Colorado economic forecasts show TABOR refunds impacted by tax credits

Expect Colorado’s upcoming state tax refund to be the last big one for a while.

Forecasts by legislative economists released on Thursday predict a softening of economic conditions, tighter budget forecasts and recent changes to state law. Together, those are expected to decrease state refunds due under Colorado’s Taxpayer’s Bill of Rights, or TABOR, from recent historic highs.

Projections put TABOR refunds for individual filers at between $181 and $571 this upcoming tax season, depending on household income. But the year after that, refunds are expected to drop to $41 per taxpayer — and remain below $75 per filer for the following two years, the forecasts show.

TABOR is a constitutional amendment that caps the state budget and requires tax revenues collected above that to be refunded to taxpayers. In fall 2022, taxpayers received $750 refunds via direct checks; for tax year 2023, $800 per taxpayer was paid out through the typical tax-filing process this past spring.

The state reverted to six income-based tiers of refunds for the current tax year, which will be paid out when people file their taxes in this spring. The six-tier system gives higher refunds to higher-income taxpayers because they paid more into the excess tax collections.

Individual filers with an income of less than $53,000 per year can expect $181; people earning between $53,001 and $107,000 can expect $241. The refund amount continues to ratchet up until it hits $571 for individual taxpayers reporting incomes of $320,000 or more, according to estimates by legislative economists.

The future drops in TABOR refunds reflect both anticipated decreases in general fund revenue and substantial new tax credits.

A new Family Affordability Tax Credit and an increase to the state’s match of the Earned Income Tax Credit, both aimed at lower income Coloradans, will cost about $652 million for this fiscal year, with the tab increasing to about $868 million in two years, according to a forecast from the executive branch.

That money otherwise would have been distributed through a standard TABOR refund. The targeted credits are expected to cut child poverty in half, according to advocates.

State Sen. Rachel Zenzinger, an Arvada Democrat on the legislature’s powerful Joint Budget Committee, said the credits were “by and large saving people more of their own money.” Low- and middle-income families, particularly those with young children, will see a bigger benefit from the credits than they would through traditional TABOR refunds.

Lawmakers also passed a cut to the state income tax, which provides a bigger benefit to higher-income taxpayers, during flush budget years. The cut brought the income tax rate down from 4.4% this year to 4.25%.

Lower forecasted revenues in upcoming years mean that the cut might not happen in either the 2025 or 2026 tax year, however.

While state revenue is expected to be strong enough to require tax refunds, the TABOR cap and higher-than-anticipated costs, particularly with the state’s Medicaid program, will also put lawmakers in a tight spot as they craft next year’s budget.

Rep. Rick Taggart, a Grand Junction Republican on the budget committee, said he was “a little bit speechless” as forecasts from both legislative economists and the governor’s office predicted shortfalls approaching $1 billion in the coming budget year if high costs and caseloads continue.