June Forecast Five: Crazy Days of Summer
The Joint Budget Committee’s June Revenue Forecast is out. See our top five takeaways and hang on for the ride!
1. Consumer Pressure Heating Up
The economic outlook continues on a positive – though waning – trajectory. Inflation continues to slow in Colorado, while inflation in the U.S. has stabilized. However, the cost of housing in the Denver-Aurora-Lakewood metro area continues to grow at a faster rate than the prices of energy, food, and transportation. This, combined with high borrowing rates and lower household finances, is placing mounting pressure on consumer spending.
Since late 2023, the unemployment rate in Colorado and in the country has been steadily increasing. In early 2023, the Colorado unemployment rate exceeded that of the U.S. The rate of growth has slowed and Colorado once again sits below the national average of 4% at 3.7% . But signs of a weakening labor market, with slower growth in added jobs, means Colorado’s unemployment rate is slowly ticking up.
2. Tax Credit Palooza Budget Impacts
Despite strong revenue collection and a healthy economy, the Legislative Council has predicted a large downward revision in General Fund revenue — almost entirely from legislation passed in the 2024 session. A number of tax credits passed last session that will see almost $900 million deducted from collections. The largest of which, the Family Affordability Credit (HB24-1311), will reduce the General Fund revenue by $648 million in FY 24-25, representing the bulk of redirected revenue.
The Family Affordability Credit (FATC) and the expansion to the Earned Income Tax Credit (EITC) depend on revenue growth to be triggered. Thanks to how these statutes are written, both credits will be available unconditionally during the years that revenue growth is negative. When expectations for revenue return to relative normalcy, with 8% growth expected in FY 25-26, the credits are set to be dependent on growth.
What this means for the surplus is that we are likely to see much smaller rebates than before — and changes during the 2024 session impact those as well. SB24-228 adjusted the six-tier sales tax refund mechanism and created a new temporary income tax rate reduction mechanism. For the next three years we will see these new mechanisms at play. For FY 23-24, the income tax rate cut will be triggered, and the six-tier will distribute the rest of the surplus. For the FY 24-25, the identical rebate will be triggered, and there will be no rate cut. And finally, for FY 25-26, the Legislative Council has predicted that the rate reduction and six-tier will return.
3. Ballot Measures Could Squeeze the General Fund Even Tighter
Revenue available for FY 2025-26 is expected to be $1.26 billion more than the FY 2024-25 budget. To give budget writers perspective, forecasters provide them with Scenario A (which keeps spending constant) and Scenario B (which takes into account caseload growth, inflation, and other obligations). It’s not good news for the General Fund. Under Scenario B, the budget will be $576 million short. But the elephant in the room is Scenario C: one where voters approve huge property tax cuts that force the state’s General Fund to pay back the revenue lost to local governments like cities, schools, and fire departments. This could require between $2.25 and $3 billion be taken from the General Fund to pay for property tax cuts. To give that figure context, the Human Services General Fund budget is $1.3 billion. Higher Education is $1.66. The 15% General Fund reserve is $2.2 billion. The state could need to cut the whole of the Higher Education and Human Services budgets to pay for these local tax cuts.
4. State Education Transfer Fund Adjustment
Voters in 2000 passed Amendment 23, which required a transfer of one-third of 1% of taxable income to a dedicated fund for schools: the State Education Fund (SEF). The SEF is like a savings account;. money from the SEF and the General Fund go toward paying the state share of K-12 funding. This ends up being around 7% of state income taxes that is no longer counted toward the TABOR revenue limit.
The tricky part is that “taxable income” isn’t reported on a fiscal year basis, so adjustments are made for any corrections. This has meant a cumulative under-transfer of $135 million since 2005 that is now being accounted for. This requires moving dollars out of the General Fund into the SEF, but it has a net zero impact in terms of the General Fund picture since that $135 million also reduces TABOR rebate revenue, which would have been paid out of the General Fund.
5. The Prop FF Puzzle Continues
Proposition FF, passed in November 2022 by voters at the ballot, created a universal school meals program using revenue from reducing the amount of deductions taxpayers making above $300,000 were able to claim. During the 2024 session, the JBC had to do some fiscal finegling to ensure that the program — which saw much higher usage across the state than anticipated — was able to operate in its first two years. Now, another wrinkle — the pay-for has brought in more revenue than anticipated. Good news for universal school meals, but bad news for the proponents who now need to return to the ballot and ask voters permission to keep the extra revenue. TABOR continues to mandate such complexity.
