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Colorado revenue forecast: Severance taxes on the rebound

Author: Marianne Goodland - June 20, 2018 - Updated: June 20, 2018

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spending ballot measures(Photo by eyegelb, iStock)

Colorado economists reported Wednesday that the state’s severance tax revenues from oil and gas operations — in the doldrums for the past several years due to low oil prices — are on the rebound in a big way.

State lawmakers also can anticipate another healthy year of corporate and individual income tax growth, and that may mean another $1 billion in extra revenue for the 2019-20 state budget, according to state economists.

Lawmakers were positively giddy in March with an extra $1 billion to spend, and spend they did: $495 million in one-time spending for transportation and paying down the state’s obligation to K-12 education by $150 million.

The June 20 revenue forecast is good news too, although economists warned that a looming trade war — the lack of resolution on the North American Free Trade Agreement (NAFTA) and tariffs levied by President Donald Trump against European and Asian trading partners — creates a higher than usual level of uncertainty.

The economy has exceeded expectations, reported Greg Sobietski, an economist with the General Assembly’s Legislative Council. Business activity has picked up, in part due to job gains in the labor market and tax benefits from the federal tax law passed last December.

The job market improvements showed up strongly in areas such as construction, with a 12.5 increase in jobs, and mining and logging, which showed a 13.3 percent increase.

What got members of the Joint Budget Committee excited was the improvement in severance tax revenues. The state collected just $19.5 million during the 2016-17 year, not enough to cover some of the programs those dollars pay for, especially water projects and impact on local communities where that activity takes place. Republican Rep. Bob Rankin of Carbondale noted that the General Assembly had to prop up the funding for those programs with general funds in the past two years’ budgets.

But 2017-18 looks very good, with revenues estimated at $108.2 million and expected to nearly double in the coming fiscal year. Larson Silbaugh, an economist with Legislative Council who specializes in severance taxes, said the state collected $40.5 million in those taxes in April alone, showing the dramatic improvement in oil and gas drilling activity and in rising prices.

With a better-than-expected forecast for those revenues, Republican Sen. Kent Lambert of Colorado Springs suggested lawmakers need to come up with “real reform” in how those revenues are distributed and managed.

The tight labor market, however, continues to be a concern, Sobetski said, and one that could lead to a slowing of economic growth. There’s little opportunity to bring in more workers, and businesses have to focus on improving wages rather than making other strategic investments.

The prospect of trade tariffs that could impact Colorado businesses and markets is also a concern.

On the import side, the top five countries from which Colorado imports iron and steel — Mexico, Canada, Italy, China and Germany — are all getting hit with tariffs on those products, according to the Legislative Council forecast.

On the export side, agriculture could be especially hard hit, as it is the industry targeted by international trading partners with retaliatory tariffs, Sobetski said. That’s bad news for an industry that, in Colorado, is already dealing with drought, low prices for cattle and other crop commodities, and overleveraging of assets.

One possible expense in the 2019-20 budget that lawmakers will start working on in November is the prospect of refunds under the Taxpayer Bill of Rights (TABOR). Economist Kate Watkins told the JBC that they will have to set aside $117 million for TABOR refunds in 2019-20, although virtually all of that will go to the state’s senior property tax exemption program and a similar one for disabled veterans.

Henry Sobanet, head of the governor’s Office of State Planning and Budgeting, offered his final set of projections for state revenues. He’s leaving OSPB at the end of the month and will become the chief financial officer for Colorado State University’s Denver operations.

His numbers are relatively close to those of the legislative council, Sobanet said. OSPB economists focused much of their report on the labor force. A robust economy has encouraged workers in the prime 25-54 age group to return to the job market, and that has helped with job growth, despite the state’s low unemployment rate.

Leila Kleats, chief economist for OSPB, told JBC members that one of the most positive signs of economic growth is in unemployment that comes when people voluntarily quit their jobs. When the labor market is strong, she said, people are comfortable quitting one job for another, often better one.

The state’s “quit rate” has grown from 1.3 percent in 2009 to 13.8 percent in January, the highest rate since 2000.

Sobanet warned lawmakers to keep their eyes on the state’s budget obligations that aren’t necessarily reflected in the forecasts, such as the longstanding debt to K-12, known as the budget stabilization factor, which is approximately $672 million.

But that caused Republican Sen. Kevin Lundberg of Berthoud to call out other state needs, such as transportation. He called the budget stabilization factor “a mythical form of accounting that is not reasonable nor fair unless you apply it across all points,” including those other state needs, which he said should be considered on an equal basis with K-12.

Lundberg is term-limited; he was in the running for the Republican nod for state treasurer but failed to make the primary ballot.

Marianne Goodland

Marianne Goodland

Marianne Goodland is the chief legislative reporter for Colorado Politics. She's covered the Colorado General Assembly for 20 years, starting off in 1998 with the Silver & Gold Record, the editorially-independent newspaper at CU that was shuttered in 2009. She also writes for six rural newspapers in northeastern Colorado. Marianne specializes in rural issues, agriculture, water and, during election season, campaign finance. In her free time (ha!) she lives in Lakewood with her husband, Jeff; a cantankerous Shih-Tzu named Sophie; and Gunther the cat. She is also an award-winning professional harpist.