Inflation and rising interest rates aimed at reining in consumer costs are causing Colorado’s economy to slow and stagnate, according to two economic and tax revenue forecasts presented Thursday to the legislature’s Joint Budget Committee.
The governor’s Office of State Planning and Budgeting warned the risk of a recession in the next 18 months has risen since June to 50%. And nonpartisan Colorado Legislative Council Staff said there are a host of economic risks, including fallout from the war in Ukraine and the effects of the Federal Reserve tightening monetary policy even further.
“A recession could be a real possibility that you could be faced with,” said David Hansen, senior economist with 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 person in Colorado from March to July. And the governor’s office forecasts that the state’s economy is “expected to rebound by the end of 2023 and return to historical growth in 2024” as inflation eases.
“We do think that the monetary policy circumstances that we’re currently under will lessen the amount of labor demand,” said Bryce Cooke, the chief economist with OSPB, who said he 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 (of unemployed people and open jobs).”
Despite the headwinds, tax revenues are still forecast to increase by hundreds of millions of dollars over the next several fiscal years.
“Colorado’s economy is strong and will continue to grow in the months ahead,” Gov. Jared Polis said in a written statement.
He is expected to unveil his 2023-24 fiscal year budget, which will take effect July 1, 2023, in the next several weeks.
But the reality for state budget writers on the JBC is that while they are expected to have $1 billion more to spend for the 2023-24 fiscal year, according to Legislative Council Staff, about 90% of that increase is expected to be consumed by the General Assembly’s existing funding plans.
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In other words, state lawmakers will have just $85 million to allocate to new initiatives when they convene in January after two years of unprecedented spending fueled by a stronger-than-expected economy and billions of dollars in federal aid. The news caused some jaws to drop — literally — Thursday among the six members of JBC.
That’s not fully accounting for the effects of inflation on the cost of governing, which could effectively mean the budget will have to shrink.
“I think we’re in the red before we even start the race,” said state Sen. Chris Hansen, a Denver Democrat and the incoming chair of the JBC.
State Sen. Bob Rankin, a Carbondale Republican who sits on the JBC, is anxious about the prospect of not being able to raise the pay of state employees as a result.
The Taxpayer’s Bill of Rights, the 1992 constitutional amendment passed by Colorado voters, limits increases in government growth and spending each year to 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.
Given high inflation rates, some JBC members have complained that the TABOR cap is lagging and thus constraining the budget, a problem that compounds over time as inflation keeps rising.
The TABOR cap for the 2022-23 fiscal year, which began July 1, was set using a 3.5% inflation rate when the inflation rate in the 2021 calendar year in the Denver-Aurora-Lakewood area is more like 8%. While the 2023-24 fiscal year TABOR cap will reflect that higher rate, it only builds off the TABOR cap 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 cap over the next three fiscal years, according to both economic forecasts presented to the JBC on Thursday. That money will have to be refunded to taxpayers, however, so it can’t be used to combat the effects of inflation on governing.
Legislative Council Staff forecast revenue 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 in the 2024-25 fiscal year.
The forecast from the governor’s Office of State Planning and Budgeting was far less rosy. The Polis administration forecast the revenue cap to be exceeded by $1.9 billion in the current 2022-23 fiscal year, $685 million in the 2023-24 fiscal year and $742 million in the 2024-25 fiscal year.
“On the surface, things looks great,” said Sen. Rachel Zenzinger, an Arvada Democrat who sits on the JBC. “We have to deal with the stuff that is under the surface.”
Complicating the situation further are two measures on the November ballot that could reduce the TABOR cap excess by hundreds of millions of dollars in future fiscal years, if not eliminate the excess entirely.
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Proposition 121 would cut Colorado’s income tax rate to 4.4% from 4.55%, a reduction estimated to slash state tax revenue by $412.6 million in the 2023-24 fiscal year. Proposition 123 would set aside up to 0.1% of taxable income each year for affordable housing, which is estimated to shrink revenue by $145 million in the current fiscal year and $290 million in the 2023-24 and subsequent fiscal years.
Under the OSPB tax revenue forecasts, the TABOR cap excess would effectively be eliminated by the passage of Propositions 121 and 123. Should there be a mild recession and tax revenue be lower than what’s forecast by OSPB, Propositions 121 and 123, should they pass, could go beyond eliminating the TABOR excess and force the legislature to reduce the size of its budget.
More TABOR refunds coming in April
The majority of Colorado taxpayers already have 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 the lowest earners (people who make up to $48,000) who are single filers to $506 for the highest earners (people making more than $266,000) who are single filers. The refund range jumps to $1,012 from $320 for joint filers based on their income levels.
Greg Sobetski, chief economist with Colorado Legislative Council, said the amounts will be finalized in the coming weeks as the state finishes its accounting for the 2021-22 fiscal year, which ended June 30.
Coloradans who filed their 2021 tax returns before June 30 have already received their $750 or $1,500 checks or will receive them by Sept. 30. Late filers who submit their returns before Oct. 16 will receive their checks by Jan. 31.
More information on the refund checks can be found at https://tax.colorado.gov/cash-back.
It’s unclear whether Coloradans will get TABOR refund checks in future years given the uncertainty around the economy and the potential passage of Propositions 121 and 123.