Economists are more optimistic about Colorado’s tax revenue future than they were three months ago, even though labor and inflation strains continue and amid uncertainty caused by COVID-19.
The headwinds have so far not been “strong enough to slow the impressive growth,” said Meredith Moon, the deputy director of the Governor’s Office of State Planning and Budgeting.
OSPB and nonpartisan legislative staff presented separate, but equally rosy budget forecasts to the legislature’s Joint Budget Committee on Friday. Economists for both agreed that state tax revenue will end up higher than previously expected.
The nonpartisan Legislative Council Staff estimated there will be nearly $800 million more in revenue for the state’s general fund this fiscal year, which began in July and ends June 30, than they predicted in September, and more than $500 million in additional revenue for the next fiscal year than their previous forecast showed.
That compares with slightly lower estimates from OSPB economists who say there will be about $700 million more in revenue for the state’s general fund this fiscal year than in their last forecast, and about $420 million more for the next fiscal year than they previously thought.
“Colorado’s economy is coming back strong,” Gov. Jared Polis said in a written statement. “This forecast shows a robust recovery.”
The improved outlook ultimately means little for how much state lawmakers will have to spend in next year’s budget. Tax dollars in the next three fiscal years were already expected to exceed limits on state revenue in the Taxpayer’s Bill of Rights, meaning the Friday forecasts predicting even more tax dollars flowing into state coffers simply means that more money will have to be refunded to taxpayers.
Nonpartisan legislative staff now anticipate about $2 billion of annual TABOR surplus revenue in each of the next three fiscal years, well above the $550 million to $900 million in excess predicted in September, when they last presented to the JBC.
OSPB’s forecast was a bit less optimistic, predicting $2 billion in excess revenue in the current fiscal year, and $1.7 billion in excess revenue in the 2022-23 and 2023-24 fiscal years. That’s still well above the $697 million to $1.1 billion in excess revenues they forecast in September.
If the revenue projections hold, taxpayers will see an income tax rate reduction and sales tax refund checks in the mail for each of the next three fiscal years.
Democrats could try to ask voters to let the legislature keep the excess revenue. They have also been mulling policy mechanisms that don’t require voter approval that would let the lawmakers keep some of the surplus money, including by moving money around to make it exempt from the TABOR cap and expanding existing tax credits, like the child tax credit and the earned-income tax credit.
The TABOR cap was exceeded by about $454 million in the 2020-21 fiscal year, which ended June 30, prompting an income-tax rate reduction to 4.5% from 4.55%, and an additional sales tax refund payment, on average, of about $70. Joint filers will receive $166 on average.
Inflation, labor issues persist
Even though Colorado’s tax revenues are expected to be strong, there are still problem areas in the state’s economy.
Inflation in the Denver metro area was 6.5% overall in November, or 5.2% excluding the energy and transportation sectors, which tend to be more volatile and are experiencing much larger rates of inflation at the moment: 36.6% and 20.5% respectively.
“Energy and transportation are really the driving forces behind inflation,” said Jeff Stupak, an economist with Legislative Council Staff.
Stupak said that ongoing supply chain issues paired with healthy demand also put positive pressure on inflation, but that he hopes by 2022 some of those pressures will wane.
The most obvious example is in the automobile market. As supply chain shortages have constrained the supply of new cars, the price of used cars has ballooned.
Additionally, Bryce Cooke, chief economist for OSPB, said he expects that inflation tied to housing prices will pick up around the same time other supply chain issues are resolved. That could put more pressure on Colorado’s already-strained housing market.
Colorado’s labor market, meanwhile, has been on the rebound, with 86% of jobs lost during the pandemic recovered. About 10,000 jobs are being regained each month.
By June, nonpartisan legislative staff expect all jobs lost during COVID to have been recovered.
But the job market is not recovering at the same pace for all sectors of income earners and in all areas of Colorado.
For instance, there are still about 16,000 pre-pandemic food service jobs that haven’t been filled, and job recovery for people making less than $27,000 a year has been far worse compared to workers earning $60,000 a year or more.
The good news for workers is that “wages and salaries are on the rise,” according to Cooke. And OSPB doesn’t expect the trend to change.
In fact, much of the revenue increases forecast Friday are being driven by personal income taxes.
Stupak cautioned that the pandemic “remains in the driver’s seat” and the new omicron variant continues to fuel uncertainty.