September 2023 Revenue Forecast Five: Get Primed on the Economy
1. Resilient but slowing economy
The economy is beating expectations for the first half of 2023, but it’s not growing as fast as it was in 2022. GDP is expected to slow in 2023 and 2024 as tighter monetary policy — to fight inflation — dampens demand. It seems the Federal Reserve (the Fed) has wrangled inflation without a recession, but still there are some weaker pockets in sectors that are impacted by those interest rate hikes. There was a slight uptick in Colorado’s unemployment rate in August to 3.1%. Personal income was 5.8% higher than the year earlier. Wages and salaries are up 5.7%. This is healthy growth, but not as strong as 2022. Employment gains are slowing and nominal wage growth is slowing.
2. Very Little New Money for Next Year’s Budget
We finished last year’s budget with a 17.6% reserve. This year’s budget looks right on the money with the revenue coming in compared to the appropriations for a 15.01% reserve—just $1.5 million above the 15% statutorily required level. But next year’s budget looks like it will have very little extra money. Next year’s budget is expected to have $1.2 billion more than this year’s appropriations, but once you cover caseload growth, inflation, reserve requirements, capital construction, and controlled maintenance (which basically keep the state even) there’s only $23 million in new money.
3. TABOR Rebates Still Expected Through Forecast
TABOR rebates will be $3.57 billion in FY 2022-23—that amounts to between $586 and $1,834 per tax filer. That could change if HH passes, however, where everyone would get $898 in an identical TABOR rebate. TABOR rebates are projected to be $1.7 billion in FY 2024-25, $1.77 billion in FY 2025-26, and $2.28 billion in FY 2025-26. Under current law, that means that tax filers will receive between $250-$850 depending on their income for the next several years. Much of those historically large TABOR rebates comes from historically high corporate income taxes. The pre-pandemic corporate income tax peak was $920 million. Colorado collected $2.37 billion last fiscal year and is expecting $1.88 billion this year. Corporate profits are up across the nation.
4. Housing and Energy Prices Eating into Wages
The inflation rate in Colorado was 4.7% in July (year over year). That’s still above the target rate of 2% and above the national inflation rate. Gas prices and housing costs are driving inflation, yet we expect headline inflation to decline throughout the forecast period — though not to the 2% target. Housing makes up the largest component of the inflation metric. The shift to remote work has created a higher floor for housing prices. Households are responding to inflation by spending down savings as illustrated by the personal savings rate below the historical average of 7.5%.
5. Budgeting to the TABOR Cap Doesn’t Keep Us Even
State revenue, which is restricted by TABOR to only grow by inflation plus population, is composed of taxes and cash fund revenue. When cash funds (like severance tax revenue or transportation revenue) grow faster than anticipated, it squeezes money available in the General Fund because TABOR rebates are paid from the General Fund. In addition, the costs for the government will continue to rise faster than the consumer price index — the measure used to grow the TABOR cap. Prices on things the government buys tend to grow faster than on things the average consumer buys. By restricting the government to only grow by a consumer measure of inflation, the state loses in real terms: next year’s budget will have basically no money for new community investments.
