Colorado lawmakers are projected to have an additional $150 million to budget for next year.
However, this seemingly substantial amount is expected to be quickly eroded by steady increases in current spending levels and commitments to enhance education funding.
The state’s economic activity is showing signs of slowing, which is likely to impact the funds available for property tax breaks for seniors.
Additionally, the state is also obligated to fulfill the commitments from a voter-approved $350 million law enforcement funding ballot measure passed last year.
The Republican budget bill currently under debate in Congress could further complicate the state’s financial situation, with the governor’s office estimating it could diminish, if not completely wipe out, the anticipated $150 million surplus in one go.
In the event of an economic recession, the financial landscape could become even more dire.
The nonpartisan Legislative Council Staff and the Governor’s Office of State Planning and Budgeting predict that the legislature could face a significant shortfall of $700 million next year if it intends to maintain its existing spending plans, assuming there aren’t any further economic downturns or the Republican federal spending plan does not go into effect.
Governor Jared Polis commented on the national economic issues, stating, “Trump’s disastrous tariff taxes continue to wreak havoc on our economy, and the erratic trade policy is projected to continue hurting our economy, slowing job growth, and increasing chances of a recession.”
Elizabeth Ramey, a principal economist for the Legislative Council Staff, noted that Colorado is trailing behind national economic indicators, particularly concerning job growth.
While some economic growth is still expected, it’s projected to occur at a slower pace than in previous years.
This situation comes on the heels of a recently passed $43.9 billion spending plan for the fiscal year beginning July 1, which included cuts to transportation projects, local governments, and various social programs to accommodate rising costs in healthcare and education.
In order to balance this year’s budget, the Joint Budget Committee (JBC) had to reduce spending plans by approximately $1.2 billion.
The forecasts provided to the JBC will mainly affect the budgeting for the 2026-27 fiscal year, which starts on July 1, 2026.
As the budget writing process is set to take place between November and April, the economic predictions delivered on Wednesday may no longer be accurate by then.
Should Republicans in Congress successfully pass a funding bill that cuts Medicaid or if the economy continues to decline, leading to a sharp drop in tax revenue, the legislature may require a special session to adjust the current budget.
The governor’s office estimates that the proposed GOP federal funding bill could cost the state up to $650 million to support Medicaid and the Supplemental Nutrition Assistance Program.
Additionally, changes to tax regulations included in the bill could result in a further annual decrease in state revenue by $600 million.
Mark Ferrandino, the governor’s budget chief, remarked, “That could really wreak havoc with where we are from a budget perspective.”
Currently, the federal budget proposal remains unsettled, reflecting disagreements among Republicans in the House and Senate regarding critical components of the legislation.
Moreover, a recession could create an additional $1.6 billion deficit in the state budget, according to estimates from the governor’s office.
In total, this could amount to a staggering $2.6 billion deficit, exceeding the state’s existing reserves.
While the JBC was aware of looming budgetary difficulties, the extent of the situation may have taken them by surprise.
Both legislative staff and the governor’s office indicated that the slowing economy would significantly impact tax breaks, which was an unexpected revelation during Wednesday’s discussions.
Although tax revenue is slated to surpass the Taxpayer’s Bill of Rights (TABOR) cap on government growth and spending over the next few years, the increase isn’t expected to be substantial.
Consequently, the legislature might need to allocate millions to fund property tax breaks for seniors, potentially leading to further cuts in current spending plans and programs.
A reduction in the TABOR surplus also implies that Colorado residents are unlikely to receive any income tax reductions or refunds this year.
Furthermore, the dwindling economic performance is anticipated to trigger cuts to, or the complete elimination of, tax breaks established by the legislature over the last two years.
These tax breaks were designed with a mechanism to be scaled back or abolished during periods of insufficient economic growth, aligning with the current situation.
The Legislative Council Staff announced on Wednesday that as a result of the lagging economy, cuts are imminent for state incentives related to electric vehicles, e-bikes, and heat pumps, which will be halved.
Additionally, if the economic conditions do not improve by September, reductions in workforce, family affordability, and earned income tax credits may also be necessary when the next round of economic and tax revenue forecasts is presented to the JBC.
Members of the JBC indicated that they would explore adjustments to the tax credits ahead of next year, should the legislature be convened for a special session.
Otherwise, the next legislative session is not scheduled to reconvene until January.
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