Forecast Five: September 2019 Revenue Forecast
By Chris Stiffler
#1 – Reduction in Colorado income tax rate set for tax year 2019
The September revenue forecast is important because it shows how much money will be available for the rest of the current year’s budget. When the economy isn’t as strong as it has been in recent years, this could mean budget cuts might be necessary if revenue comes in below previous projections. When times are good, Colorado is different than almost every other state in the country because Article X, Section 20 of the state constitution (AKA TABOR) mandates that revenue over a certain amount must be refunded instead of using it to make additional investments or save it for a rainy day. While TABOR says money over the cap must be returned, it does not specify how, and the mechanisms are set by the legislature.
In this case, after all was said and done, the state’s obligation for rebating revenue over the TABOR revenue cap is $428.5 million for tax year 2019. Some of that money will be returned via the Homestead Property Tax Exemption for Seniors and Disabled Veterans. And while the $428 million in rebates is less than the June projection of $575 million, it will still be large enough to trigger a temporary reduction in the income tax rate from 4.63% to 4.5%.
#2 – Volatility created by the ad valorem credit for severance taxes is apparent
The state will collect $255 million in FY2018-19 from severance tax on minerals extracted from the ground, 95% of which is oil and gas (for more on severance tax, check out our video on the subject from earlier this year). Severance tax typically has large fluctuations because of the boom and bust nature of the energy sector and That figure is projected to fall by 43% next year to $147 million. This forecast also highlights how the state’s ad valorem tax credit (which allows energy producers to claim a property tax break) increases the level of volatility.
Because oil and gas production in Colorado was lower in 2015 and 2016, the energy producers had smaller property taxes those years, and they get a small tax credit offset to be used in later years. Since the ad valorem credit lags production by two years, that means even though 2018 is a high production year with a low Ad Valorem credit, next year producers will get a bigger tax break and the credit will offset more of the state’s severance tax collections.
#3 – Potential economic slowdown could mean we will only have enough to keep up
Colorado’s economists are predicting a slowdown in the economy. That means slower growth in revenue collections for the General Fund, which funds K-12 education, higher education, and other important priorities. After 7.2% growth in revenue last year, the General Fund is only expected to grow by 3% this year and by 2.7% the following year. For next year’s budget (FY2020-21), the General Assembly will have $833 million more to save or spend in the General Fund than what was spent in this year’s budget. While this sounds like a lot, because Colorado is a growing state, more students, prisoners, and patients, will mean most of that new money will need to be used for ongoing expenses. If appropriations grow by the historical rate of 6 percent, the General Assembly will have about $57 million more to spend or save in next year’s budget on top of the required 7.25% reserve.
While this is more good news than bad news, it’s important to remember that the state is currently underfunding education below what the state constitution mandated in Amendment 23 by hundreds of millions of dollars a year. This deficit is known as the Budget Stabilization Factor (previously known as the Negative Factor) for K-12 education. While keeping up with inflation and population growth is good, it means we won’t have much to invest in our schools so they’re funded at the level voters expected when they passed Amendment 23 in 2000.
#4 – The growth in the state’s older population is driving the cost of funding the Homestead Property Tax Exemption
Older Coloradans who meet certain qualifications are eligible for a tax break known as the Homestead Property Tax Exemption (read our paper from earlier this year on the inequities of the exemption if you haven’t already). The cost of this tax expenditure has three components: home value appreciation, the statewide residential assessment rate set by Gallagher, and the amount of people aged 65 and older who qualify. Since the property tax break only impacts the first $200,000 of home value, and since 94% of filers who claim the exemption have houses worth more than $200,000, the growth in housing prices doesn’t really impact the cost of the exemption. The drop in the portion of housing property subject to the residential assessment rate also lowers the cost. The number of older Coloradans is expected to grow by 4.3% over the forecast period.
#5 – Big swings in revenue expectations since March come from federal tax code changes.
The 2019 March revenue forecast projected a $65 million TABOR rebate this year. The June estimate saw that figure jump to $575 million. Now the actual figure came in at $428 million. Why the big swings in projections? Much of it can be explained by changes in behavior due to the federal tax code changes that took effect in 2018. In March, economists had very little data on income tax collections for tax year 2018, so they had to make assumptions on behavior. Because the federal tax code changes expanded Colorado’s tax base, the state collected more in income tax than projected. But because TABOR prevents us from investing this increase in revenue, even during very good economic times, this doesn’t mean more money available for schools and roads, it only means bigger rebates.
