A bleak report issued this week by Colorado State University on the long-term fiscal health of state government indicates a “perverse irony” in which the recession actually improved the state’s long-term outlook. But the state is still grappling with a structural deficiency that will only worsen over time.
Perhaps most suggestive of the structural insufficiency is a conflict between a legislative-approved hospital provider fee and the Colorado Taxpayer’s Bill of Rights, which requires that surplus tax revenues be returned to taxpayers in the form of a refund.
The legislature in 2009 authorized the state to collect hospital provider fees in an effort to increase federal Medicaid matching funds. The state taps into the cash fund in order to offset some of its share of Medicaid expansion costs.
But economists with CSU’s Colorado Futures Center report that lawmakers will be forced to make deep cuts to the general fund — including public safety, higher education, human services and the courts — in order to pay refunds to taxpayers because of the additional revenue generated by the provider fee.
They anticipate that the refunds will become a reality by 2017, and the gap between general fund expenditures and revenues will grow to $1.5 billion by 2025 and climb to $2.9 billion per year by 2030.
“What we’re projecting to see happen is that the hospital provider fee is going to continue to grow at the same time the economy’s recovering, and eventually the hospital provider fee is going to force us to reach the TABOR limit,” lead economist Phyllis Resnick explained on Tuesday at a presentation to the media unveiling the report.
“We have this very strange circumstance where we’re assessing a fee against hospitals, bringing that money into the state budget, it’s forcing us to reach the TABOR limit, and the general fund has to refund money out the back end,” Resnick continued.
Complicating matters is the fact that the state intends on using the fee to fund a second expansion under the Affordable Care Act that begins in January. After three years, the state will have to pay a share of the federal burden for the expansion.
“It’s a perverse story, and kind of a great deal for Colorado citizens, but probably something that is hard to unwind now,” added Resnick.
Charles Brown, director of the Colorado Futures Center, pointed out that the provider fee was enacted in 2009, before the deepest part of the recession had taken hold. But he said there was evidence even in 2009 that this would happen in a few years.
“The fact that it’s happening in our forecast in 2017 should not be a surprise to anybody…” opined Brown.
“The magnitude of it was the surprise…” added Resnick. “We’re going to be explaining to folks why we’re cutting the budget at the same time we’re giving refunds.”
Julian Kesner, spokesman for the Colorado Hospital Association, said the provider fee issue does not come as a surprise.
“It was first discussed as a possibility several years ago when the provider fee legislation was passed,” said Kesner. “We plan to discuss it with [Gov. John Hickenlooper] and other appropriate stakeholders as warranted in the future.”
As for solutions, economists believe that there are two options, one of which would require a vote of the people and the other could be done through the legislature, though there are several legal questions that remain.
In order to get the hospital provider fee revenue out from under the TABOR limit, lawmakers could refer a measure to Colorado voters, or an initiative process could have the same result.
But with Coloradans appearing resistant to any additional tax burdens — having this November widely rejected a proposal that would have raised their taxes by an estimated $133 per year to fund K-12 education — it would be an uphill battle to convince taxpayers to forgo a tax refund.
Voters in 2005 approved Referendum C, which temporarily allowed the state to retain and spend money from existing revenue sources above the TABOR limit. But the climate has dramatically changed since then.
“It’s… taking people’s refunds away… I wonder how many people would have to jump out of an airplane to convince people…” joked Resnick, referring to when then-Denver Mayor Hickenlooper jumped out of an airplane for an ad supporting Referendum C.
On the legislative side, economists believe that lawmakers could declare the operation as a government enterprise. If enterprises have revenue-bonding authority and get less than 10 percent of their revenue from general tax purposes, it can take the revenue outside the TABOR limit, explained Resnick.
But that proposal comes with a host of legal questions, and would likely lead to a divisive debate between Republicans and Democrats in the legislature.
Affect the cause
Economists, however, say the state must look beyond healing the symptoms in order to affect the cause. Spending on education and health care is still growing faster than the rate of growth of revenue.
“That’s sort of the definition of a structural problem, when you’ve got spending growing faster than revenue,” surmised Brown. “In your own personal budget, when that happens… you’ve got problems. You’ll spend through savings and be upside down rather quickly.”
One area in which the state could take action is on harnessing the shift to ecommerce. Economists say the state is doing a poor job capturing those taxes.
Colorado lawmakers in 2010 enacted a so-called “Amazon Tax,” which requires online retailers to collect the 2.9 percent state sales tax, or report to the state a list of Colorado customers so that it can collect the tax. That law is still tied up in legal battles, most recently with a case in Denver District Court following an unsuccessful appeal of the law by the Direct Marketing Association in federal court.
In Colorado, the law has proven to be controversial since online retailers have cut ties to local affiliates in order to avoid collecting the sales tax. The issue has also become a partisan debate, as Republicans argue that such a tax closes local businesses, thereby cutting jobs.
State legislatures are looking to Congress to solve the problem. The Democratic-controlled U.S. Senate in May passed the Marketplace Fairness Act, which would allow states to collect sales and use taxes from online retailers. But it has faced gridlock in the Republican-controlled House.
“Right now we’re not doing a terrifically good job of capturing the sales in our sales tax base…” Resnick said of online sales. “We’re going to have to have some law changes to allow that to happen.”
Another problem in Colorado is that the state taxes “goods,” or as Resnick likes to put it, “Things that if you pick them up and drop them on your foot, they’ll hurt you.” But the state does not tax services. Meanwhile, there has been a drop in the sales of “goods,” while many of those items — such as computers and televisions — have been dropping in price.
“As we’re not buying goods anymore, we’re shifting our consumption to services. So, we’re stuck in this state… with a sales tax code that taxes the purchases of goods at a time when consumers are buying more services,” explained Resnick.
Economists, however, pointed to some success within the state. A previous study by CSU in 2011 predicted that state government general fund expenditures would exceed revenues by $3.5 billion by 2025. But the recent study said the gap would grow to only $1.5 billion by 2025.
The reason for this is deceptive. There were unprecedented levels of monetary government stimulus, including the Federal Reserve keeping interest rates low. As a result, there has been unusual stock market performance that created a lot of gains, which income tax is paid on.
“We’ve seen revenues recover at a rate that far exceeded any of our expectations…” said Resnick. “We never could have imagined that revenues would have come back as quickly as they did, and we think that a lot of that is because we had this sort of unprecedented level of Federal Reserve intervention in the economy.”
Economists expect that rate of growth to slow for several reasons, including less intervention by the feds; massive student debt obligations; a legacy of unemployment left by the recession, thereby affecting pay scales; and a growth in baby boomers who are headed into fixed incomes, thereby spending less.
“Although we are seeing this one-time, or multi-year period of year-over-year high rates of revenue, which has bumped up the base of which our revenues are growing, we expect that trajectory to slow and flatten out into the future,” said Resnick.
If the state is to correct this trajectory, then economists say lawmakers and voters must agree to fix the constitutional conflicts in Colorado’s tax code.
Education is perhaps the single greatest dilemma. Amendment 66 this year sought to ease some of the spending conflicts in the school funding formula, but voters rejected the idea because it was dependent on a two-tier income tax increase.
“There aren’t any easy answers or silver bullets, and government cannot fix the challenge outlined by this study by simple across-the-board spending cuts or tax rate increases,” said Brown. “It’s going to take a structural approach to a structural problem, blending thoughtful and creative solutions to really get at the root issues threatening Colorado’s long-term fiscal health.”