The Future of Colorado’s Budget
By Charlie Brown and Phyllis Resnick, Colorado Futures Center
It probably wouldn’t surprise any Coloradan to learn that the state has fiscal concerns on the horizon. At the Colorado Futures Center at Colorado State University, we semi-annually assess the future sustainability of state finances. Findings from our most recent update, released in December, paint a picture of our state’s future that requires attention today.
This complex story is difficult to share in an hour, much less a short blog post, but here is a quick take on the current situation. The good news is that the state’s fiscal future is slightly more sustainable than when we released this study in August 2011 due to three echoes of the recession: higher-than-forecast state revenues, low inflation and a lower forecast of population growth. Because of the convergence of these three best-case scenarios, the $3 billion structural gap we originally forecast for some time around 2025 will not materialize until just after 2030.
While these echoes of the recession slowed growth of the state’s long-term structural budget gap, our analysis shows there are still some real threats to the state’s fiscal sustainability over the coming decades. Paramount among these is the structure of the current state sales tax, a system designed in the 1950s when we still had a consumption economy based on goods. Today, however, Americans buy more services than goods and services generally aren’t taxed. And, what goods we do buy are more frequently purchased online, where sales are inconsistently taxed if they are taxed at all. In addition, our state is getting older, which will result in both slowing revenue growth and increasing healthcare costs as the Baby Boomers reach retirement age and beyond. All of those trends will be a drag on the state’s ability to generate enough revenue to meet its expenses over the long-term.
The trends we outlined above—shifting consumer purchasing habits and an aging state population—are what could be considered external inputs that impact revenue growth; they aren’t specifically a result of state policies. The next issue is a complex state policy that is having a very real impact on the state’s ability to pay for services. Legislation enacted in 2009 led to hospitals deciding to assess themselves a “Hospital Provider Fee” to leverage federal funds to expand Medicaid. Hospitals are okay with the fee with the idea being that expanded Medicaid roles will expand the patient base they serve. We’re going to skip a few steps here, but the bottom line is that the hospital fee will generate enough new revenue that it is forecast to force state revenue to exceed the Taxpayer’s Bill of Rights (TABOR) limit in the year 2017. Hitting the TABOR limit will trigger taxpayer refunds from the General Fund, starting modestly in tax year 2017 and growing to $900 million by 2030. Since the General Fund is the designated mechanism for paying TABOR refunds—absent any other structural changes—the state will be cutting programs and remitting TABOR refunds simultaneously.
In Colorado, our work is laid out for us. Our state must take action to look forward and make structural changes—among them removing the hospital provider fee revenue from the TABOR limit and reforming Colorado tax policy reform to better match our tax code with the emerging economy. The time to start making changes is now; we no longer have time to wait.
Additional materials from the study are available on the Colorado Futures Center website.
Phyllis Resnick