Declining Colorado birth rate could impact state budget in coming decades, researchers say

Colorado is experiencing the third largest reduction in fertility rates in the country, a trend that could impact how the state crafts its budget in upcoming years to anticipate a smaller worker pool and lower tax revenue, according to a recently released Pew Charitable Trusts research brief.

Colorado’s birth rate has been trending down since 2005, and declining at a more rapid pace than the national average since 2011. The state has experienced a 25.1% decline in general fertility rate when comparing 2020 numbers to the annual average between 2001 and 2010, the third largest reduction in the country behind Arizona and Utah.

That lower birth rate could have both short-term and long-term consequences.

“Many state budgets, for the most part, are in good shape. They received substantial federal aid over the course of the pandemic. But there are a number of pressures that could pose difficulties in the coming decades, and fertility is one of them,” Mike Maciag, an officer with Pew’s state fiscal health project and author of the report, told Newsline in an interview.

“In some cases, states may be enjoying cost savings from low fertility now, but they could potentially end up with a smaller working age population over the long term if they are unable to attract residents from elsewhere. It is important for states to take a long term view of their budgets,”

The research brief notes that states that rely heavily on taxes sensitive to population decline, such as income and sales taxes, are especially vulnerable. The largest share of Colorado’s revenue comes from income tax, including over $8.6 billion in fiscal year 2019-20.

The governor’s Office of State Planning and Budgeting predicted in a March economic outlook that the declining birth rate — which has already affected expected pupil counts — will impact the labor force in five to six years.

A slowing population growth could also affect the allowable revenue growth cap in Colorado that is set by the Taxpayer’s Bill of Rights. That cap, and therefore how much the state government can raise and spend, is determined by a combination of inflation and population growth.

“These are partially based on population, so when that doesn’t grow, it effectively limits how much tax revenue states can raise. Colorado is one of the prime examples of this,” Maciag said. “If the budget is pushing up against that limit and the population is not growing as fast as it once was, this has a direct impact.”

Gov. Jared Polis’ recent budget request does not mention the declining birth rate. Instead, it references a population increase — 86% in the population of people 65 years and older and 33% in the 18 to 64 year old population — to justify spending more on Adult Protective Services.

A 2017 State Demography Office study into the declining fertility rate notes that Colorado’s situation is not unique, and that labor force growth is expected to slow on a national level as well, which will lead to more competition for the pool of skilled workers. It notes that the fertility slowdown forecast is important for public finance planning.

Maciag said that if states like Colorado focus on attracting new residents from out of state, they might mitigate some of the state budgeting consequences from a falling fertility rate.