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1. Federal Tax Changes Mean More State Tax Revenue for Colorado
The federal tax bill has far-reaching implications for Coloradans. The bill (known as the Tax Cuts and Jobs Act) was just passed by the house and senate and will likely be signed into law before Christmas. At the federal level and for nearly every state, the TCJA means less tax revenue. But Colorado can expect to see an increase in revenue: the JBC forecasts $35.2 million more in the General Fund reserve by June 2018 under the TCJA, and an additional $196.5 million for the FY2018-19 budget.
Why? Unlike most states, Colorado uses Federal Taxable Income to calculate its tax base. By eliminating many deductions, the TCJA broadens the federal tax base for individuals and corporations. The bill then lowers federal tax rates, resulting in cuts in federal taxes. In Colorado, however, the tax base (Federal Taxable Income) broadens but the state tax rate remains the same—so more state revenue.
Though this means Colorado can expect a bump in state tax revenue, the dramatic effects of the Tax Cuts and Jobs Act will still put pressure on our state budget. The tax bill costs a lot of money ($1.5 trillion, by most estimates), and decreases federal revenue significantly. Republican members of congress have promised cuts to federal spending in 2018, which means less federal money for Colorado. That makes the pie smaller for all Coloradans, and will require the state to make up the difference (for reference, more than 1/3 of Colorado’s budget comes from the federal government).
2. Why Do Front Range Home Values Hurt Local Government Budgets in Rural Colorado?
The Gallagher Amendment prevents the share of housing property taxes to increase relative to non-residential property (for more on how Gallagher works, watch our handy Gallagher video here!). Because housing value is expected to increase relative to other property, the Residential Assessment Rate (RAR) is projected to fall from 7.2 percent to 6.11 percent in 2019. That 15 percent drop in the statewide RAR will be particularly damaging to local government budgets, especially in regions that haven’t seen growth in housing value like the Front Range has. Legislative Council projects that 18 counties in Colorado will actually have less property value to tax in 2019. The automatic cut to housing property taxes will also put more strain on the General Fund to provide a greater share of school funding.
3. Colorado’s Economy in 2018: Slowing Our Roll
Tax collections jumped by 7.8 percent in 2017 but that type of year-over-year growth isn’t set to continue in 2018 because of the aging population, housing costs, and a tight labor market. In particular, the state’s growing aging population constrains economic expansion. (For context: the share of Coloradans age 65 and older is expected to increase 115% by 2050, according to state demographers.)
Historically low unemployment rates in our state can also mean less job growth. A robust job market means employers have trouble attracting workers if they don’t raise wages, which increases the cost of doing business and can slow growth. The high cost of housing is dampening consumer spending as more and more of our paychecks pay for the cost of living. Sky-rocketing housing prices are also leading to a slowing of people moving to Colorado; in fact the projected-rate of population growth was reduced from 1.6 percent to 1.4 percent because of a slow down in net migration.
Despite these constraints, Colorado’s economy is strong. Using our current economic strength to invest in the future is fiscally responsible and makes Colorado more resilient. Providing crucial supports like affordable housing and healthcare to all Coloradans helps to stabilize and sustain growth.
4. Good News or Bad News for School Budgets? Hard to Tell
Schools are funded both by state revenue and local tax revenue. Because local property taxes came in higher than what was anticipated when the FY 2017-18 budget was written, the state requirement to fund schools dropped by $110 million. Schools could benefit from the extra $110 million if the state keeps its funding constant, but it is not obligated to do so. State aid to schools could be cut by $110 million to free up revenue for other parts of the state budget. The automatic property tax cut on homes prompted by the Gallagher Amendment will also adversely impact school budgets in the next several years. Gallagher’s side effects will put a greater burden on the state General Fund to pay for schools as local tax contributions for schools continue to fall.
5. More State Revenue for the FY2018-19 Budget
There are no TABOR rebate obligations projected for the forecast period.
The General Fund is expected to end the FY2017-18 with a 6.8 percent reserve (which is $35 million above the required amount). The General Assembly will have $963 million more to spend for the upcoming year than what was budget for in FY2017-18. That isn’t all new money however, keeping up with inflation and pupil growth requires the state to pay $240 more next year just to maintain the same school funding levels.
