The state lawmakers who write Colorado’s budget are raising red flags about how two measures on the November ballot — one that would reduce the income tax rate and another that would set aside about $300 million annually for affordable housing — could combine to hamstring the legislature’s future finances, namely by eating into education funding.
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Proposition 121 would cut Colorado’s income tax rate to 4.4% from 4.55% a reduction estimated to decrease 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 be $145 million in the current fiscal year — which ends June 30, 2023 — and $290 million in the 2023-24 and subsequent fiscal years.
In years where tax revenue exceeds Colorado’s Taxpayer’s Bill of Rights cap on government growth and spending by about $1 billion, the budget wouldn’t necessarily be affected by the passage of the measures.
But in all other years, the initiatives — if they both pass — would cut into the state budget. And when the legislature is forced to pare back its spending, it’s frequently education dollars that get slashed first.
“There’s no free lunch,” state Sen. Chris Hansen, a Denver Democrat and the incoming chair of the Joint Budget Committee, told constituents Saturday at a town hall. “K-12 and higher education (is) where the marginal dollar is in our state budget. So $1 less means $1 less for education.”
Proposition 121, which is being pushed by conservatives and is ostensibly supported by Democratic Gov. Jared Polis, has the clearest path to becoming law of the two initiatives. Coloradans often vote in favor of tax reductions and there’s no well-funded opposition to the measure.
The politics surrounding Proposition 123 are more complicated. It’s endorsed by a number of prominent nonprofits and a host of Democratic state lawmakers and politicians. But it also has a bipartisan group of skeptics who want voters to think long and hard before weighing in on the measure, especially given the growing risk of a recession stemming from high inflation and rising interest rates meant to tamp down consumer costs.
“I recognize the need for a more sustainable revenue source for affordable housing,” said Sen Rachel Zenzinger, an Arvada Democrat who also sits on the JBC. “As a budget writer, I’m one of the people that is going to have to think about the implications, though, for budgeting down the road.”
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The money generated by Proposition 123 would be distributed to local governments and nonprofits to acquire and preserve land for affordable housing, develop units, secure shelter for people who are homeless and provide downpayment assistance to first-time homebuyers. Local governments must commit to increasing affordable housing by 3% annually and creating a fast-track approval process for affordable-housing projects to qualify for funding.
Taxes wouldn’t be raised under the measure, though in TABOR refund years Coloradans would receive less money back from the state if Proposition 123 is approved.
“We know that right now affordable housing is the single biggest crisis facing the state of Colorado: hospitals who can’t keep nurses, school districts who can’t keep teachers, restaurants who can’t keep staff,” said Democrat Mike Johnston, a former state senator who leads Gary Community Ventures, the organization bankrolling the committee working to pass Proposition 123. “It’s past time to do something, and this offers a chance to do that without raising taxes.”
Johnston pointed out that the state’s tax revenue is forecast to exceed the TABOR cap in the next three fiscal years. And since Proposition 123 would be a statutory change not a constitutional one, the legislature could simply vote to turn off the affordable housing funding spigot in years when the TABOR cap isn’t exceeded.
“If that unforeseen eventuality comes to pass then there’s a structure in place for the legislature to manage that,” Johnston said.
The reality of Colorado’s budget situation, however, is more nuanced.
While it’s true that tax revenue is forecast to exceed the TABOR cap in each of the next three fiscal years, the amount is up for serious debate.
Legislative Council Staff and the governor’s Office of State Planning and Budgeting offered wildly different projections to lawmakers Thursday while presenting their quarterly economic forecasts.
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 TABOR excess forecast by the governor’s Office of State Planning and Budgeting was $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.
Under the OSPB forecast, if Propositions 121 and 123 both pass — and the legislature doesn’t turn off the affordable housing funding spigot — they would start cutting into the state budget as soon as next year.
If there’s a recession — of which both Legislative Council and OSPB staff warned there is significant risk — all bets are off when it comes to how much, if any, TABOR excess there would be.
In a weak recession, Hansen said, “we are immediately out of TABOR surplus.”
(Both Johnston and Hansen, meanwhile, are rumored to be considering 2023 Denver mayoral bids.)
Even some proponents of Proposition 123 see the cause for alarm.
“The impact of 121 passing and 123 passing would be brutal,” said Scott Wasserman, who leads the liberal-leaning fiscal nonprofit Bell Policy Center, which has endorsed Proposition 123 and opposes Proposition 121.
Both Hansen and Zenzinger also cast doubt on how easy it would be for the legislature to pause the affordable housing spending.
“The proponents will say, ‘it’s statutory, so you can go in and just fix it,’” Zenzinger said. “But not really, because if this is voter approved there really is a mandate from the people. And so we’re going to be on the hook having to backfill that money.”
State Sen. Bob Rankin, a Carbondale Republican who sits on the JBC, shares the concerns of other conservatives about how Proposition 123 would cut into TABOR refunds. But he also notes the legislature spent hundreds of millions of dollars last year on affordable housing projects.
“I’d like to know how the money we’ve already allocated to housing is working,” he said.
Rep. Julie McCluskie, a Dillon Democrat who chairs the JBC, echoed those concerns.
“While I support further investments in affordable housing, I think we should all pause and really consider what sort of pressure (Proposition 123) as well as 121, a reduction in the tax rate, will put on Colorado’s budget,” she said. “The people in this state expect great public schools, a strong transportation system, high-quality college and university experiences. When we start to look at the depletion of resources, we will impact the ability to deliver those high-quality services. And I think that’s what all of us need to be mindful of.”
Despite her concerns, McCluskie said she’s not sure how she will vote on the measures.
That may be an indication of the intense politics surrounding them both.
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The Colorado Democratic Party and a number of Democratic state lawmakers have endorsed Proposition 123. Its backers include Sens. Rhonda Fields, Jeff Bridges and Julie Gonzales, as well as Reps. Naquetta Ricks, Cathy Kipp and Lindsey Daugherty.
“Proposition 121 would be devastating for Colorado’s ability to meet our financial and budgetary obligations,” Gonzales said. “But in almost every conversation I’ve had with constituents, they are urging us to use every tool in our toolbox to address the housing affordability crisis.”
She said being able to dedicate a new, annual stream of money to housing affordability “would be both transformational and sustainable.”
“I appreciate the JBC’s concern,” Gonzales said. “I think it’s valid and fair and understandable given the budget challenges that we’ve had over the past several years. But if we find ourselves (without a TABOR surplus) we will do what is right to meet our obligations.”
There are separate questions about how the proposition was written. The policy could use some work, says Peter LiFari, executive director of Maiker Housing Partners, Adams County’s public housing authority.
“The pros far outweigh the cons, and we need the measure,” he said, “but the measure has some shortfalls that need to be addressed so that its good points can be maximized.”
LiFari worries about local government buy-in given the strings attached to the program’s funding. But he appreciates how the measure addresses “all of the needs within the housing continuum.”
Voters will get the opportunity to weigh in Nov. 8.