Forecast Five: March 2018 Revenue Estimates
- TABOR Rebates Projected for Coming Budget Year
Thanks to stronger economic growth, Legislative Council now projects that the state will exceed the revenue limit by $8.4 million and be required to give TABOR rebates in FY2018-19, the budget which lawmakers are currently building. TABOR rebates are also projected to be $156.4 million in FY2019-20. This is a large change from the December forecast when there was still several million dollars of room below the revenue cap. Those TABOR rebates will not come in the form of refund checks to taxpayers, but rather fund a property tax break for seniors and disabled veterans known as the Homestead Exemption.
- More Revenue Uncertainty Than Usual
Legislative Council warned legislators that there is a great deal of uncertainty that could affect the forecasted figures, resulting in a larger margin of error that is typically the case. These factors include shifts in taxpayer behavior before and after the passage of the Tax Cut and Jobs Act, and several unknowns stemming from changes in the federal tax code.
As a result of TCJA, Legislative Council estimates the state will see increased revenue of $196.5 million in FY 2018-2019, and $329.8 million in increases in FY 2019-2020. However, new analysis from the Institute on Taxation and Economic Policy suggests the revenue increase next year could be closer to $28 million.
Because these are essentially estimates on estimates, and a lot remains unknown about taxpayer behavior under the new federal tax code, legislators should proceed with an abundance of caution with these numbers.
- A Booming Economy, For Now
The forecasts suggest that Colorado’s strong economic growth is expected to continue, at least in the near term. Employment growth and other business indicators appear favorable, though both Legislative Council and OSPB pointed out that higher costs of living, such as housing, and a tighter labor market could damper or restrict continued economic growth. Colorado has continued to see some of the sharpest housing price increases in the country, though those increases and new housing inventory have been inconsistent across the state. As well, both forecasts flagged the possibility that inflationary pressures and national economic factors could pose additional risk in out years.
Oil production in Colorado has spiked to record levels, which is driving at least part of the increased revenue estimates through severance tax collections, but oil and gas employment has not yet fully recovered from the 2015 downtown. Wage growth in Colorado continued its moderate increase and resumed outperforming national wage growth. However, wage growth continues to be dampened by demographic factors, such as higher-wage employees aging out of the work force.
The state’s economic indicators are pointing in the right direction, but as we’ve seen in the past, and as one state economist warned, “that could turn on a dime, frankly.”
- A Portion of the Revenue Boon Might be One-Time Money
General Fund revenue expectations were increased by $297 million from December because of stronger economic activity. This means lawmakers will have $1.23 billion more to invest or save than was budgeted for last year. This is great news for legislators as it provides more opportunity to get out of the state’s funding hole and make the public investments that help communities thrive – or to save for when economic conditions inevitably change. The governor called for budget-makers to use to extra revenue for transportation, education, and boosting the General Fund reserve. The governor’s office also cautioned that some of the money this year might only be a one-time thing. Budget-makers should also be aware that obligations from the General Fund to pay for transportation projects ramp in the next few years because of SB17-267.
- The TABOR Rebate Situation Impacts Legislation This Session
For legislators trying to adjust tax credits or raise revenue, the March revenue forecast is something of a game changer. Now that the state is projecting TABOR rebates, there are implications for what type of changes legislators can make during the current legislative session (look to the Mesa County v. State ruling). Legislation that changes tax policy that results in net new revenue would likely necessitate voter-approval and fee increase proposals will result in larger TABOR rebates.
