DENVER – Colorado’s economy continues to chug along but at a slower rate than was anticipated, according to a pair of revenue forecasts released Tuesday by state economists.
The slowdown could lead the Legislature to draw on its reserve funds to offset a shortfall in expected income tax revenue, which accounts for nearly two-thirds of the state’s general fund.
Natalie Mullis, chief economist at the Colorado Legislative council, said growth has slowed because Colorado’s economy is at, or close to, its productive capacity, meaning it may have reached maximum growth based on factors such as population, infrastructure and available resources.
An example of a constraining factor is housing construction.
While construction is growing, availability is low, particularly in comparison to population growth, which is driving up home values and leading to affordability concerns.
If the state has neared its productive capacity, it will cause the economy to settle into a slower growth pattern through 2019, which is as far as the forecasts project, while the state’s capacity is expanded.
Mullis added that the growth projection could be off because of unforeseen factors.
“It’s difficult to figure out where the productive capacity of our economy is right now because we’ve got structural changes going on right now in the economy,” she said.
Changes include increased automation, an aging population, which is affecting the consumer and labor market, as well as “shadow markets” that operate within the state but outside of its purview, such as the online sales market, she said.
“It’s possible there is more room for economic growth, in which case our forecast is too pessimistic,” Mullis said.
But it is also possible that the economy is operating beyond capacity, which could, in a worst case scenario, lead to a recession in the forecast period.
The slow but steady growth means the state’s budget is expected to grow by 1.8 percent for the upcoming fiscal year, which is slower than estimated in March and budgeted for by the Legislature’s Joint Budget Committee causing a gap that must be balanced.
The state’s budget shortfall can be attributed to a $144 million reduction in the revenue gathered by individual income taxes in 2017, and an additional $67 million less expected in 2018.
To offset the revenue reduction and keep the state’s budget balanced, lawmakers might have to tap into the state’s reserve fund, which is essentially a “rainy day” fund for the state that should amount to 6.5 percent of the total general fund.
The reserve fund was reduced to 6 percent during the legislative session, from $633 million to $588 million, to balance the state’s budget.
With $7.2 million unallocated by the JBC and available for filling the revenue shortfall, the reserve could be tapped to the tune of $136 million to finish out the 2016-17 fiscal year.
Because the reserve fund is only replenished when new funding is dedicated to it, the $136 million shortfall will carry over into the 2017-18 fiscal year, as will the trend of reduced tax income, resulting in $171.9 million needed to balance the budget once other avenues have been exhausted.
The funding will come from the reserve next year, leaving it at roughly $504 million or 4.8 percent of the anticipated general fund.
Kate Watkins, state economist, said the income tax projections were off because taxpayers delayed selling assets in anticipation of a federal tax break.
This shortfall in individual income tax revenue is a drop from what was projected in March and overall income tax revenue is still expected to grow by 4.4 percent in 2017.
While income tax revenue as a whole underperformed, wage withholdings overperformed by $95 million, Watkins said. That is a result of an upward trend in salaries across the state that should continue into 2017 when salaries are expected to grow by 5.6 percent in Colorado.
The growth would exceed the expected national salary growth of 5.2 percent and the cost of inflation, which is estimated to be 2.5 percent, according to the U.S. Bureau of Labor Statistics.
Colorado’s economic growth can also be seen in it unemployment rate, which is the lowest in the nation at 2.3 percent, Mullis said.
The economy of less populated areas of the state are, however, lagging behind and experiencing lower job and income growth than the Front Range, particularly areas dependent on agriculture.
La Plata County proves an exception to this rule, with an estimated unemployment rate of 1.7 percent as of April, according to the Bureau of Labor Statistics.