Forecast Five: June 2021 Revenue Estimates
By Chris Stiffler, senior economist
Though the 2021 legislative session ended the week prior, the Joint Budget Committee was still at work last week to hear from state economists about the newest revenue outlook.
Overall, Colorado’s economy is coming out of the pandemic in a good position, thanks in large part to strong public investments. Tax dollars invested in workers’ paychecks and public goods are a win-win for the state, though as with any good economy in Colorado, the return of constitutionally mandated tax rebates will mean the state can’t fully invest the fiscal rewards of a strong recovery.
Here are our top give takeaways from last week’s revenue forecast:
#1 – Many economic metrics are back above pre-pandemic levels
The economy is expected to grow by a very strong 6.5% in 2021. Retail sales are back above pre-pandemic levels with even the hardest-hit sectors like leisure and hospitality catching up—though they still remain slightly below pre-pandemic levels. Colorado’s has regained two-thirds of the jobs we lost since pandemic began and Colorado is now back up to trend levels of sales tax collections. Personal Income growth is also well above where it was before the COVID recession.
#2 – Stimulus works
The best stimulus is one that gets spent right away, and the data shows the unprecedented federal stimulus to combat the pandemic did just that. A quarter of the growth in personal income is attributable to increased federal spending (direct payments, extended unemployment benefits, business assistance, and individual tax policies). Consumer spending accounts for roughly 70% of the economy and data shows that consumer did a lot of spending in the beginning of the year. Sales tax collections are soaring. This does bring with it one of the current economic headwinds: supply still hasn’t caught up to pre-pandemic levels despite even though consumers are unleashing pent-up demand, particularly on in-person experiences that they missed out on in 2020.
#3 – A big General Fund rebound means this wasn’t a typical recession
Because of pandemic-related delays in 2020 tax returns, state economists didn’t have their usual income tax collections in March 2021 to do their projections. With the data now available in June, those figures were significantly revised upward. Compared to the March 2021 revenue estimates, this year’s budget will have $1.6 billion more than we thought 3 months ago. High income earners in Colorado continue to do very well, pushing up General Fund collections and the federal stimulus (direct payments and unemployment insurance payments) had big stimulating effects. It’s not typical to have unemployment rates above 6% (Colorado’s unemployment rate stated steady at 6.4% for last 3 months) and also to be talking about general fund surpluses.
#4 – Not all General Fund revenue growth will fund public investments
State economists are expecting TABOR rebates in each year of the forecast period. Revenue is expected to exceed the TABOR revenue limit this year by $440 million, $658 million next year and $908 million two years from now. That $440 million will be returned to taxpayers this year via three methods: the homestead property tax exemption, the six-tier sale tax rebate, and a reduction in the state income tax rate from 4.55% to 4.50%. (Technically, revenue will exceed the limit by $551 million this year, as there was too much TABOR revenue refunded in the past since legislators readjusted the revenue limit in SB21-260).
#5 – Next year’s budget (FY2022-23) will be a big swing from bad to good
In May 2020, we were talking about a potential double-digit drop in General Fund collections (which were modeled off the last two recessions). But this recession wasn’t like the last two. With unprecedented federal stimulus and the strong growth in income tax collections from high-income earners, current revenue collections are expected to grow by a whopping 11.4% over last year’s levels despite the constitutionally mandated tax rebates. This means the budget legislators will begin working on in January 2022 will have $3.2 billion more than what was spent in the FY2021-22 budget. And that’s on top the 13.4% General Fund reserve (basically the state’s savings account) which is also much larger than it’s been in years.
