By Chris Stiffler and Elliot Goldbaum

Note to readers: This special edition of our usual Forecast Five has been expanded due to the size and scope of the revenue reductions created by the COVID-19 pandemic.

1. Lawmakers will start work on the budget with 25 percent less than they had last year

Hundreds of thousands of workers have been laid off by their employers in the last two months, many businesses remain closed, projects and deals have been delayed, and with all of that comes a drastic reduction in state tax revenue. Revenue that provides services and pays wages in communities across the state.

To put this revenue decline into perspective, $3.3 billion is roughly one-fourth of the entire state General Fund. The General Fund is where most of the funding for state support of K-12 education, Medicaid, and colleges and universities comes from.

As hard as that number is to fathom, it’s still understating the real size of the problem. Even during the best economic times, growth in population and the cost of government services mean even level funding is effectively a cut. During this current crisis, the need for services will be much higher than it would have been if COVID-19 never existed.

2. Reduced income tax collection is driving the decline in revenue

Since income taxes are 61 percent of the General Fund, any time the state isn’t collecting as much of them it means we have less to invest in education, health care, transportation, and other priorities. Even before the current crisis, those collections haven’t been enough to adequately fund our investments.

Compounding this problem is Colorado’s constitutionally mandated single income tax rate of 4.63 percent, which hasn’t changed since the year 2000. During the last two decades, income gains for those at the very top have grown substantially, but that hasn’t translated into similar gains for education or transportation. Overall, the wealthiest Coloradans pay the lowest share of their income in state and local taxes.

3. The CARES Act helped, but contained unfair tax provisions

The CARES Act, the most important of several federal relief laws passed since March, is providing some relief to Coloradans through increased unemployment benefits, one-time cash payments, and loans to some small business owners.

However, other less-noticed provisions from that legislation are worsening the state budget picture. Legislative analysts are now predicting those changes, which overwhelmingly benefited the wealthiest people, will mean over $255 million less in revenue the state will have to make up for elsewhere in order to balance the budget.

4. The Gallagher Amendment continues to negatively affect the state budget

Revenue reductions will be worse in the future as Constitutional provisions mean less property tax revenue to support all kinds of local public services. State officials predict the residential assessment rate used to determine the amount of property tax owed by homeowners will fall to 5.88 percent from its current 7.15 percent level. This won’t be felt until the 2022 tax year and will result in $500 million less for schools. (Note: some of this is in dollars from local mill levy overrides and some will have to be backfilled by General Fund dollars)

This means even more pressure on emergency fire and medical services which rely on property taxes, many of which were already facing budget challenges created by Gallagher and TABOR. Local fire protection and other districts will have difficult decisions to make about how to cut services and balance their budgets. 

5. Bottom line: Colorado needs more revenue

Cutting $3.3 billion from the state budget will be devastating. Because Colorado was already barely keeping up with the demand for all the services our tax dollars pay for before the crisis, there isn’t much lawmakers can cut that won’t make life harder for many.

One way lawmakers can act is by passing a temporary emergency tax, which is authorized under TABOR to deal with the effects of a public health emergency like the one we’re in currently.

They can also look to tax loopholes that overwhelmingly benefit those with the highest incomes as a way to protect some services. However, there is not nearly enough wiggle room in the tax code to make up for the entire $3.3 billion needed to fill in the gap in the budget created by the pandemic.

Finally, Congress can provide aid to the state beyond the emergency funds they already authorized. New funds specifically designed to help state budgets, rather than just deal with the immediate need of fighting the virus, would go a long way towards reducing the impending budget cuts.

6. It won’t just be the General Fund that gets hit hard

Revenue the state raises when we buy things like gasoline, along with severance taxes paid on the extraction of natural resources, don’t flow to the General Fund. Instead, they go to Cash Funds, which are only authorized to pay for specific purposes. Collections for those funds are projected to fall by an additional $250 million.

Because of decreased demand (analysts said demand for fuel plummeted by more than one-third during the stay-at-home order) gasoline taxes are expected to drop substantially. 

There has also been a substantial reduction in supply due to the steep drop in oil prices because of global market shifts and the pandemic. Severance taxes, an already volatile part of Colorado’s tax code, closely track the price of oil, and analysts predict as much as a 90 percent drop compared to last year. Those taxes, almost all of which are paid on the production of oil and natural gas, help fund many important functions of state government including the Department of Natural Resources and the Department of Local Affairs.

7. The broader economy is headed for a “swoop-shaped” recession

Though there is significant disagreement among economists about how bad the coming recession will be, state legislative analysts predict a 5.6 percent contraction in 2020. That number is double the size of the Great Recession and, while there is some immediate anticipated recovery, it will be years before the state economy fully recovers.

And despite problems with the CARES Act, it provided a boost to the state’s sputtering GDP. The declines in GDP growth would have been worse without the federal stimulus payments and other provisions like expanded unemployment. The national economy would be $1.8 trillion smaller without the federal investments made in the CARES Act.

8. Some industries and geographic regions have been more affected than others

While everyone has been affected by COVID-19, unemployment is not being spread out equally among workers and communities. Workers in the hospitality, food service, and recreation industries are the most likely to have been laid off.

Mountain communities have twice the unemployment claims as those on the Front Range, with average claims at 11.5 percent along the Front Range compared to 21.6 percent in the mountains. One reason for this difference: spending from tourists is down 80 percent from the same time last year.

It’s also important to note the revenue forecast only looks at state government, and doesn’t address the drastic decline in city and county government revenue as local sales tax collections have plummeted.

9. Budget reserves won’t make much of a dent

Because of TABOR, Colorado lacks a true “rainy day” fund like the ones most states have. Instead of banking revenue over a certain amount, the state constitution requires that money be refunded. While lawmakers have set aside enough every year to build a 7.25 percent budget reserve, it won’t be nearly enough to balance the budget.

10. Uncertainty in the forecast

The biggest question mark for the state budget is the same one that’s on all of our minds: how long will the COVID-19 pandemic last? No matter how the pandemic plays out, it’s clear we’ll be feeling its economic effects for a long time.

Another source of uncertainty is the lack of hard data. The last month of actual collections calculated by the state is for March. Everything else, including April, is being modeled. The governor’s decision to follow the lead of the IRS and delay tax payments until July also makes the future murky. Because businesses have deferred tax payments, they don’t know how much less they’ll be paying.

The next revenue forecast is scheduled for June, and economists were quick to point out that we will have only a slightly clearer picture of the revenue situation, if not the pandemic.