Colorado budget writers may be headed back to the drawing board.
Slower population growth and rising fee revenue could trigger upward of $300 million more state taxpayer refunds than expected in the current budget year, under economic forecasts presented to the Joint Budget Committee on Friday.
The latest forecasts leave top lawmakers well short of what they expected to be able to spend in next year’s budget, with less than a week left to finalize the 2024-25 spending plan before it has to be submitted to the General Assembly for consideration.
Under Colorado Legislative Council Staff estimates, the budget committee could need to cut or reject as much as $267 million in spending requests to balance the budget for next fiscal year, which starts July 1. Even under a more optimistic scenario presented by the governor’s Office of State Planning and Budgeting, lawmakers could still face a gap of $150 million or more without major budget balancing maneuvers.
State economists present revenue forecasts to the legislature every 3 months. But the March update takes on special importance, because the estimates determine how much the legislature has to work with when it adopts the annual budget, known as the long bill.
Here’s some key takeaways from the forecasts.
For months, lawmakers and governor’s office officials have insisted this year would represent a return to a “normal” Colorado budget after years of booming growth coming out of the pandemic.
That return to normal could be even more challenging than expected – but not because of any economic turbulence.
Instead, the budget will be squeezed primarily by two seemingly minor factors.
One, U.S. Census estimates now say the state’s population grew by less than the state’s demographer had anticipated. That means the state revenue cap under the Taxpayer’s Bill of Rights, which tracks inflation and population growth, can only increase by 5.8% this budget year rather than the 6.1% legislative forecasters were expecting.
Two, the state is now expected to collect $185 million more in road usage fees and retail delivery charges this year than last, under the legislative staff estimates.
Taken together, the two forecast changes mean state lawmakers could have to issue larger than expected TABOR refunds to Coloradans next year, leaving the state with fewer General Fund tax dollars to spend on public services.
Under the legislative staff forecast, Colorado would have a $1.8 billion TABOR surplus this budget year, while the governor’s office expects $2 billion in excess revenue. That would translate to a nearly $400 refund for the average single-filer in 2025 under the current refund formula, which is tiered based on income. (This year, all single-filers received $800.)
Reductions in this year’s cap spell trouble for the 2024-25 spending plan, too.
The JBC has pushed to increase spending significantly on Medicaid providers and state workers to combat staffing crises that continue to linger after the coronavirus pandemic. And lawmakers have major decisions yet to come before the long bill is introduced in the House on Friday – like how much to increase spending on higher education.
Economic forecasters expect the state’s economy to continue to grow – just more slowly than in years past.
Wages have been rising faster than inflation in recent months, a positive change from 2022 and early 2023, when the cost of goods and housing more than offset the pay increases workers received. Real disposable income grew 4.2% after adjusting for inflation, according to the governor’s office forecast. That’s the highest mark since 2020, after Coloradans’ spending power fell 6% in 2022 due to high inflation.
Wage growth has led to strong consumer spending, even as inflation fell to 3.5% year-over-year, forecasters said.
Nonetheless, unemployment ticked up to 3.4%. And while forecasters don’t expect an imminent recession, governor’s office analysts said it may feel like one in some industries over the next year.
The governor’s office expects 2.2% GDP growth in 2024, slowing to 1.5% in 2025.
