June Revenue Forecast Five: The Fiscal Situation
#1: No New Money Projected for the Out-Year Budget
The out-year’s budget (FY2024-25, which starts July 2024) is projected to have an extra $1 billion within our revenue limit — but that’s before accounting for caseload growth, inflation, and other scheduled payments on the books.
Keeping up with inflation (i.e. more students and Medicaid enrollees) requires $372 million to stay even in real terms. Add reserve requirements, controlled maintenance, and inflation adjustments for state employee compensation, and that “extra” $1 billion is used up. In fact, after staying even in real terms, the state is projected to be $78 million short of its 15 percent reserve requirement, despite sending back almost $3.3 billion in TABOR rebates.
#2: Inflation Slowing, but Still Elevated
After a very high 8.5 percent inflation rate last year, prices aren’t rising as fast this year. Colorado is looking at a 5 percent inflation rate through May 2023. Home prices and energy prices have dropped recently, contributing to the decreasing rates. For example, Denver’s home prices are down 6.1 percent from the peak last year. Still, 5 percent inflation is above where it has been in the last 15 years.
The slowing inflation rate is good news for the economic growth forecasts, as the Federal Reserve is expected to pause interest rate hikes. Wages are starting to catch up with inflation, too. After two years of aggregate wages being outpaced by inflation, it seems we may finally see positive real wage growth in 2023.
#3: Corporate Income Taxes are Way Up
Corporate income taxes are up 145 percent between 2023 and 2019 — that’s double and a half above the pre-pandemic levels. Corporations seeing record profits means more tax collections for Colorado, but it doesn’t necessarily mean more revenue for schools and roads. Why? The extra $1.3 billion that corporations paid between the pre-pandemic levels and now just means more TABOR revenue will be sent back to taxpayers since we are over our revenue cap. Even with record corporate profits, we still won’t be able to pay down what the state owes to schools (Budget Stabilization Factor) while only budgeting to the current TABOR revenue cap.
#4: TABOR Rebates Revised Upward For This Year
The state is projected to return $3.3 billion in TABOR revenue this year and $2 billion next year. Compared to the March forecast, TABOR revenue expectations were increased by $560 million in FY22-23. These are historically large TABOR rebate amounts. Before last year, when Colorado returned $3.7 billion, the largest TABOR rebate was less than $1 billion.
There are currently 3 rebate mechanisms in law that are used to refund surplus dollars above the revenue cap. About $3 billion will be returned via the six-tier sales tax rebate mechanism and $394 million will be used to fund the Senior Homestead Property Tax Exemption, along with some other property tax breaks from Senate Bill 22-238. The $3 billion returned via the six-tier mechanism means between $587 and $1,854 will be returned per tax filer depending on their income. The current way the six-tier mechanism is set up gives higher rebates to those with higher income. High-income taxpayers making over $279,000 annually could get as much as $3,000 more than the lowest-earning Coloradans, depending on filing status, at a time when many families are still struggling.
#5: What does this mean for Prop HH, which voters decide on this November?
This year, Colorado voters will decide on Proposition HH, which gives property tax cuts by lowering assessment rates, backfills some local governments for the lost revenue of those property tax cuts, and allows the state to keep more TABOR revenue by growing the revenue cap by an extra 1 percent each year for 10 years.
A yes vote on HH would also change the six-tier rebate mechanism to an identical rebate for all tax filers for one year only. Instead of between $587 and $1,854 for tax filers depending on their income, this would give everyone $809. The effect of allowing the revenue cap to grew by an extra 1 percent is more pronounced several years from now, but it would mean an extra $166 million above the current cap this year.
Stay tuned for further Prop HH details from CFI this summer!
