Plain talk on Colorado's budget: What's up (or down) with state revenues?

Type: Budget Watch
Published Date: July 19, 2011
Author: Buchanan, Wade

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Two weeks ago, we introduced you to General Fund and told you about the critical role he plays. Last week, we told you he is shrinking – in terms of real
purchasing power per Coloradan, he's 25% smaller than he was just eleven years ago.

Why is this happening? The answer is complex. Our tax system was designed in the middle of last century, when the economy looked very different, and it just doesn't work very well anymore. For us, it comes down to five factors:

  • A shrinking sales tax base
  • Eroding local property tax support for schools
  • Gas tax revenues that aren't keeping pace with need
  • Federal tax law changes that reduce state revenues
  • Permanent state tax cuts enacted in 1999 and 2000

It all adds up to a General Fund that is asked to do more with significantly less.

Shrinking sales tax base. Colorado taxes the sale of goods (like what we buy in stores) but not of most services (like hair cuts or lawn care). In fact, we tax fewer services than almost any other state. Chart 1 illustrates the shift from a goods-based economy last century to one increasingly based on services. Today, only a third of purchases are of goods, meaning the sales tax base has declined 40 percent since the system was designed. That trend will continue.

And now many purchases are made online, causing a further drop in revenues. The Denver University Center for Colorado's Economic Future estimates the share of General Fund contributed by sales taxes declined from 41 percent 30 years ago to under 29 percent today.

Eroding local property tax support for schools. In 1982, voters passed the Gallagher Amendment to shield homeowners from large property tax increases. Ten years later, voters passed TABOR to limit revenue growth from year to year for all levels of government, including schools.

A consequence of the interaction of these amendments has been a major decline in local property tax revenues for schools, requiring significant backfill from the state. Chart 2 shows, that since 1989, the share of education funding paid by local school districts has dropped from 57 percent to 37 percent. This erosion of property tax support is expected to continue – the Center for Colorado's Economic Future projects the state share will exceed 70 percent by 2025.

Explaining why this happened would take more space than we have. Those who are interested can find an in-depth discussion of school finance and the interaction between TABOR and Gallagher on pages 30-39 of the DU report.

Gas tax revenues that aren't keeping pace with need. Our gasoline tax is a flat 22 cents per gallon, regardless of price. As vehicles become more fuel-efficient, people drive farther on a tank of gas, using the highways more and paying less. The tax rate was last raised in 1991, and since then its purchasing power has eroded almost 60 percent (Chart 3).

And while the gasoline tax goes to a cash fund rather than General Fund, legislators have repeatedly looked to General Fund to backfill for the erosion in motor fuel revenues.

Changes in federal tax laws that reduce state income tax revenues. Like many states, Colorado uses the federal definition of adjusted gross income and corporate income as the starting point for its income tax calculations. As one method of cutting taxes, the federal government made changes to how those numbers are calculated. And as the income subject to federal taxes dropped, state revenues dropped as well. According to the Center for Budget and Policy Priorities, federal tax changes in 2001 reduced Colorado state revenues more than $100 million each year.

Permanent tax cuts. In the late 1990s, the economy was growing fast and generating more tax revenues than TABOR allowed the state to keep. Some lawmakers argued this was a permanent surplus and proposed lowering tax rates. While others argued good times wouldn't last forever, those who wanted permanent tax cuts won. Over several years the legislature cut the income tax rate from 5 to 4.63 percent and the sales tax rate from 3 to 2.9 percent. These cuts total more than $500 million a year.

The Bell has endorsed a proposal to return rates to 1999 levels for five years and use the additional revenue for education. You can learn about this potential ballot measure at www.BrightColorado.com.

The combined effect of federal changes and cuts in the state income tax rate was a 12.5 percent drop in total income taxes Coloradans paid per $1,000 of total state personal income – from $23.69 in 1998-99 to $20.74 in 2007-08, according to data from the Legislative Council Staff.

Join the conversation. We want to hear your 2 cents' worth.

Should we consider reforming our tax system to help address
Colorado's fiscal challenges?

How would increasing taxes affect your community and quality of life?

If we consider increasing taxes, what do you think is the best approach?

What do you think of the "Bright Colorado" proposal to return to 1999 tax rates
and use the money for education?

Email PlainTalk@BellPolicy.org and let us know how you answer these questions.

NOTE: This is the third in a series of emails addressing budget and fiscal issues in Colorado. It builds on the information in our In Plain Talk video and tool kit. Learn more and get involved by visiting our In Plain Talk video page or by "joining up" at www.boomorbustcolorado.com.