As Colorado enacts significant changes to its tax policy, economic forecasters are predicting a potential shift in the state's revenue flow. Although the state is expected to hit the constitutional cap on revenue collections in the coming years, there are concerns about falling below the cap for the first time in half a decade during the adjustment period. The TABOR cap, set by the Taxpayer’s Bill of Rights, grows based on population growth and inflation, and any money collected over it must be refunded to taxpayers.
New Tax Credits Impacting Budget Growth
Lawmakers have passed more than 30 bills during the recent legislative session that either adjust or create new tax credits. These credits include expansions to the earned income tax credit for low-income Coloradans, senior housing tax credits, and a potential new credit for families if certain economic triggers are met. While these credits are expected to reroute hundreds of millions of dollars, if not more than a billion, per year from state coffers, they ultimately benefit the wallets of Coloradans.
In the next fiscal year starting July 1, these tax credits could potentially push state revenues below the TABOR cap. Economists from the legislative branch and governor’s office anticipate that revenues will remain above the cap. However, there is a warning of a margin of error in forecasting that could result in revenue falling below the cap, particularly from Sobetski's office. Legislative forecasters project $1.4 billion in revenue collected above the cap this fiscal year, with an expected decrease to about $328 million next fiscal year before bouncing back to over $1 billion for the following fiscal year.
Optimistic vs. Pessimistic Outlook
Forecasts vary between the Legislative Council Staff and the governor’s office, with the former expecting around $700 million needing to be refunded for the next fiscal year. Exact TABOR refunds for the upcoming tax year will only be determined months later and depend on future economic forecasts.
Despite expectations of continued economic growth and lower recession risks in the short term, high interest rates are hampering economic activity. State economists had initially anticipated interest rate cuts from the Federal Reserve this year, but the lack of such cuts has led to a downward revision in state economic growth expectations. The delay in expected interest rate cuts has slowed down the acceleration of interest rates, impacting the state's economic outlook.