Forecast Five: September 2018 Revenue Estimates
By: Chris Stiffler, Senior Economist
1. Colorado’s economy is firing on all cylinders
The state is seeing stronger than expected sales, individual income, and corporate income tax collections. The state’s GDP expanded by 3.0 percent in the first quarter of 2018, the fourth highest in the country, led by strong performances from the information, agriculture, and manufacturing sectors. Colorado’s unemployment rate of 2.8 percent and underemployment rate of 6.1 percent are below the national average. The tight labor market is also moving wages higher—average hourly earnings increased 2.9 percent year-over-year which was the fastest increase during the current business cycle.
2. Brace yourselves, TABOR rebates are coming
The state collected more in taxes and fees than the revenue limit allows in last year’s budget (FY2017-18), in this year’s budget (FY2018-19), and is projected to do again in next year’s budget. In this year’s budget, revenue subject to TABOR is expected to exceed the Referendum C cap by $209.4 million, resulting in a TABOR refund in tax year 2019. The first $147 million of those rebates are returned via the reimbursements for property tax exemptions for seniors and disabled veterans. The remaining $62.4 million will be returned to all taxpayers using the six-tier method, which gives a sales tax refund to taxpayers based on their income. That $62.4 million in TABOR rebates means about $15 for the average taxpayer in Colorado, and they won’t see it until they do their taxes in April 2020. To put that number in perspective, $62 million could also be used to make an investment in a Colorado child tax credit, an expanded Earned Income Tax Credit for working families, or just paying down the debt we owe to our public schools.
3. Strong budget today means lawmakers must plan for tomorrow
The outlook for the General Fund is very optimistic. The state will have $1.16 billion more for next year’s budget above the current budget. However, that doesn’t account for caseload growth (more students, more patients, more clients) or inflation. After caseloads are factored in, the state has about $500 million in new money to spend in next year’s budget. Because state economists are already predicting a slowing economy in the next few years, legislators will have to be prudent with the budget commitments they make because they can’t rely on General Fund surpluses every year.
4. A Look at School Finance
To keep up with inflation and pupil growth, total program funding for schools will have to increase $295 million next year. Inflation expectations for 2018 have changed since the March forecast from 2.9 percent to 3.2 percent. Projections for local assessed values will grow by 3.9 percent, which will cover $109 million of that $295 million caseload increase. That spending level is still $672 million below the level of spending that voters thought they would be getting when they passed Amendment 23. To put it another way, funding for K-12 is actually lower now on an inflation-adjusted basis than it was before the recession.
5. TABOR mutes new online sales tax collections
The recent U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. could allow states to require out-of-state (including online) retailers collect and remit state taxes. This could mean an additional $110 million in sales taxes for Colorado, but that won’t translate to more revenue for the state budget. Because we are already above the TABOR revenue cap, the additional sales tax from online retailers will just increase TABOR rebates. That means it can’t be used to make investments in public schools, roads and bridges, health care, or other priorities.
