Forecast Five: December Revenue Estimates
1. Legislators will have (some) new money to spend
The General Assembly will have $1.22 billion (about 9.6 percent) more to spend or save in the upcoming budget than was allocated in the budget passed by lawmakers this year. That’s not all new money, though. Caseload growth in Medicaid, increase in K-12 student headcount, and inflation must come first. Keep in mind this extra budget flexibility probably won’t last as state economists expect the economy to slow in coming years.
2. TABOR could still trigger a temporary income tax rate reduction
The state is projected to collect $380 million more than the TABOR revenue cap allows in the current budget year (FY 2018-19). This money will be returned via a property tax break for seniors and via the “six-tier sales tax refund” mechanism (the average Colorado taxpayer will get back about $60 when they file their taxes in 2021). If the revenue above the TABOR cap is $16.5 million higher, well within the forecast margin of error, it will trigger a temporary reduction in the income tax rate from the current 4.63 percent rate to 4.5 percent. The income tax rate reduction would give $1,100 to a millionaire and about $6 to a minimum wage worker.
3. The Gallagher Amendment will continue to reduce revenue for local services…
The residential assessment rate is expected to decrease from 7.2 percent to 6.78 percent for 2019 – a 5.8% drop in the assessment rate on homes. The impact of this reduction will be felt differently across the state. For instance, the property tax base for fire districts, libraries, and partially for schools, counties and cities grew 11.8 percent in Metro Denver but only by 2.3 percent in Pueblo and 1.7 percent in the San Luis Valley. The reduction in the assessment rate will mean fewer dollars for local services in in areas of the state that haven’t experienced the same housing growth seen in the Front Range.
4. …But that could end up meaning more state support for schools
Because Gallagher caps residential property taxes at 45 percent of statewide collections, the rate used to determine the value of residential property must be lowered if home values outpace the growth in value of non-residential property (e.g. real estate like shopping centers and office buildings). But Because of strong growth in oil and gas property values, the state will be able to reap more of the revenue generated by Colorado’s strong housing market. In fact, the growth in local money for schools can fully cover student enrollment growth and inflation for FY 2019-20 – this extra flexibility could be used to pay down some of the $672 million negative factor owed to schools.
5. Global issues and tariffs are impacting Colorado’s economy – particularly the agricultural industry
Though Colorado remains at a historically low unemployment rate of 3.2 percent (still below the national average of 3.7 percent), job markets are not even across the state. For example, the 5 percent unemployment rate in Pueblo is still high compared to Boulder and Fort Collins, which both stand at 2.9 percent. Additionally, while business activity in Colorado remains strong thanks to high consumer confidence and solid industrial production, rising interest rates will dampen activity in the next several years. Finally, agriculture has been the sector of the state’s economy most impacted by global issues, including the tariffs imposed by the Trump administration and the ongoing trade war with China. So why does Chinese trade policy affect Colorado farmers? If China isn’t buying high-tariff soybeans produced by American farmers, there will be ripple effects on farmers who grow corn – one of Colorado’s biggest cash crops. The more trade uncertainty in the global economy, the harder it will be for local agricultural producers to plan for the future.
