A new income tax rate cut will be triggered in Colorado in three of the next four years, state economists told lawmakers this past Thursday.
Taxpayers will see their income tax rate fall from 4.4% to 4.25% in 2024, and then to 4.36% in 2026 and 4.29% in 2027, according to the governor’s Office of State Planning and Budget and the nonpartisan Legislative Council Staff. That is because the state expects to receive revenue over the constitutional limit set by the Taxpayer’s Bill of Rights. The limit is determined by inflation and population growth.
In May, the Legislature passed a bill that allows income tax cuts to be used as one mechanism to return excess revenue to taxpayers.
New family affordability tax credits and earned income tax credits will also be triggered in the next few years.
But the various tax cuts and credits lawmakers signed off on recently, combined with a cooling economy, could create a tight budget scenario for the Legislature’s Joint Budget Committee to operate in next year.
The LCS forecast anticipates general fund revenue at $16.93 billion in fiscal year 2024 and $17.96 billion in fiscal year 2025. OSPB predicts $17.2 billion and $17.6 billion for those same years, a decrease from its June forecast.
“Slowing inflation in future years, as well as constrained household finances, will impact sales tax revenue, which is expected to be sluggish in the current year. A slowing labor market will impact income tax revenue,” Emily Dohrman, with the LCS, said.
She said there should still be a TABOR surplus, and therefore an obligation to return money to taxpayers, within the multi-year forecast period, but it will be smaller than in recent years. The surplus was 7.1% of projected revenue for fiscal year 2024, for example, but just 1.9% of the forecast for fiscal year 2025. If revenue falls under the TABOR cap, lawmakers might have to reduce general fund spending.
Economists shared that the state is about $314 million short of its required 15% reserve for the current budget cycle. That is partly due to a $154 million overspend for the state Department of Health Care Policy and Financing, which oversees Medicaid.
“This is not unique to Colorado. This is something we’re seeing nationwide of higher utilization of Medicaid services,” OSPB director Mark Ferrandino said.
But the number, which could grow if that Medicaid trend continues among an older and less-healthy population, worried state lawmakers.
“To me, this department, the lack of accountability, the lack of transparency – it just feels like they’re imploding, and I think our budget problem is just going to get that much worse,” Sen. Barbara Kirkmeyer, a Brighton Republican, said of HCPF. “I’m wondering if there is a plan.”
As lawmakers look to plan the next budget, they are likely facing a $900 million hole if they are to maintain the 15% reserve.
This was the final quarterly economic forecast to the JBC ahead of the deadline for Gov. Jared Polis’ 2025-206 budget proposal, which is due Nov. 1. The Colorado fiscal year starts on July 1.
“While this forecast shows us returning to more normal budget conditions, we will work hard to protect funding for crucial services our communities depend on,” Rep. Emily Sirota, a Denver Democrat, said in a statement. “The Joint Budget Committee is no stranger to making tough decisions on how we will allocate state dollars, and we understand that Coloradans are relying on us to implement a more equitable school finance formula, support universal preschool, health care, emergency response, and much more.”
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