Ask almost anybody what’s wrong with Colorado’s state budget and you’ll hear familiar answers – TABOR, the modest economic recovery, depressed energy revenues and too much earmarked spending, among other things.
But there also may be deeper social and economic factors behind the state’s financial situation, and they don’t bode well for the future.
To oversimplify, you can blame it on the baby boomers, or more specifically the unavoidable fact that they’re getting older.
“Why is revenue growth slowing?” was the question teed up by legislative chief economist Natalie Mullis during a briefing at a recent Colorado School Finance Project meeting.
“The aging population has a lot to do with it,” she said.
The percentage of Colorado’s population that’s of working age is shrinking, and the percentage of retirees “is growing very quickly.”
How does that affect state revenues?
To oversimplify, as people get older they spend less, and that affects sales tax revenues for the state.
And as people age they earn less money, slowing growth in income tax revenues. “Taxes peak around age 45,” Mullis said.
More than 90 percent of income to the state general fund, Colorado’s main checking account, comes from income and sales taxes.
Add that all up and it means a flattening of state tax revenues when calculated based on the contribution of an individual taxpayer. “On a per-person basis … total revenue to the general fund is going to be flat,” Mullis said.
To compound the problem, younger taxpayers aren’t picking up the slack yet. “We’ve had a cultural shift … they [millennials] are spending at rates lower than the baby boomers did,” Mullis noted.
But wait, there’s more bad news.
While demographic trends are slowing state revenue growth, they’re also creating pressure for more state spending. “The aging population has other effects … it actually increases demand on government services,” said Mullis.
The biggest demand is for Medicaid, the state/federal program that helps provide medical care for low-income people, including the elderly.
“The things our general fund pays for have become more expensive,” she said.
Things will get worse whenever the next recession hits, which will accelerate the demands for state services.
“We’re going to have tough budgets that persist,” Mullis concluded. “We care going to have to cut the budget from here on out.”
(Please don’t write to me complaining that I downplayed TABOR. Yes, TABOR is a problem – at least for people who worry state government doesn’t have the flexibility to meet changing state needs – because it requires tax refunds if state revenues grow beyond a certain level each year. But that’s a post for another day.)
-- Todd Engdahl