78 percent of the jobs Colorado lost since Spring 2020 are back, which is slightly above the rest of the 76 percent mark for the country as a whole. Overall wages are growing faster than before the pandemic and the pockets of places where wage growth had been lagging are now shrinking. This job and wage growth, accompanied by government payments, is driving growth in state revenue collections. Individual income tax withholdings and sales tax collections, the two biggest components of General Fund revenue, are exceeding pre-pandemic trend growth. Additionally, retail sales in the hard-hit industries like hotels and restaurants are now back above pre-pandemic levels.
To give a feel for how much money legislators must invest in services in next year’s budget, Legislative Council compares their three-year revenue projections to what is being spent in the current year’s budget. They are estimating that the General Assembly will have $3.3 billion more to budget for when they write the FY2022-23 budget then what was spent in this current budget. While that amount does not consider increasing numbers of students in K-12 schools, the number of patients using Medicaid for health care, or inflationary pressure, $3.3 billion to spend above this year’s appropriation shows solid economic growth.
That growth has now exceeded inflation by such an amount that it resulted in $453 million in rebates (mandated under TABOR) for the budget yeat that ended on June 30 of this year and will show up in refunds when taxpayers they file their 2021 taxes next year. Among the mechanisms used to refund that money is a temporary reduction in the income tax rate to 4.5 percent. Refunds are projected to exceed $1 billion annually for the next three years.
The state’s reserve is also healthy. The current budget has a projected reserve of 28.6 percent, which is $1.9 billion above the current 13.4 percent reserve requirement. This level of revenue makes budgeting less risky since legislators can predict that any forecast change will be absorbed by these reserves and unspent dollars.
#3 – The Pandemic has exacerbated wage and wealth inequality
Not all the news is good, however, particularly when it comes to equity. High-wage jobs have more than rebounded while low-wage job recovery hasn’t kept pace. Colorado’s unemployment rate dropped below 6 percent for the first time since the pandemic began, hitting 5.9 percent in August. Though this is still lower than the national unemployment rate of 5.2 percent, that number in isolation can be misleading. In fact, the data shows more Coloradans are actively looking for work than nationwide, which leads to more people being counted as unemployed.
Unemployment rates vary across demographics. 5.8 percent of Colorado women are unemployed, while the rate for men is slightly higher at 6.1 percent. Unemployment remains high for Black workers at 14.5 percent. It also varies by age, with younger workers 20-24 years old and workers 55 and older employment continuing to lag pre-pandemic levels. For workers between 35-44, employment has almost fully recovered.
Education is also playing a role, with 8.9 percent of Colorado workers without a high school degree currently unemployed.
The recovery has also been unequal across economic groups. The net economic value held by people who earn the lowest 20 percent of incomes increased by only 2.5 percent (pre pandemic growth levels were close to 15 percent). Meanwhile, the net worth of the middle and high end of the distribution grew by 13.1 and 13.9 percent (nearly twice as high as pre-pandemic levels). This is largely due substantial growth in the price of real estate and the value of stocks.
#4 – The uncertainty of inflation has many interconnected budget impacts, but it may be temporary
Inflation doesn’t just affect the ability of consumers to afford goods and services. Many of Colorado’s complicated and unique fiscal policy constraints are affected by inflation. For instance, the revenue cap mandated by TABOR factors in inflation and the school finance formula is based on per-pupil growth and inflation.
While the headline inflation rate currently sits at 5.2 percent—well above the standard 2 percent it has been for the past decade—it hasn’t been growing across the board. Energy and transportation are the biggest components driving higher headline inflation rates, both of which saw dramatic effects from pandemic public health measures. As we see more data come in, the expectation data suggests the spike in inflation is temporary or transitory. For example, OSPB’s economic forecast shows that long-run inflationary measures (5-10 years out) taken at the University of Michigan rose only slightly to 3 percent from 2.8 percent. This leads state economists to believe that price spikes consumers are feeling now will head back to normal in a year or so.
#5 – The Child Tax Credit expansion has given a big boost to household budgets
Total personal income is growing, and that growth partially reflects implementation of the expanded federal Child Tax Credit’s (CTC). The program provides monthly payments of up to $300 a month per child, and with 600,000 Colorado parents eligible to receive this benefit, it’s resulting in a monthly injection of $255 million into the state’s economy. Early evidence suggests this is having a real impact on the number of families living in poverty. For example, the number of families with kids earning less than $35,000 who reported not having enough to eat dropped by 8 percent this year.
Budget Reconciliation and a Pathway to Citizenship
This week, the US House joined the US Senate in passing a $3.5 trillion budget reconciliation resolution that includes critical immigration reform measures. While not final, the action Congress took is an important step in the process. And though the details are scarce, the plan calls for a path to citizenship for undocumented people who came to the country as children (a group sometimes referred to as “Dreamers”), refugees and asylum seekers who fled their home countries for humanitarian reasons, and some essential workers. Budget and economic legislation might not be the place advocates thought immigration reform would come from, but as a data-driven organization, we at the Colorado Fiscal Institute know that it makes perfect sense.
Immigrant Contributions to Colorado’s Economy
Immigrants supercharge the economy and drive prosperity in every part of the country, especially Colorado. A path to citizenship for all the people without documentation who want to call America home have a major positive effect in several economic and fiscal areas.
Immigrants Power Core Colorado Industries
According to 2019 American Community Survey data from the US Census Bureau, of the 190,000 Coloradans without documentation, about 100,000 are workers. These workers are the lifeblood of industries that define Colorado and shape our shared prosperity—outdoor recreation and tourism, farming, ranching and food distribution, care giving, restaurants and hotels, and construction. Those industries don’t work without immigrant workers.
Though the virus has resurged due to the Delta variant, economic recovery is still on the horizon. Now is the time to recognize the contribution of undocumented immigrants in Colorado and the country, to value the essential roles they play in our economy and our communities, and open a path for them to fully contribute.
Impact of Immigration Status on Workers and Their Families
As we look to “build back better,” we must include a path to citizenship for all immigrants, particularly working people who are supporting their families and communities. Workers who gain legal status see between an 11-15% increase in earnings, as legal status makes them less vulnerable to wage theft and other forms of workplace abuse. In fact, recent studies show that immigrant inclusion boosts wages for all workers and the places most accepting of immigrants saw the highest wage growth. Increased earningshave been found to contribute to greater family stability, productivity and the physical and mental well-being of children.
Impact of Citizenship on Our Economy
Immigrants have also always been entrepreneurs, and are more likely than their US-born counterparts to start main street businesses. Creating a pathway to citizenship for immigrants would mean more small businesses and more jobs in every part of the state. Citizenship for undocumented immigrants would create an estimated 159,000 new jobs annually across the country.
Economic Growth
As jobs are created and families earn more, overall economic activity increases, creating a virtuous cycle of growth and prosperity across the state. Nationally, creating a path to citizenship would boost GDP by as much as $1.7 trillion in the next 10 years.
Increased Tax Revenue
Finally, greater economic activity leads to increased tax revenue for cities, states, and the federal government. That means more revenue to invest in the physical and social infrastructure the White House and Congress are proposing in reconciliation. Going forward, it also means more security and solvency for Social Security and Medicare—programs that we all rely on now or in the future. Here in Colorado, undocumented immigrants already pay $140 million a year in state and local taxes. Granting legal status would mean an additional $33 million in tax revenue to state and local governments every single year.
Creating Path to Citizenship is Building Back Better
Creating a path to citizenship for undocumented immigrants is not just the right thing to do, it’s the fiscally smart thing to do. And the time is now. Bringing these workers out of the shadow economy and allowing them to fully share their talents and skills is good for immigrant workers and their families, good for business and local economies, good for state and local governments, and good for the federal treasury. It’s essential for our economic recovery and our future economic resilience that we create a path to citizenship for all immigrants.
When you hire a contractor to do work on your home, it’s smart to make sure that person carries some sort of protection against the work not being completed – a financial product similar to insurance called a bond. Bonding protects all parties involved from financial distress if someone doesn’t live up to an agreement. Unfortunately, when it comes to oil and gas production, sometimes oil and gas companies leave a big, costly mess for the rest of us to clean up: orphan wells.
What Are Orphan Wells?
“Orphan wells” are a subset of unplugged abandoned wells. They are non-producing wells for which no owner or operator can be found, or the owner or operator cannot or is unwilling to plug the well. This could happen if the owner goes bankrupt due to volatility of the oil and gas industry, or if the well is left unplugged and abandoned prior to the recent plugging standards, and now no legal responsible party can be found for the well.
What Happens When Orphan Wells Aren’t Cleaned Up?
When oil and gas wells go out of operation, they need to be properly cleaned and plugged to prevent adverse environmental and health impacts. Methane and carbon dioxide leakage from unplugged wells intoxicate the air and contribute to climate change: An analysis from the Environmental Protection Agency (EPA) showed methane emissions from unplugged wells are about 100 times greater than emissions from plugged wells. They also emit naturally occurring radioactive materials and air toxins such as benzene, and the migration of gas or fluid from unplugged wells and improperly cleaned sites can contaminate soil and ground water, harming wildlife and livestock.
Who Pays For Orphan Wells?
Oil and gas companies are legally obligated to plug wells once they are no longer producing oil. In reality, however, many operators have abandoned the wells they have profited from without paying for their cleanup and closure. The EPA’s estimate shows that in 2019, there were about 2 million unplugged abandoned oil and gas wells across United States.
When such a well is left unplugged and “orphaned,” the responsibility for closing the well and cleaning up the site falls on the rest of us to pay the costs collectively through our tax dollars. For instance, Petroshare Corporation declared bankruptcy in 2019 and sold its major assets to a creditor, Providence Energy, leaving the state of Colorado with no choice but allowing Petroshare to abandon its unwanted wells without plugging them, burdening Coloradans with the costs to clean it up.
How Do We Hold Negligent Operators Accountable?
Many states have financial mechanisms in place to hold operators accountable. For example, operators are required to obtain bonds, which are a form of financial assurance, to support the costs of plugging a well in case it becomes orphaned. However, these bonding requirements are often based on very low-cost estimates, which makes abandoning a non-operating well significantly cheaper than cleaning and plugging it. For example, in the example of PetroShare’s well that became orphaned, Colorado required bonds in the amount of $425,000, of which $400,000 were designated for plugging and abandonment costs. Based on estimates from independent energy finance think tank Carbon Tracker, that number only represents about 3% of the expected plugging costs.
How Many Unplugged Wells Does Colorado Have?
Colorado has about 60,000 unplugged wells (including currently producing wells, stripper wells, injection wells, temporarily abandoned wells, and zombie wells), and Carbon Tracker’s estimates show that the costs of cleaning and plugging them are about $7 billion. According to the Colorado Oil and Gas Conservation Commission’s Orphaned Wells Program, Colorado has at least 215 orphaned wells and 454 associated sites, which can include well pads, storage tanks, flowline locations and other facilities.
Data source: Carbon Tracker
Number Of Orphan Wells Expected To Rise
As the industry naturally declines due to the inevitable transition from fossil fuels to renewable energies, and more and more wells become unprofitable, the number of orphaned wells is expected to rise. In order to avoid burdening Coloradans with billions of dollars in cleaning and plugging costs, states need to require bonding amounts from oil and gas companies that reflect the actual costs of plugging and cleaning wells.
How Legislation Can Help Mitigate Clean-Up Costs
A recently introduced bill from US Senator Michael Bennet will modernize federal oil and gas bonding standards to better reflect the actual costs of dealing with these cleanups. The bill would fund orphaned well remediation on federal, state, and tribal lands as well as increase individual bonding requirements to $150,000 and establish standards for inactivity and cleanup. Currently the bond-per-well requirement in Colorado is only $10,000 for wells less than 3,000 feet deep, and $20,000 for wells deeper than 3,000 feet. Operators with up to 100 active wells can provide a statewide “blanket” bond of just $60,000, while those with more than 100 wells need to pay $100,000 for state-wide blanket bonds. The bill will increase the statewide bonding requirement to $500,000.
A recent editorial from The Durango Heraldpraised Bennet’s solution to this problem:
The bill also will fund new jobs while reducing methane emissions, which are particularly high in the Four Corners Area. It will modernize long-outdated bonding requirements; individual well bonds would increase to $150,000, while a statewide bond would be $500,000. (The 1960s-era bond amounts currently in place are $10,000 per individual well; $25,000 statewide; and $150,000 nationwide.) This will ensure that oil and gas companies, not taxpayers, fund cleanup in the future.
The bill will also establish standards for identifying inactive wells and when cleanup must start, and what exactly constitutes remediation and reclamation of impacted land and water resources. A publicly accessible database of information about all onshore leases will be created.
Durango Herald editorial, July 14, 2021
Holding Industry Accountable
Increasing the bonding requirement to reflect the true cost of plugging and abandoning wells is an essential step in holding the industry accountable for their environmental pollution and protecting health and safety of our communities. The orphaned well fund proposed in the bill will also create new jobs while mitigating climate change.
Signing of the Tax Fairness for Coloradans Package on July 23, 2021.
The 2021 session was one of the most ambitious and productive in recent memory. Between the session’s first day in January (including a six-week pause until mid-February) to the final day in June, lawmakers passed 502 bills of the more than 620 they introduced.
Among the historic legislation passed was the Tax Fairness for Coloradans Package, HB21-1311 and HB21-1312,sponsored by Rep. Emily Sirota and Rep. Mike Weissman and Sen. Chris Hansen and Sen. Dominick Moreno, which will bring about the biggest tax reform in Colorado in decades. The tax overhaul closed loopholes for the wealthy and big corporations and funded expansions to the state Earned Income Tax Credit and finally funded the Colorado Child Tax Credit. Everyone at CFI is grateful to our legislative champions, our friends and allies who stood side-by-side with us to get it done, and the everyday parents and workers who shared their stories about what a fairer tax code means to them.
There was a lot more that happened this year too. For a full rundown of all the bills we were engaged in, read our 2021 legislative wrap-up on our website.
We also invite you to join us on July 13th to celebrate this historic win at our Tax Fairness for Coloradans Celebration. Click here for more information and to RSVP.
On May 28th, the Biden-Harris administration released their Fiscal Year 2022 budget proposal, and the Treasury Department released its “green book,” which provides additional details and guidelines about the provisions in the proposal. The budget proposal includes the American Families Plan and the American Jobs Plan, two major tax and infrastructure overhauls presented by the White House earlier this year.
The President’s proposal includes tax increases for corporations and high-wealth individuals and families, many of which undo changes made to the tax code by the Trump-era Tax Cuts and Jobs Act. The proposal also includes tax credit increases for people who earn low incomes and parents.
Biden Tax Plan Changes
Changes to individual income taxes include:
Increasing the top individual tax rate from 37% to 39.6%
Raising the capital gains tax rate from 20% to 39.6% for people making over $1 million
Ending “stepped-up basis,” which allows people to pass investments down to heirs without the investments being taxed at the time of their death
Expanding tax credits for people who earn low incomes
Making permanent the Affordable Care Act premium tax credits, the expansion of the Earned Income Tax Credit, and the expansion of the Child and Dependent Care Tax Credit from the American Rescue Plan
Extending the Child Tax Credit changes from the American Rescue Plan to 2025
Changes to corporate income tax include:
Increasing the top corporate tax rate from 21% to 28%
Raising the tax on Global Intangible Low Tax Income—income earned by foreign affiliates of US companies from intangible assets such as patents, trademarks, and copyrights—from 10.5% to 21%, calculating it on a country-by-country basis, and eliminating the exemption of a 10% return on tangible investment abroad.
Imposing a 15% minimum tax on corporate book income, which is levied on a firm’s financial profits instead of taxable income for firms with revenue over $100 million
Repealing the Foreign-Derived Intangible Income deduction, which incentivizes firms to move intellectual property into the U.S.
Providing a tax credit for certain activity around moving jobs from other countries to the US and denies expense deductions on jobs that were moved from the US to other countries, a business practice known as offshoring.
Increasing corporate tax enforcement
Eliminating certain deductions and credits for the fossil fuel industry
Biden Tax Plan IRS Funding & Enforcement
The plans also increase IRS funding and enforcement, with particular attention to wealthy corporate and individual taxpayers. This comes in the wake of reporting from ProPublica that showed low-income taxpayers were more likely to be audited than those with the highest incomes, and that many of the country’s richest people avoid paying any income taxes.
Biden Tax Plan & Tax Fairness
Passage of the American Families Plan and the American Jobs Act would be significant shifts in the federal tax code. The plans move millions of dollars in tax liability from low-income households to high earners by increasing top marginal rates and expanding tax credits for working families. The plans also undo many of the harmful changes made in 2017.
Tax Fairness Wins In Colorado
While the White House is hopeful they can pass this ambitious plan, states like Colorado are moving forward with tax changes of their own. Gov. Jared Polis recently signed HB21-1311 and HB21-1312, which expanded state-level tax credits for workers and families who earn low incomes. Those tax credits were funded by closing tax loopholes used by the wealthy and corporations to avoid paying their fair share. The new Colorado laws shifted hundreds of millions of dollars from high-income households to low-income households through the tax code.
Coloradans are thrilled to see a fairer state tax code (be sure to join us on July 13 to celebrate the passage of the Tax Fairness for Coloradans Package) we’re grateful to our state legislators for putting tax policy front and center in economic equity debates, and to our members of Congress who supported improvements to the tax code in COVID relief legislation, we hope Congress will continue the momentum by passing the federal tax changes outlined in the White House’s budget proposal.
In 2020, the United States endured 22 separate billion-dollar weather and climate disasters at a cost of nearly $100 billion. These include damage from seven tropical cyclones, 13 severe storms, one drought and one wildfire. Closer to home, Colorado suffered $1.7 billion in costs from wildfires and drought. With climate change exacerbating the severity and frequency of these types of events, there will be a higher risk of roads washing out, streets getting flooded, air quality declining due to smoke from wildfires, and threats to food security from droughts. Decades of disinvestment in infrastructure has made our roads, bridges, and buildings vulnerable to extreme weather events. The 2021 winter storm in Texas that caused 70 deaths showed the power grid is also very vulnerable to extreme weather events.
Addressing climate change is also an economic and environmental justice priority. Low-wage workers and their families, a disproportionate number of whom are people of color, are the most likely to be harmed by the effects of climate change. They are more likely to live in areas with polluted air and water, or in urban areas where they lack access to green space and are exposed to increased heat in the summer. They are also less likely to have the financial resources to prepare for climate disasters and other related events.
The American Jobs Plan (AJP), proposed by the Biden-Harris administration earlier this year, would invest about $2 trillion in improving our country’s infrastructure and shifting to greener energy over the next eight years, and putting the country on track to achieve net-zero carbon emissions by 2050. The plan also targets investments to support infrastructure in the communities who face the greatest physical and financial threats from disasters driven by climate change.
Transportation
The transportation sector is the largest contributor to greenhouse gas (GHG) emissions—think carbon dioxide and methane—in the United States (transportation responsible for 29% of total emissions in the country). In 2020, transportation surpassed electricity generation as the largest source of pollution in Colorado. The American Jobs Plan proposes a $174 billion investment in electric vehicle (EV) incentives to shift away from combustion engine vehicles. The plan includes incentives like tax credits to purchase American-made EVs, building 500,000 EV charging stations across the US by 2030, and converting at least 20% of school buses from gas to electric. The plan would also replace 50,000 diesel transit vehicles.
The US market share of plug-in EV sales is only one-third the size of the Chinese EV market, so this investment will put the US in a more competitive position, while ensuring these vehicles are affordable for all families and manufactured by workers with good jobs. According to a study by the American Lung Association, transitioning to zero-emission transportation solutions along with increasing levels of renewable energy by mid-century will save thousands of lives, avoid tens of thousands of asthma attacks, and tens of billions of dollars in health costs as a result of significant pollution reductions.
In Colorado, people living in the Denver Metro Area disproportionately live near high-traffic areas and are exposed to higher noise and air pollution levels. Figure 1 shows the percentile rankings of Colorado census tracts with respect to traffic proximity and volume. The areas colored in orange are more exposed to traffic and its resulting pollutants compared to other areas of the state. Electrification of the transportation system reduces pollution from cars in this area. The AJP proposes $85 billion to modernize public transit with the goal of bringing buses, rapid transit, and rail services to underserved communities across the country. This investment will reduce traffic congestion.
Coloradans who take public transportation spend an extra 74.6% of their time commuting and households of color are 1.8 times more likely to commute via public transportation than white households.
Figure 1: Traffic Proximity and Volume, State Percentiles
Electricity generation
All climate models project that Colorado’s climate will warm substantially by 2050 if we fail to take action. This warming will drive longer, hotter, and more intense heat waves. Heat-related illnesses are the number one killer of people from natural disasters. Moreover, the urban heat island effect is an added environmental burden to low-income residents and people of color who are already living in communities with the most exposure to pollution.
Figure 2 shows a projection of the number of days each year by mid-century where the maximum temperature in an area exceeds the historic maximum temperature of that area (i.e., extreme heat conditions) under business-as-usual greenhouse gas emissions. The figure shows that many areas will experience more than 100 days of extreme heat.
Figure 2: Average Number of Days Hotter than Historic High Temperatures by Mid-Century (Business-as-Usual Scenario)
Climate change is projected to increase energy consumption in the US and Colorado as summer cooling needs are expected to grow faster than the decline in winter heating needs as a result of increasing temperatures. In 2020, record breaking wildfires in the West triggered by dry and hot conditions caused blackouts as demand for air conditioning increased. It is estimated that power outages cost the US economy up to $80 billion annually.
The American Jobs Plan will invest $100 billion to update the electric grid and make it more resilient to climate change. The US electric sector is the second-largest emitter of greenhouse gases nationwide (25% of total emissions). The AJP creates a “Energy Efficiency and Clean Electricity Standard,” a mandate that would require a portion of US electricity come from zero-carbon sources like wind and solar power. This will put us on the path to 100 percent carbon-free electricity by 2035.
Infrastructure resilience and restoration, and drought resilience
The AJP calls for $50 billion in dedicated investments to improve infrastructure resilience and protect and restore nature-based infrastructure – land, forests, wetlands, watersheds, and coastal and ocean resources. It will invest in protection from extreme wildfires, coastal resilience to sea-level rise and hurricanes, support for agricultural resources management and climate-smart technologies, and the protection and restoration of major land and water resources. The plan calls for a tax credit that has been proposed by both parties to help families and small businesses invest in disaster resilience. The plan also calls for a $10 billion investment in a new Civilian Climate Corps to conserve public lands and waters and strengthen resilience.
In Colorado, three of the largest wildfires in the history of the state occurred in 2020, burning more than 540,000 acres. Figure 3 shows the historical costs of wildfires and the areas burned in Colorado over the past five decades. The graph shows that wildfires have become significantly larger and costlier in the past 20 years.
Figure 3: Costs of Wildfires and Acres Burned in Colorado, 1970-2020
Climate change is expected to make forests drier and more susceptible to fires in Colorado. Figure 4 shows projections for fire danger across the state by mid-century under business-as-usual greenhouse gas emissions. In addition to a higher probability of wildfires, population growth in the wildland urban interface (WUI) has increased the likelihood of fire ignition caused by people and has made more communities vulnerable to the negative impacts of wildfires, as well as increasing costs from fires.
Figure 4: Number of Days with High Fire Danger by Mid-Century (Business-as-Usual Scenario)
The AJP also proposes funding for western drought resilience efforts through investments in water efficiency and recycling, tribal water settlements, and dam safety. In Colorado, 2020 was the third-driest water year on record, trailing only 2002 (driest) and 2018 (2nd driest). By December 2020, over 90% of the state was at least in severe drought and over 27% ranked as exceptional drought.
During the last few decades, soils have become drier in most of the state, especially during summer. In future decades, summer precipitation and runoff are likely to decrease in Colorado, and droughts are likely to become more frequent and more severe (Avery et al., 2011). Dryland crops are entirely dependent on precipitation and are more susceptible to damage by droughts. Figure 5 shows how much less precipitation Colorado can expect by 2050 without taking action to curb the effects of climate change.
Figure 5: Percent Change in Precipitation Compared to Historic Average (1980-2010) by Mid-Century (Business-as-Usual Scenario)
Drought also threatens Colorado’s outdoor tourism as less precipitation will fall as snow. The Inter-governmental Panel on Climate Change (IPCC) predicts that a 1.8° F increase in annual global temperatures will decrease snowpack by 20 percent in the Northern Hemisphere (IPCC 2007). Diminishing snowpack will shorten the length of the ski season and skiing in Colorado will become less reliable, leading to losses for the industry as the effects of climate change become more tangible (Williamson et al., 2008). Figure 6 shows the change in ski season length by mid-century under a business-as-usual greenhouse gas emissions scenario. Some areas will experience ski seasons that are up to 65 days shorter.
Figure 6: Change in Ski Season Length by Mid-Century (Business-as-Usual Scenario)
Abandoned wells and mines
Abandoned wells leak methane and create environmental and health risks by contaminating surface and ground waters. The EPA estimates there are about 1 million abandoned oil and gas wells across the country. In 2019, the Colorado Oil and Gas Conservation Commission reported 275 orphaned wells and 422 associated orphaned sites. The AJP proposes investing $16 billion towards plugging oil and gas wells and restoring and reclaiming abandoned coal, hardrock, and uranium mines. This will reduce Methane emissions and leaks from these wells while generating 250,000 union jobs.
Housing and buildings
Commercial and residential Buildings are responsible for 13% of total greenhouse gas emissions in the US. This is mainly due to fossil fuels burned for heat, the use of certain products that contain greenhouse gases, and the handling of waste.
The AJP proposes $213 billion in spending to build, modernize, and weatherize affordable housing which addresses both climate and economic justice issues. It will retrofit more than 2 million homes and commercial buildings to increase energy efficiency, with a focus on low-income communities and communities of color, and build and rehabilitate more than 500,000 homes for low- and middle-income homebuyers.
Climate and clean energy research and development
The plan calls for investing $35 billion in research and development efforts for technological solutions to address climate change. The plan also seeks to invest $15 billion in demonstration projects for “utility-scale energy storage, carbon capture and storage, hydrogen, advanced nuclear, rare earth element separations, floating offshore wind, biofuel/bioproducts, quantum computing, and electric vehicles, as well as strengthening US technological leadership in these areas in global markets.” Moreover, the plan proposes investing $46 billion of federal procurement spending toward the development of clean energy technologies to help meet the goal of achieving net-zero emissions by 2050.
Drinking water
Clean and safe drinking water should be a right for all communities. According to the Biden-Harris administration, “over the next 20 years, Colorado’s drinking water infrastructure will require $10.2 billion in additional funding.” The American Jobs Plan includes $111 billion in investments in water infrastructure, including $45 billion to eliminate lead pipes to make sure drinking water is safe. Replacing the pipes would reduce lead exposure in 400,000 schools and childcare facilities.
How is the AJP funded?
The AJP would raise the corporate income tax rate from 21% to 28%; increase the minimum tax on US corporations to 21% and calculate it on a country-by-country basis so it includes profits in tax havens; impose a 15% minimum tax on the income corporations use to report their profits to investors (“book income”); and make it harder for US companies to acquire or merge with a foreign business to avoid paying US taxes by claiming to be a foreign company.
Is this plan too costly?
As we think about the costs of climate provisions of the American Jobs Plan, we must also consider costs of inaction. Since 1980, the number of extreme weather-related events per year costing more than one billion dollars per event has increased significantly (accounting for inflation), and the total cost of these extreme events for the United States has exceeded $1.1 trillion. $890 billion of these costs have occurred in the last decade (2011-2020), and $600 billion over the last five years (2016-2020). From 2010 to 2020, Colorado has experienced 30 extreme weather events, costing the state up to $50 billion in damages.
Climate change is increasing the frequency and intensity of certain extreme weather events, pollution from burning fossil fuels threaten the health of our communities, and rising temperatures pose a threat to our economy. It is absolutely essential that we invest in climate change mitigation and adaptation now to avoid these damages, protect the health of our people, and maintain the competitive position of the United States among industrial countries.
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.
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.
You’d think we could all agree that very wealthy folks don’t need big tax breaks in order to get them to spend money. But the debate over reforming Colorado’s 529 savings program—a tax incentive to encourage saving for college which should be targeted in a more equitable way—is proving otherwise. Taxes are ripe for confusion and any time changes are being considered, some taxpayers who will lose their ability to pay less in taxes will object. That’s exactly what’s happening with HB21-1311, which would, among other provisions, change the state’s tax incentive for college savings.
Colorado’s 529 tax deduction was adopted in 1981 to help low- and middle-income families save for post-high school education. It creates a tax incentive to save for qualified higher education expenses by allowing taxpayers to subtract, dollar for dollar, any contribution to a qualified 529 savings program from their state taxable income.
The state deduction advantage is not the biggest tax benefit of saving through a 529 plan. Federally, any interest or return on investment gained on 529 investments is tax-free federally (and at the state level) when it is used for allowable purposes. This means, for example, if a family saves $60,000 for a child’s education over 15 years, any interest on those investments can be used for college expenses without being reported as income. These tax advantages make 529 investments an attractive way to help incentivize saving for the constantly rising cost of higher education.
And who is using the tax advantages from Colorado’s 529 incentivized savings program? Lots of Coloradans. In 2017 (the newest Department of Revenue data available), 55,565 taxpayers claimed the deduction. However, that same data shows the program largely benefits Colorado’s richest taxpayers—people who don’t really need an incentive to save since they can often pay cash for tuition and education costs.
Source: Bell Policy Center
However, taxpayers with adjusted gross incomes of more than $500,000—the threshold for being in the top 1% of Colorado taxpayers—make up 6.2% of Colorado taxpayers claiming the 529 deduction and have an average deduction of $28,327. And despite being such a small group of people, those deductions make up 24% of the total spent on this deduction. To reiterate: The top 1 percent of Colorado taxpayers claim 24% of this tax deduction.
A tax incentive to save for college is vastly different than a tax credit to make college tax free. The 529 deduction isn’t designed to make college costs tax-free. It’s designed to encourage people to put money away for a big and important future expense. While it’s been made confusing by those wanting to protect the current deduction, the reform contained in HB21-1311 does not change the tax advantage of saving for college through a 529 for most Coloradans, only those who are wealthy enough to put away very large amounts of savings.
Colorado’s 529 deduction was authorized to help low- and middle-income families. Imposing an annual cap on the deductibility of 529 contributions of $15,000 per beneficiary—contributions won’t be capped and will still get favorable tax treatment for investment returns and interest—will enhance the ability of this credit to meet its original objective. While the cap will mean that some of the highest income investors will lose a portion of their tax deduction, few (if any) low- and middle-income families would see any change in the deductibility of their investment.
Let’s use a practical example to show just how much a middle class family would have to save to be affected by the proposed annual cap amount. A taxpayer earning Colorado’s median annual household income of $70,000 would have to save nearly 20% of their income each year. That is an unrealistic annual college saving rate.
In fact, the 2017 data shows that the average annual deduction for taxpayers earning that median income is $3,730, a fairly healthy amount but nowhere near the cap proposed in HB21-1311. It’s hard to imagine that those taxpayers have much more room in their budgets considering that, on average, those same taxpayers devote over 30% of their income to housing. The 2017 data reveals that no group of taxpayers (other than those with incomes above $500,000) come close to the proposed cap of $15,000. 32 of the 36 states that allow income tax deductions for 529 savings have a cap.
Most states that allow income tax deductions for 529 plans have a cap
The current deduction means those with financial resources to pay cash for college expenses can do so tax-free but those who lack those cash resources are required to pay for college from taxed assets. That hardly seems fair, does it?
What makes the current rules of this deduction even more unfair is that one of the reasons college costs are growing so fast is the lack of state investments in higher education. Tuition at Colorado public universities is growing faster than all but five other states. Support for higher education ranks us second-to-last among all states.
Of course, the primary reason for lack of state support is lack of state revenue, a problem made worse by inequitable treatment of 529 deductions that allows the wealthiest to pay less. That lack of state revenue has also resulted in a bigger part of college costs being paid by students and families in Colorado. Since 2000, the portion of tuition costs paid by families has increased from 32% to 61% while the state contribution has fallen from 68% to 39%, making it harder for low- and middle-income families to afford college and other higher education opportunities for their kids.
Tax cuts passed in 1999 and 2000 directly affected the state’s ability to fund higher education, shifting responsibility for paying tuition to students and their families.
The COVID-caused recession has laid bare the many inequities that plague our public systems. And “building back better,” a slogan that’s been embraced by our legislators this year, is a goal Coloradans across the state are embracing too. Modernizing and reforming our tax code, like adding a cap to the deductibility of 529, is the path forward to make it work for more than just a few wealthy people.
The deduction cap, as well as other tax code clean-ups in HB21-1311 and HB21-1312, are common sense, data-based reforms we need now. It’s time to change the rules so that those with the assets to pay cash for college are not relieved of their responsibility to pay state taxes at the expense of students in families who struggle to afford higher education.
For FY2020-21 revenue is expected to fall by only 1.1 percent compared to the prior year. These revenue estimates have been revised upwards substantially (by $571 million) from the December forecast, driven by strong revenue collections data and upgrades from economic outlook caused by vaccine distribution and another federal stimulus.
#2: A very rosy General Fund outlook for next year’s budget (FY2021-22)
To put that drastic upward revision into perspective, in May 2020 we thought the FY2021-22 budget would have $10.3 billion in revenue, now the state economists believe it will be closer to $14.9 billion. That means there will be $5.29 billion more to spend on next year’s budget compared to the current budget. While there were significant cuts in the current budget that need to be restored and lawmakers will need to build the General Fund Reserve back up, there remains a lot for legislators to work with when writing next year’s budget.
#3: Low-wage workers are still dealing with big job losses
Broad-based economic measures look strong: national GDP has almost recovered and retail sales (along with sale tax revenue) are already back above pre-pandemic levels. As of January 2021, Colorado has regained 57 percent of the jobs we lost since the pandemic. The jobs that haven’t yet bounced back are in sectors that have lots of low-wage jobs. For example, the number of jobs paying less than $27,000 a year are still down 30 percent, while there are currently more jobs that pay above $60,000 a year than there were before the pandemic began. Not surprisingly, the Accommodations and Food Service industry still remains the hardest hit by COVID.
Unlike The federal stimulus in the wake of the pandemic was
much greater this time around than during the Great Recession. US personal income
is up a whopping 13 percent between January 2020 and January 2021. To put that
in context, two years after the Great Recession personal income was still below
pre-recession. The size of the two federal stimulus packages, which totaled
roughly $41 billion for Colorado, were about 10 percent of state GDP.
#5: Despite structural deficits, TABOR rebates could be back very soon
Revenue is bouncing back more quickly than economists expected this time last year. In fact, forecasters pointed out that were it not for our constitutionally mandated revenue cap, we would be able to take advantage of this quicker-than-expected growth and pay and pay for the still-rising cost of providing services for our growing population. Instead, we will be looking for ways to cut back our community investments.
In a typical economic downturn, it takes a few years for revenue to recover. During the Great Recession, once revenue subject to TABOR fell, it took seven years to catch back to the Referendum C cap. State economists are currently predicting it might only take two years following the COVID recession. Next’s year’s budget (FY2021-22) will be $329 million below the cap. With a cloudy crystal ball about what tax returns will look like for 2020, there’s a potential that we could be back into a TABOR rebate situation as early as next year.
