Forecast Five: June 2020 Revenue Estimates
By Chris Stiffler & Elliot Goldbaum
1. Cuts are here to stay (at least for 2020-21 and likely 2021-22)
Following up on their special May revenue forecast, Legislative Council only had one extra month of data to work with. Some were hoping the regular June revenue forecast would deliver rosy revenue news that would soften the blow to communities from budget cuts passed in the 2020 state budget. The June forecast is a bit better than May, but not by much. Even with an optimistic outlook for the next two years, the state budget still won’t catch up to where we were prior to the pandemic, and that sober analysis actually understates the damage. That’s because it doesn’t account for growth in student enrollment enter our schools and more people sign up for health care through Medicaid.
2. Tax policy changes during the session helped
In May, the FY2019-20 budget – which lawmakers passed last year to fund the state through the end of June 2020 – was facing an $896 million deficit. Fortunately, due to tax policy changes from legislation ($321 million), transfers to the General Fund ($145 million), and $281 million from appropriation changes and tapping into the General Fund Reserve (bringing the reserve from 7.25% to 3.07%), the legislature transformed that deficit into a $365 million surplus.
The more than $300 million worth of revenue from tax policy changes – much of it from repealing tax giveaways to the very wealthiest Coloradans that were part of the CARES Act – helped close the gap in revenue from this current year (FY2019-20). It also added badly needed revenue for closing the $3.3 billion shortfall we learned about in the special May forecast.
3. Square root-shaped recovery
During the last two recessions in 2001 and 2009, the general fund saw a 17.3 percent decline in the following two years. Legislative Council is predicting that this recession will result in a 14.2 decline. This might seem counterintuitive given the unprecedented nature of the economic response to COVID-19.
But just like the recession looks completely different than any we’ve ever seen, the recovery probably will look different too. This recession hit far more quickly than past recessions and caused a rapid decline in economic activity. Quarterly GDP fell by 5 percent in the first quarter of 2020, and the U.S. officially entered a recession in March 2020. However, some recent indicators are pointing to a correspondingly quick economic uptick as retail sales have rebounded this past month and mortgage applications for home sales are back up. Despite this swing, economists are still predicting it will take years for the economy to fully recover. Even with an optimistic forecast in the out years, don’t expect state and local government budgets to look like they did in 2019 for a while.
4. Much higher unemployment rates in big tourist towns
Colorado lost 16,500 job in March and another 323,500 jobs in April, with the leisure and hospitality sector comprising the largest share of layoffs. In a continuing trend, the counties in Colorado that rely heavily on tourism have been the most affected. While the unemployment rate in Colorado as a whole was 11.3% (the 15th highest among the 50 states), Pitkin, Gilpin, San Miguel, Summit and Eagle counties have rates that exceed 20 percent. The most recent data show a slight halt in the amount of job losses, but the decrease in tourism is reflected in travel data: vehicle miles traveled were down 22 percent compared to April last year. Even as towns begin to reopen, it’s likely consumer activity will remain subdued.
5. We still need more revenue, and Initiative 271 is the best solution
Even during the boom years of 2017-2019, when Colorado had one of the best economies in the country, the state budget still wasn’t able to fully pay back. Today, we’re continuing to dig a deeper hole in our commitment to education. The Budget Stabilization Factor (the annual shortfall in funding for K-12) is back to its largest-ever dollar value. We’re not just cutting education either.
Initiative 271, which lowers the income tax rate for 95% of Coloradans and asks the top 5% to pay more, will generate about $2 billion that will offset a big chunk of the coming state budget cuts. If we want better roads, well-paid teachers, and the resources we need to get all of our communities through the pandemic and its aftermath, we need more revenue. Initiative 271 is the most impactful way we can get Colorado on the right track.
