Two tax measures approved by Colorado voters this November won’t directly bite into the state budget in coming years, but will chip away at projected tax refunds, state economic forecasters said Tuesday.
Economists for both the legislative and executive branches predicted the state would take in more money than it is allowed to keep under the Taxpayers Bill of Rights, commonly known as TABOR, for the next three fiscal years. That is despite an overall decrease in projected general fund revenue for the upcoming fiscal year.
In all, the legislature’s economist estimates more than $2 billion in lower revenue over this fiscal year than without the two tax measures. But overall revenue is still expected to be billions over the cap set by TABOR.
“Those declines are significant, but ultimately won’t affect your budget because we were over the TABOR limit,” Greg Sobetski, chief economist for the legislative branch, told lawmakers Tuesday.
Overall, his office predicts Proposition 121 and Proposition 123, both approved by voters this November, will have the biggest effect. Proposition 121, which cut the state income tax from 4.55% to 4.4%, will account for $1.5 billion lost from the budget over this fiscal year and the next two. Proposition 123, which sets aside .1% of income tax for affordable housing, will divert $750 million over that time frame. This fiscal year ends June 30.
The forecast from the Office of State Planning and Budgeting, which falls under the governor’s office, likewise predicts the state’s budget constraint will be due to TABOR, not the tax cuts.
That office predicts the average single filer will receive an average of $224 this fiscal year, not including what has already been returned, and nearly $600 in the following fiscal year, which begins July 1. The refund typically comes in six tiers depending on the filers’ tax bracket.
Michael Fields, a conservative activist who backed the income tax cut, said the cut means people get to keep their money upfront, versus waiting for it to return to them via tax refund.
“Prop 121 didn’t cause any cuts to the state budget, but does make us more competitive with other states, and ensures more money is in the pockets of Coloradans permanently,” Fields said.
Overall, forecasters with the legislature still expect the national economy to grow, though they warn of the ongoing possibility of a recession as the Federal Reserve continues to raise interest rates. They also expect inflation to continue to rise, further constraining the budget as lawmakers seek to keep up with rising expenses. The ongoing Russian war against Ukraine adds further global uncertainty.
“The TABOR limit and not our revenue outlook is the relevant constraint on your budget, under our forecast,” Sobetski said. “That means the immediate risks to the budget outlook are on the expenditure side because costs are increasing for virtually everything across the economy.”
Lawmakers on the Joint Budget Committee warned after the hearing on Tuesday that those increasing constraints will lead to a tighter budget this year and in the future as the state budget races to keep pace with inflation.
“Today’s forecast is a reminder that while Colorado’s economic outlook remains strong, we are facing fiscal challenges that will test our limits and put enormous pressure on the state budget,” Committee chair Rachel Zenzinger said in a statement.
Gov. Jared Polis has previously warned of a tight budget this upcoming fiscal year, which runs from July 1 until June 30, 2024. His budget proposal also includes bolstered reserves to help the state weather any downturn. Given the new forecast, he will present an updated budget request to lawmakers at the start of the new year. There is still one more economic forecast before the General Assembly passes the budget bill in the spring.
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