Two ballot measures approved by voters in November will reduce the amount of money the legislature has to spend by about $750 million in each of the next three years, but two economic and tax revenue forecasts presented to state lawmakers Tuesday predicted the reduction won’t cut into Colorado’s budget.
The forecasts also indicate Coloradans can continue to expect tax refunds — albeit smaller ones than they would have received had the two ballot measures failed.
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Proposition 121, which reduced the income tax rate to 4.4% from 4.55%, is expected to reduce state tax revenues by $620 million in the current fiscal year — which ends June 30, 2023 — and by some $400 million in the 2023-24 and 2024-25 fiscal years. Proposition 123 sets aside up to 0.1% of taxable income each year for affordable housing programs, which is estimated to be about $150 million in the current fiscal year and roughly $300 million in the 2023-24 and subsequent fiscal years.
Should there be a deep recession, however, nonpartisan Legislative Council Staff and the Governor’s Office of State Planning and Budgeting warned budget cuts may be possible and taxpayer refunds would be erased. And both agencies said the risk of an economic downturn remains high.
“Amidst this rapid monetary policy tightening, the housing correction and declining household balance sheets, we believe that risks to the forecast remain elevated and weighted toward the downside,” Jeff Stupak, a monetary policy and inflation analyst for Legislative Council Staff, told the legislature’s Joint Budget Committee, which writes Colorado’s budget.
Greg Sobetski, chief economist for Legislative Council Staff, said “we think a recession is very possible.”
The legislature isn’t allowed to spend all of the money the state collects in tax revenue because of Colorado’s Taxpayer’s Bill of Rights cap on government growth and spending, which is calculated by annual inflation and population rates. Any money collected by the state in excess of the cap must be refunded to taxpayers. Refunds are expected in each of the next three fiscal years.
Legislative Council Staff forecast that tax revenue will be above the cap by $2.5 billion in the current fiscal year, $1.5 billion in the 2023-24 fiscal year and $1.4 billion in the 2024-25 fiscal year.
The tax revenue forecast from the governor’s office was less rosy. It predicted $2.4 billion in revenue above the TABOR cap in the current fiscal year, $469 million in the 2023-24 fiscal year and $736 million in the 2024-25 fiscal year.
Lauren Larson, who leads OSBP, said the reason for the discrepancy has to do with the agency’s expectation that there will be “a slight downturn for a couple of quarters in late 2023.”
After $225 million in TABOR excess is refunded as property tax relief in the current fiscal year, thanks to a bill passed in 2022, the legislature is still expected by nonpartisan legislative staff and the governor’s office to have more than $2 billion to refund.
The money can be refunded in a variety of ways. Earlier this year, the fiscal year 2021-22 TABOR excess was sent back to Coloradans via checks of $750 or $1,500 depending on whether they filed their taxes individually or jointly.
The legislature will decide during the 2023 legislative session, which begins Jan. 9, how to refund the TABOR cap excess.
Digging into the numbers
Colorado’s job market remains strong, both OSPB and Legislative Council Staff told the JBC. There are roughly two jobs available for every unemployed person in the state and Colorado’s unemployment rate was 3.5% in November.
“The majority of sectors we’ve recovered all the jobs lost in the recession,” Supak said.
There were exceptions in the mining, government, food services and real estate sectors. However, labor demands across the board continue to outpace supply, according to OSPB.
Both OSPB and Legislative Council Staff said inflation continues to put pressure on Coloradans. And while the overall inflation rate in Denver is lower than the national rate, Denver’s housing inflation rate is 10% compared with the 7.1% national average.
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Housing prices have caused the most significant contributors to inflation across the U.S., according to Legislative Council Staff. However, those costs are falling nationally and in Denver as the market cools. Denver home prices are down 4.5% from their peak, though housing demand is still outpacing supply and rental prices are climbing.
Additionally, rising interest rates caused by the Federal Reserve’s hopes of cooling inflation have caused significant decreases in purchasing power for home buyers.
Stupak said that someone who could afford a $550,000 home with a 20% down payment in 2021 had a monthly mortgage payment of $1,900.
“That same person, if they wanted to keep the same down payment and monthly payment, they would have gone down from being able to afford a $550,000 home to a $413,500 home. So about a 25% decrease in their purchasing power,” he said.
The housing market uncertainty is part of the reason state economists are warning of a recession. Another indicator of a possible economic downturn are trends in consumer spending, which make up 70% of economic activity, according to the Legislative Council Staff.
“We’ve seen a falling savings rate, falling household balance sheets and kind of declining expectations from consumers for the economy in the future,” Stupak said.
The OSPB projects slow consumer demand and economic growth in the second half of 2023. “The labor market and consumer spending are currently outpacing previous expectations for this year, but slower consumer demand and economic growth are expected in the second half of 2023,” said Bryce Cook, chief economist at OSPB.
Legislative Council Staff expects the annual inflation rate in Colorado to drop to about 4% in 2023 after hovering around 8% in 2022.