State Budget Outlook Kate Watkins Chief Economist Legislative - - PDF document

▶
state budget outlook
SMART_READER_LITE
LIVE PREVIEW

State Budget Outlook Kate Watkins Chief Economist Legislative - - PDF document

Feb 23, 2024 190 likes •334 views

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

slide-1
SLIDE 1

3/23/2018 1

State Budget Outlook

Colorado School Finance Project

March 23, 2018

Kate Watkins Chief Economist Legislative Council Staff

2

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?
slide-2
SLIDE 2

3/23/2018 2

3

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

4

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

  • 15%
  • 10%
  • 5%

0% 5% 10% 15% 20% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Wage Withholding Sales Tax

Sales tax and income tax collections have accelerated in FY 2017-18.

Year-over-Year Percent Change in State Tax Collections

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.

Oil and commodity price collapse

slide-3
SLIDE 3

3/23/2018 3

5

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

$305.1 $213.0 $47.6 $32.3 $77.3 $128.3 $30.3

Withholding Estimated Payments Refunds Cash with Returns Corporate Income Sales Use Individual Income

+8.3% +29.0% +11.7% +13.0% +32.6% +7.0% +17.8%

Corporate Income Sales Use

Source: Colorado Office of the State Controller. February 2018 data are preliminary and provided by the Department of Revenue.

Partially attributable to pre-paying state income tax; May also reflect higher capital gains Oil & gas production; HB10-1193: Out-of-state retailers must notify customers of use tax owed

6

$4 $5 $6 $7 $8 $9 $10 $11 $12 $13

The LCS revenue forecast was revised upward significantly on stronger collections to date and a stronger economic outlook.

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.

Gross General Fund Revenue

Billions of Dollars +$243M +$297M +$378M

Change Relative to December

slide-4
SLIDE 4

3/23/2018 4

7

$4 $5 $6 $7 $8 $9 $10 $11 $12 $13 $14

OSPB and LCS General Fund revenue forecasts differ, yet budget outlooks converge in FY 2018-19.

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.

Gross General Fund Revenue

Billions of Dollars

OSPB (Blue Dots) Legislative Council (Grey Bars)

  • $231.2M

+$218.9M +$288.0M Above/(Below) LCS Forecast

8

Risk #2: State revenue impacts of the federal Tax Cuts and Jobs

Act remain uncertain. New revenue will flow to both the General Fund and State Education Fund

$35.2 $196.5 $329.8 $434.4 $591.5 $748.4 $832.1 $877.9 $691.9 $526.9

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.

Dollars in Millions

slide-5
SLIDE 5

3/23/2018 5

9

Tax Bill Provisions with the Largest Colorado Impacts

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

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.

For more information, see: http://leg.colorado.gov/publications/federal-tax-legislation-interested-persons-memo

Federal Taxable Income Gross Income

(All sources of income)

Adjusted Gross Income Adjusted Gross Income × Tax Credits

  • =

Net Federal Taxes Owed Personal Exemptions

=

Standard or Itemized Deductions

  • Federal

Taxable Income =

How Are Individual Income Taxes Calculated?

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.

Tax Rates

Federal

“Above-the-Line” Deductions

slide-6
SLIDE 6

3/23/2018 6

How Are Individual Income Taxes Calculated?

Tax Rates Gross Income

(All sources of income)

Adjusted Gross Income Adjusted Gross Income

Personal Exemptions

=

Standard or Itemized Deductions

  • Federal

Taxable Income Federal Taxable Income

State Additions State Subtractions

+

  • = Colorado

Taxable Income Colorado Taxable Income 4.63% Tax Rate ×

State Tax Credits

  • Net Colorado

Taxes Owed

= =

Federal Colorado

Federal Taxable Income × Tax Credits

  • =

Net Federal Taxes Owed “Above-the-Line” Deductions

  • 12

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900

FY 2017-18 General Fund Reserve

Millions of Dollars

6.5% Reserve Requirement

December 2017

Expectations

$675.4M

$171.8M Above Required Reserve

8.1% Reserve $681.7M

March 2018

Expectations

Source: Legislative Council Staff forecasts based on current law. Amounts include estimated impacts of the federal Tax Cuts and Jobs Act.

$34.7M Above

6.8% Reserve

slide-7
SLIDE 7

3/23/2018 7

13

$0 $200 $400 $600 $800 $1,000 $1,200 $0 $200 $400 $600 $800 $1,000 $1,200

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

Expectations

Source: Legislative Council Staff forecasts based on current law. Amounts include estimated impacts of the federal Tax Cuts and Jobs Act.

$962.7 million $1,291.6 million

Increased revenue expectations and FY 2017-18 budget decisions +$328.9M

December 2017

Expectations

14

$7 $8 $9 $10 $11 $12 $13 $14 $15

March 2018 TABOR Outlook

Source: Colorado Office of the State Controller and Legislative Council Staff March 2018 forecast.

Revenue Subject to TABOR

Dollars in Billions Referendum C Five-Year Timeout Period

Referendum C Cap TABOR Limit Base TABOR Surplus $8.4M $156.4M

slide-8
SLIDE 8

3/23/2018 8

15

…go toward reimbursements to local governments for property tax exemptions in the next fiscal year*

TABOR Refund Budget Impacts

General Fund Set-Asides… FY 2018-19 $8.4 million FY 2019-20 $156.4 million

*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.

FY 2019-20

$8.4 million FY 2018-19 surplus

+$21.8 million FY 2014-15 remaining surplus

$30.3 million toward reimbursements FY 2020-21 $156.4 million toward reimbursements

16

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

slide-9
SLIDE 9

3/23/2018 9

17

Risk #3: How long can the expansion last?

Source: U.S. Bureau of Labor Statistics. Data are seasonally adjusted. *Colorado data are not available prior to 1990. 2% 4% 6% 8% 10%

1980 1985 1990 1995 2000 2005 2010 2015

Unemployment Rate

US: 4.1% CO: 3.0%

62% 64% 66% 68% 70% 72% 74%

1980 1985 1990 1995 2000 2005 2010 2015

Labor Force Participation Rate January 2018

1 2 3 4 5

  • 6%
  • 4%
  • 2%

0% 2% 4% 6%

1980 1985 1990 1995 2000 2005 2010 2015

Nonfarm Employment Growth, Year-over-Year Change

CO: 2.6%* US: 1.5% CO: 68.5% US: 63.0%

18

Declining per capita revenue

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 – Population growth Budget Pressures

Rising demand for state services

slide-10
SLIDE 10

3/23/2018 10

19

Questions?

Kate Watkins

Chief Economist • Legislative Council Staff kate.watkins@state.co.us • (303) 866-3446 www.leg.colorado.gov/lcs

20

Oil prices are increasing…

Source: U.S. Energy Information Administration and Colorado Legislative Council Staff March 2018 forecast.

Price per Barrel of Oil Received by Colorado Producers

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019f

2016

$36.67

2020f

$66.12

Forecast

slide-11
SLIDE 11

3/23/2018 11

21

$0 $25 $50 $75 $100 $0 $2 $4 $6 $8 $10 $12 $14 $16 $18 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019f

…leading to more production.

Oil Price

Right Axis

Oil Production Natural Gas Production Value of Colorado Oil and Gas Production Billions

Forecast Oil Price

per Barrel

Source: U.S. Energy Information Administration and Colorado Legislative Council Staff March 2018 forecast. 22

$0 $20 $40 $60 $80 $100 $120

2014 2015 2016 2017p 2018f 2019f 2020f

Residential Non-Residential 29% assessment rate 7.20% RAR

Target Percentage

Source: Division of Property Taxation and Legislative Council Staff December 2017 forecast.

Assessed values under current assessment rates.

Actual Values × Assessment Rate = Assessed Values Billions

slide-12
SLIDE 12

3/23/2018 12

23

$0 $20 $40 $60 $80 $100 $120

2014 2015 2016 2017p 2018f 2019f 2020f

Source: Division of Property Taxation and Legislative Council Staff December 2017 forecast.

Residential Non-Residential 29% assessment rate

Target Percentage

7.20% 6.11% Assessed values under forecast assessment rates.

Actual Values × Assessment Rate = Assessed Values Billions

24

Change in Residential Assessed Values by County 2016 to 2017

Source: Department of Local Affairs, Division of Property Taxation.

slide-13
SLIDE 13

3/23/2018 13

25

Change in Total Assessed Values by County 2016 to 2017

Source: Department of Local Affairs, Division of Property Taxation.