Forecast Five: March 2022 Revenue Estimates
#1 – Inflation continues to squeeze family budgets
U.S. headline inflation was 7.9% in February, the highest rate in 40 years. Ongoing pandemic-induced supply chain disruptions, the war in Ukraine, and wage increases are all contributing. Transportation, energy, housing, and food are the biggest components of price increase locally. This caused Legislative Council to double their 2022 inflation estimate from 3.4% in December to 7% now. That projection will affect the next year fiscal year’s budget (FY2023-2024). Inflation is also affecting how much revenue the state can retain and invest in public services (more on that below). Inflation remaining high means lawmakers should be focused on targeting fiscal and economic policies at people who earn low and moderate incomes who are getting squeezed hardest.
#2 – $2 billion in TABOR rebates this year, but less in coming years
This year’s rebates are twice as big as any that came before, but while state economists revised 2022’s rebates up from $1.87 billion at the December forecast, rebates in the years to come are now expected to be much lower. As the risk of a recession starts to creep back up and the 7% inflation figure in 2022 increases the Ref C cap, the actual number has major policy implications elsewhere: Lawmakers are still considering plans that could make TABOR rebates fairer by being less slanted toward the wealthy. Elsewhere, advocates have filed a ballot initiative that would ask voters to forego about $800 million of their TABOR rebates and send that money into the State Education Fund.
#3 – A likely temporary situation calls for smart, one-time investments
Revenue is higher for a few reasons. First, federal fiscal stimulus propped up the economy through paycheck protection programs, unemployment insurance, and other temporary measures. Second, the pandemic recession had only minor impacts on many high-income earners, who make up a large share of the income tax base. All of this means lawmakers coming budget will have $3.2 billion more to spend than the current budget. However, many economists predict this trend is unlikely to continue, and higher deficits and inflation will probably temper the level of federal intervention in the next recession. This all means lawmakers should focus on policies that make one-time investments in people, not permanent changes based on temporary circumstances.
#4 – Colorado is nearly back to pre-pandemic jobs numbers
The state has recovered 98.4% of the jobs lost since March 2020. That’s better than the 90.4% figure nationwide. The sectors with the most jobs that haven’t yet returned to pre-pandemic levels are in the hard-hit accommodations and food service sector, which makes sense given how long the pandemic has dragged on. Despite these gains, Colorado’s unemployment rate was 4.1% in January compared to the U.S. rate of 3.8%. While that might sound bad, it’s due to Colorado’s high labor force participation rate, which is third highest among states. CFI Executive Director Kathy White talked to The Colorado Sun about that this week.
#5 – Strong wage gains for low-wage workers getting eaten by inflation
Wage growth in beginning of 2022 has favored Colorado workers who earn low wages. According to the 12-month moving average of wages, the workers in the lower 25% saw their wages rise 5.8%, followed by 4.2% increase in the next 25% of workers. Low-wage workers haven’t seen wage growth that strong since 2007. Unfortunately, that high inflation is making it so workers are spending most of those gains on more expensive goods.
