers will receive is based on their income level and is expected to range from $160 for low income earners (people earning up to $48,000) who are single filers to $506 for high-income earners (those earning more than $266,000) who are single filers. The refund range increases from $320 to $1,012 for joint filers depending on their income level.
Greg Sobetski, chief economist for the Colorado Legislative Council, said the amounts will be finalized in the coming weeks as the state completes its accounting for the 2021-22 fiscal year, which ended June 30.
Coloradans who filed their 2021 tax returns by June 30 have already received their checks for $750 or $1,500 or will receive them by September 30. Latecomers who submit their returns by October 16 will receive their checks by January 31.
More information about cashback checks can be found at https://tax.colorado.gov/cash-back.
It is unclear whether Coloradans will receive TABOR refund checks in future years given the uncertainty surrounding the economy and the potential adoption of Propositions 121 and 123.