3/23/2018 State Budget Outlook Kate Watkins Chief Economist Legislative Council Staff Colorado School Finance Project March 23, 2018 State Budget Outlook • Why is the near-term budget outlook so strong? • Why are the risks to the forecast so high? • What is the longer-term outlook? 2 1
3/23/2018 Economic Summary The near-term outlook is bright • Wages are rising as the labor market tightens • Stronger global demand is contributing to inflationary pressures • Business investment and profits are elevated • Consumer spending continues to rise Risks remain elevated • Risk of overheating in the late stages of expansion • Rising interest rates will shift investor behavior • Geopolitical risk and policy uncertainty cloud the outlook 3 Sales tax and income tax collections have accelerated in FY 2017-18. Year-over-Year Percent Change in State Tax Collections 20% 1 Wage Withholding 0.9 Sales Tax 15% 0.8 10% 0.7 0.6 5% 0.5 0% 0.4 -5% 0.3 Oil and commodity 0.2 -10% price collapse 0.1 -15% 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: Colorado Office of the State Controller. Data are seasonally adjusted by Legislative Council Staff and shown as three-month moving averages to further smooth calendar effects and unusual collections patterns. 4 2
3/23/2018 Risk #1: TCJA-related distortions are difficult to disentangle from underlying economic growth. Change in General Fund Revenue by Major source July 2017 through February 2018 (First 8 Months) over the same period last year Dollars in Millions Individual Income Withholding $305.1 +8.3% Partially attributable Estimated Payments $213.0 +29.0% to pre-paying state Refunds $47.6 +11.7% income tax; May also Cash with Returns reflect higher capital $32.3 +13.0% gains Corporate Income Corporate Income $77.3 +32.6% Sales Sales +7.0% $128.3 Oil & gas production; Use Use $30.3 +17.8% HB10-1193: Out-of-state retailers must notify customers of use tax owed Source: Colorado Office of the State Controller. February 2018 data are preliminary and provided by the Department of Revenue. 5 The LCS revenue forecast was revised upward significantly on stronger collections to date and a stronger economic outlook. Change Relative to December Gross General Fund Revenue Billions of Dollars + $378M $13 + $297M $12 + $243M $11 $10 $9 $8 $7 $6 $5 $4 Source: Colorado Office of the State Controller and Legislative Council Staff March 2018 forecast. Amounts include estimated impacts of the federal Tax Cuts and Jobs Act. 6 3
3/23/2018 OSPB and LCS General Fund revenue forecasts differ, yet budget outlooks converge in FY 2018-19. Gross General Fund Revenue Above/(Below) LCS Forecast $14 Billions of Dollars +$288.0M $13 OSPB (Blue Dots) +$218.9M Legislative Council (Grey Bars) -$231.2M $12 $11 $10 $9 $8 $7 $6 $5 $4 Source: Colorado Office of the State Controller and Legislative Council Staff and OSPB March 2018 forecasts. Amounts include estimated impacts of the federal Tax Cuts and Jobs Act. 7 Risk #2: State revenue impacts of the federal Tax Cuts and Jobs Act remain uncertain. Dollars in Millions New revenue will flow to $832.1 $877.9 both the General Fund and State Education Fund $748.4 $691.9 $591.5 $526.9 $434.4 $329.8 $196.5 $35.2 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 Source: Legislative Council Staff estimates. Estimates remain preliminary and subject to change. 8 4
3/23/2018 Tax Bill Provisions with the Largest Colorado Impacts The federal tax bill broadens the tax base and lowers federal tax rates. For the state of Colorado, the bill broadens the tax base, while rates remain constant. Individual Income Tax Roughly doubles the standard deduction • Modifies several itemized deductions • Repeals the deduction for personal exemptions • Businesses Income Tax Allows a 20% deduction for pass-through entities • Allows immediate expensing for depreciation of property • Limits interest and net operating loss deductions • For more information, see: http://leg.colorado.gov/publications/federal-tax-legislation-interested-persons-memo 9 How Are Individual Income Taxes Calculated? Federal “Above-the-Line” Adjusted Gross Income - = Deductions (All sources of income) Gross Income Federal Adjusted Personal - Standard or - = Taxable Income Gross Income Exemptions Itemized Deductions Tax Federal Tax Net Federal - × = Rates Taxable Income Credits Taxes Owed At the federal level, the federal tax bill broadens the tax base and lowers tax rates. On net, these changes lower taxes owed by most taxpayers and lower federal tax revenue. 5
3/23/2018 How Are Individual Income Taxes Calculated? Federal Adjusted Gross Income “Above-the-Line” - = Deductions Gross Income (All sources of income) Federal Adjusted Personal - - Standard or = Taxable Income Exemptions Gross Income Itemized Deductions Federal Tax Tax Net Federal - Taxable Income × = Rates Credits Taxes Owed Colorado = Colorado Federal State State - + Taxable Income Taxable Income Additions Subtractions Colorado 4.63% State Net Colorado - = × Tax Credits Taxes Owed Taxable Income Tax Rate FY 2017-18 General Fund Reserve Millions of Dollars December 2017 March 2018 Expectations Expectations $171.8 M Above Required Reserve $900 $900 8.1% Reserve $34.7 M Above $800 $800 6.8% Reserve $700 $700 6.5% Reserve $681.7M $675.4M $600 $600 Requirement $500 $500 $400 $400 $300 $300 $200 $200 $100 $100 $0 $0 Source: Legislative Council Staff forecasts based on current law. Amounts include estimated impacts of the federal Tax Cuts and Jobs Act. 12 6
3/23/2018 FY 2018-19 Budget Outlook General Funds available above FY 2017-18 appropriations to spend, save, or return to taxpayers Millions of Dollars March 2018 December 2017 Expectations Expectations $1,291.6 million $1,200 $1,200 Increased revenue expectations +$328.9M and FY 2017-18 budget decisions $962.7 million $1,000 $1,000 $800 $800 $600 $600 $400 $400 $200 $200 $0 $0 Source: Legislative Council Staff forecasts based on current law. Amounts include estimated impacts of the federal Tax Cuts and Jobs Act. 13 March 2018 TABOR Outlook Revenue Subject to TABOR Dollars in Billions TABOR Surplus $156.4M $15 $8.4M $14 $13 $12 Referendum C Cap $11 $10 TABOR Limit Base $9 Referendum C $8 Five-Year Timeout Period $7 Source: Colorado Office of the State Controller and Legislative Council Staff March 2018 forecast. 14 7
3/23/2018 TABOR Refund Budget Impacts General Fund …go toward reimbursements to local governments Set-Asides… for property tax exemptions in the next fiscal year* FY 2019-20 FY 2018-19 $8.4 million FY 2018-19 surplus $8.4 million + $21.8 million FY 2014-15 remaining surplus $30.3 million toward reimbursements FY 2019-20 FY 2020-21 $156.4 million $156.4 million toward reimbursements *Pursuant to SB17-267, the TABOR refund is first allocated toward reimbursements to local governments for the senior homestead and disabled veteran property tax exemption. Local government reimbursements are not reduced. Instead, TABOR surplus revenue is set aside to pay for these reimbursements in the following budget year. 15 Risks to the revenue forecast are elevated 1. Unusual shifts in taxpayer behavior in recent months 2. Federal Tax Cuts and Jobs Act impacts remain uncertain 3. Late stages of the economic expansion, more susceptible to shocks 16 8
3/23/2018 Risk #3: How long can the expansion last? Unemployment Rate 10% January 2018 8% 6% US: 4.1% 4% CO: 3.0% 2% 1980 1985 1990 1995 2000 2005 2010 2015 Nonfarm Employment Growth, Year-over-Year Change 6% 5 4% CO: 2.6%* 4 2% 3 US: 1.5% 0% 2 -2% 1 -4% -6% 0 1980 1985 1990 1995 2000 2005 2010 2015 Labor Force Participation Rate 74% 72% 70% CO: 68.5% 68% 66% 64% US: 63.0% 62% 1980 1985 1990 1995 2000 2005 2010 2015 Source: U.S. Bureau of Labor Statistics. Data are seasonally adjusted. *Colorado data are not available prior to 1990. 17 While the near-term budget situation is relatively rosy, budgetary pressures will persist over the long term. • Aging population = lower per capita income and sales tax • State tax structure constraints – Shifts from brick and mortar to online, from goods to services – Erosion of gas tax revenue with higher fuel efficiency – TABOR Amendment limits revenue the state may spend or save – Gallagher Amendment requires the residential assessment rate to fall • Demand for services outpacing revenue growth – Amendment 23 K-12 funding requirements – Aging infrastructure Budget – Population growth Pressures Declining per capita revenue Rising demand for state services 18 9
3/23/2018 Questions? Kate Watkins Chief Economist • Legislative Council Staff kate.watkins@state.co.us • (303) 866-3446 www.leg.colorado.gov/lcs 19 Oil prices are increasing… Price per Barrel of Oil Received by Colorado Producers Forecast $100 $90 $80 2020f $66.12 $70 $60 $50 $40 2016 $30 $36.67 $20 $10 $0 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019f Source: U.S. Energy Information Administration and Colorado Legislative Council Staff March 2018 forecast. 20 10
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