The lawmakers who write Colorado’s budget are preparing to pare back some capital projects in the coming months as they contend with inflation straining a budget capped by the state’s Taxpayer’s Bill of Rights.
The TABOR cap, a key component of Colorado’s 1992 constitutional amendment limiting government growth and spending, is calculated by adding together the rates of inflation and population growth.
But the inflation rate used to determine the cap comes from the previous calendar year, or six months before the start of each fiscal year.
So for the 2022-23 fiscal year that began July 1 and ends June 30, 2023, the federal consumer price index inflation rate in the Denver-Aurora-Lakewood area used to calculate the TABOR cap was the 2021 rate of 3.5% and a 0.9% rate of population growth. Under that cap, more than $3 billion in excess tax revenue is expected to be refunded to taxpayers in the form of direct checks and tax breaks.
By the end of May, however, the inflation rate in the Denver metro area had shot up to 8.3%, sharply increasing the cost of governing and of state construction projects.
But the TABOR cap set using the 3.5% 2021 inflation rate didn’t budge.
The state lawmakers who sit on the Joint Budget Committee, the bipartisan legislative panel that balances the budget, face the difficult fiscal reality that they will have to reduce the scope of projects they budgeted for this and previous fiscal years or dig into their reserves to cover the discrepancy.
Already a project approved in the 2021-22 fiscal year budget to refurbish the heating and cooling systems in nine buildings on the Auraria campus in downtown Denver has been cut back because its price tag more than doubled. Now, only three buildings will get upgrades.
State Sen. Chris Hansen, a Denver Democrat who is slated to be the next chair of the JBC, said he expects other projects to be scaled back. He called the situation a “train wreck.”
“The state is facing an immediate escalation of its costs but we’re not going to get any extra revenue retention to meet that,” Hansen said. “We’re going to have these refunds but immediately be short of the money we need to run the state.”
Michael Fields, a fiscal conservative activist, downplayed inflation’s effect on the budget, pointing out that state expenditures have increased by billions of dollars in recent years. This year’s budget, at roughly $36 billion, is the largest ever.
“The thing I’m worried about with inflation is families and groceries and gas,” he said, “not if state government only gets $1.5 billion more and not $2 billion.”
Nonpartisan staff in the legislature expect the Denver-Aurora-Lakewood area inflation rate to finish the 2022 calendar year at 7.9%, or nearly double the rate it was in 2021. That would increase the TABOR cap by $1.5 billion in the 2022-23 fiscal year.
Assuming the inflation rate is 7.9%, lawmakers will also be forced to pump hundreds of millions of extra dollars into K-12 education. That’s because Amendment 23, approved by voters in 2000, requires the legislature each year to increase per-pupil funding each year by at least the rate of inflation.
That would raise the base per-pupil funding in the 2023-24 fiscal year to $8,068.93 from $7,478.16 in the current fiscal year. (The actual funding per pupil this year was about $9,500.)
That means those millions of dollars won’t be available to the legislature for other priorities. And that money won’t be available to help blunt the effects of inflation on the cost of governing.
“Where I see the biggest challenge with inflation this year is with Amendment 23,” said Rep. Julie McCluskie, a Dillon Democrat and the current chair of the JBC.
Inflation and TABOR have long been debated
Democrats and Republicans in the legislature have long been worried about the role inflation has in setting the TABOR cap.
First, the inflation rate in the Denver metro area doesn’t necessarily reflect the inflation rate across Colorado. Second, opponents argue, the rate doesn’t necessarily take into account the cost of offering government services in the realms of health care and construction, where inflation rates can be much higher than they are for other goods and services.
In 2017, two Republicans sought to put a measure on the ballot asking voters to decouple inflation and the TABOR cap. They wanted the cap to be calculated by the average rate of change in state personal income over a five-year period.
Their bill failed in the Republican-controlled Senate, where hard-line conservatives chafed at the proposal, despite support from the business community.
But this appears to be the first time that TABOR and inflation have clashed in such a pronounced way.
“This is the first year TABOR has really had to reckon with inflation,” said Scott Wasserman, who leads the liberal-leaning fiscal nonprofit Bell Policy Center.
Hansen, the incoming JBC chair, is among those who think tying the TABOR cap to inflation is a bad idea. But there doesn’t appear to be an appetite to try to forever split the two.
Instead, members of the JBC, including Sen. Bob Rankin, a Carbondale Republican, want to explore if there is a way to prevent outdated inflation rates from being used to set the TABOR cap.
“What if we can make an estimate of the inflation rate in the year we’re in and use that?” he said. “That would help us raise the TABOR limit for the year we’re actually budgeting for. I don’t know if we can do that. I want to go back and examine the constitutional constraints. But the inflation rate that we use to raise the TABOR cap ought to match our current problem, not a year ago or two years ago.”
Hansen said JBC members have “been talking to legal staff” about potential changes.
But stauncher conservatives are skeptical.
“We’ve changed the formula so many times. We’ve gone around it so many times,” said Jon Caldara, a conservative commentator who leads the Independence Institute. “Isn’t it time that just once we just read the damn law and do what it says and give people back their tax money? Taxpayers deserve a win every now and then.”
His message: “Just use what’s in the law.”
Fields said any changes made should at least be consistent so that the legislature can’t cherry-pick the inflation number that gets them the most revenue.
“Whenever anybody is talking about changing the formula it’s because they want more revenue,” Fields said. “State government has more money than ever right now. They’re doing just fine.”
The JBC will begin drafting the 2022-23 budget in the coming weeks. The legislature reconvenes in January.