Five Takeaways from the December Revenue Forecast: One Month Later and $100 Million Shorter

By Chris Stiffler

CFI Economist
The legislature must find an additional $100 million in cuts based on today’s revenue estimates. When the governor introduced his budget in November, we learned revenue was $500 million short of continuing current commitments, now it appears to be $600 million short.

Below are five takeaways from the December revenue estimates that will hopefully clarify the budget shortfall legislators must deal with when they convene in January.

Large cuts expected in FY 2017-2018 

There’s not enough new revenue for next year’s budget to cover the cost of maintaining current obligations for schools, health care and transportation. Something will have to give — school funding, Medicaid spending, reserve balances, taxpayer rebates or transportation funding will have to be reduced by about $600 million in order to comply with the constitutional mandate for a balanced budget.

Residential property tax reductions exacerbate the General Fund shortfall

Constitutional tax code provisions require a reduction in the amount of residential property subject to local property taxes. This constitutionally required reduction in residential property tax collections means $178 million more in state funding is needed to fund schools. Colorado’s Constitution requires the state maintain a consistent ratio between the share of property taxes collected from homes and the share of property taxes collected from commercial property. Because housing values grew faster than the value of other property, the portion of the value of homes that is taxed (called the residential assessment rate) must fall. It’s expected to decrease from the current rate of 7.96 percent to 6.85 percent in 2017.

This reduction is particularly challenging since the rate is already lower than it should be to meet constitutional requirements. The residential assessment rate should have been set at 9.13 percent in 2013 and 2014 and 8.24 percent for 2015 and 2016. However, the rate can’t be raised by the legislature without a vote of the people. Unfortunately, for all the priorities funded from the state General Fund, the legislature can lower the assessment rate but can’t increase it. So, basically, schools can’t benefit from the increase in home values, and instead this places a larger burden on the General Fund to backfill school funding as local property tax bases are eroded.

More cuts to schools expected next year

Schools will require $381 million from the General Fund in FY 2017-18 to maintain the current per pupil funding amount. Of this $381 million obligation from the General Fund, $178 million is the result of changes in expectations for the local share because of the falling residential assessment rate, explained above. Given the projected General Fund collections, schools should expect more cuts.

Rebounding cash funds driving the TABOR rebates

TABOR sets a limit on the amount of taxes and fees the state can collect in a given year, with the exception of fees that are “enterprised” and not counted against the limit. If tax and fee revenue exceeds the cap, then rebates must be paid to taxpayers. What further complicates budgeting is when increased fee revenue results in rebates. This happens because the rebates are not paid from the growing cash fund revenue but from the General Fund revenue that is not growing as fast.

This situation is contributing to the challenges for next year’s budget as rebounding severance taxes (counted as fees for TABOR purposes) and hospital provider fee dollars will force larger TABOR rebates. Further increasing the demand for General Fund dollars, TABOR rebates projected for FY 2017-18 are 2.5 percent of the General Fund, which is less than the 3 percent of the General Fund level that would eliminate automatic transfers to roads and capital construction.

TABOR Rebates in 2017: Feast for some, famine for most

Lawmakers will most likely reduce spending for roads and schools because they are obligated to return $256.5 million to taxpayers in the form of TABOR rebates. Because the TABOR rebate amount is large enough, most of the money will, without a change in law, be returned via a reduction in the state income tax rate. These rebates will provide the greatest benefits to the wealthiest Coloradans and very little benefit to low-income Coloradans. In fact, the reduction in the income tax rate will mean more than $500 to Coloradans at the upper end while only about $14 for nearly the entire bottom half of earners in the state.