Colorado's wage growth and overall economic output continue to exceed expectations as inflation eases, state economists told lawmakers at the Capitol on Friday. But pressures from high housing costs and other factors still pose significant “downside risks,” they warned, and quirks in the state's constitutionally mandated budget limits could put pressure on state social spending.
March updates to the state's official economic forecasts were presented to the Legislature's powerful Joint Budget Committee, which will play a key role in shaping Colorado's roughly $40 billion budget in the coming weeks. Two different quarterly forecasts are prepared by analysts on the staff of the Legislative Council, an arm of the General Assembly, and the Governor's Office of State Planning and Budgeting.
Both forecasters revised up some of their key estimates from earlier numbers in December and projected that Colorado's gross domestic product and state tax revenues will be higher than expected in 2024. However, because Colorado's tax revenues are strictly limited by a 1992 constitutional amendment, the taxpayer's Bill of Rights means Coloradans are projected to receive significant refunds in each of the next three years.
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The combination of the TABOR limits and higher-than-expected revenue from the state's cash funds — which collect fees and allocate them for a specific purpose, such as transportation — could lead to less room in the state's general fund, much of which is earmarked for education, health care and other social services.
“When we have increasing cash fund revenues subject to TABOR, we have an increased general fund obligation for TABOR refunds that limits the fiscal space available,” LCS chief economist Greg Sobetski told lawmakers.
A slide from a March 15, 2024, presentation by legislative staff to the Joint Budget Committee shows how higher-than-expected tax revenues due to limits set in the Taxpayer's Bill of Rights could depress general spending on social services. (Legislative Council staff)
In a news release, Democratic lawmakers said the forecasts show a “strong economy” but a “constrained state budget.”
“The March economic forecast represents the final data before we finalize this year’s budget,” said state Sen. Rachel Zenzinger, an Arvada Democrat and JBC vice chair. “Today’s cautiously optimistic outlook reaffirms our budget work to date: We want to be bold to support essential services by fully funding schools and health care provider plans, but also be responsible and limit spending so we remain well prepared for the future.”
The excess revenue under TABOR can be refunded through various mechanisms. For the second consecutive fiscal year, Coloradans will receive “flat” reimbursement checks of $800 each this year instead of staggered payments based on income level, under a plan that lawmakers passed in a special legislative session last year.
Although neither forecast suggests that an economic downturn is likely in the near term, the OPSB still estimates the probability of a recession next year at 30%. Consistent with national trends, Colorado's inflation rate continues to decline while the unemployment rate has increased slightly as higher interest rates have dampened job growth. Both forecasts noted the upward pressure on the cost of living caused by Colorado's housing shortage and looked ahead to possible federal interest rate cuts in mid-2024 that could help mitigate “housing inflation” by boosting home construction.
“Colorado continues to lead the nation with strong economic growth and unemployment below the national average,” Gov. Jared Polis, a Democrat, said in a statement Friday. “Our focus on further strengthening our workforce and saving Coloradans money on housing, education, health care and more will drive an even more dynamic economy while protecting our reserves and the state’s financial strength.”
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