Inflation, threat of recession continue to impact Colorado economic outlook
Recent ballot measures will affect revenue levels but not state budget
Members of the Colorado House of Representatives on May 9, 2022. (Pema Baldwin for Colorado Newsline)
State economic forecasters told Colorado lawmakers Tuesday that they are expecting positive — but slow — economic growth that will continue to be heavily impacted by inflation through 2023.
Analysts with the nonpartisan Legislative Council Staff expect a national 2% growth overall for 2022 and a 1.2% growth in 2023.
“Really, the No. 1 story affecting the economy has been inflation for all of 2022 and late 2021,” Jeff Stupak, a monetary policy and inflation analyst for the Legislative Council Staff, told the Joint Budget Committee on Tuesday morning.
He said he expects inflation to come out to a national average of 8.1% for 2022 and slow to 4.6% in 2023.
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Housing is the largest contributor to inflation currently even as costs fall, Stupak said, with food costs coming in second. In Denver, home prices are down 4.5% from their peak in the summer, but interest rates handed down from the Federal Reserve in hopes of easing inflation have weakened purchasing power for potential home buyers.
“If you take a hypothetical home buyer who was in the market in December 2021 with monthly payments of $1,900. Let’s say that person wasn’t able to buy a home and now they’re back on the market looking,” Stupak said. “That same person, if they wanted to keep the same down payment and monthly payment, they would have gone down from being able to afford a $550,000 home to a $413,500 home. So about a 25% decrease in their purchasing power.”
Economists with the Governor’s Office of State Planning and Budgeting agree with the forecast of a slowdown of economic growth next year.
“The labor market and consumer spending are currently outpacing previous expectations for this year, but slower consumer demand and economic growth are expected in the second half of 2023,” Bryce Cook, chief economist at OSPB, told members of the Joint Budget Committee, which comprises lawmakers from the state House and Senate and writes the state budget.
Experts are still wary of a possible near-term recession and warn of its impacts on the budget and taxpayer refunds.
“Amidst this rapid monetary policy tightening, the housing correction and declining household balance sheets, we believe that risks to the forecast remain elevated and weighted toward the downside,” Stupak said.
Impacts of measures passed in November
Two measures that Colorado voters approved in the midterm election will reduce state revenue but won’t cause revenue to dip below the Taxpayer’s Bill of Rights constitutional cap and therefore won’t necessarily affect the state budget in the near future.
TABOR puts a cap on government growth and spending, calculated with annual inflation and population rates. Anything over the TABOR limit gets refunded to taxpayers using a variety of mechanisms.
Proposition 121, which reduced the income tax rate to 4.4% from 4.55%, is expected to reduce income tax revenue by about $670 million for the current fiscal year. The Legislative Council Staff expect the revenue impact to be $440 million for the next fiscal year and more than that in subsequent years as taxable income increases.
At the same time, economists expect a TABOR surplus during the same time period.
“So the result of reducing income tax revenue is that we have a smaller TABOR surplus and a smaller TABOR refund obligation. That means less general fund revenue but also less general fund obligations for refunds, so a net zero impact on your discretionary budget so long as we do actually have a TABOR surplus,” Greg Sobetski, chief economist for the Legislative Council Staff, said.
Voters also approved Proposition 123, which sets aside up to 0.1% of taxable income each year for affordable housing programs starting next year. That will divert about $150 million in fiscal year 2022-23 and about $300 million in fiscal year 2023-24.
“With Prop 123, that money is still not available for your general budget. But that’s not a change relative to preexisting law and that money now gets moved to another fund and has to be spent from that fund for affordable housing programs,” Sobetski said.
Proposition FF, which will fund school meals, is estimated to increase taxes by $48.7 million in fiscal year 2022-23 and by $97.4 million in fiscal year 2023-24. Like the other ballot measures, it will have no impact on the discretionary budget.
The Legislative Council Staff forecast that tax revenue will be above the TABOR cap by $2.5 billion in the current fiscal year, $1.5 billion in fiscal year 2023-24 and $1.4 billion in fiscal year 2024-25.
OSPB has less optimistic predictions: $2.4 billion above the TABOR cap in the current fiscal year, $469 million in fiscal year 2023-24 and $736 million in fiscal year 2024-25. The agency expects there to be “a slight downturn for a couple of quarters in late 2023,” director Lauren Larson said.
The governor’s office will use the December economic forecast to inform an amendment to its state budget request, which it will submit in January.
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