The Finance Gourmet

Personal Financial Advice from a former Certified Financial Planner

Colorado State Taxes and Finances

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Hey, guess what I found?

It’s an economic document focused on Colorado!

Whoop! Whoop! Finance Nerd Alert!

The Colorado Legislature’s December 2018 Economic Forecast is out. There’s always plenty of good stuff in there for a finance geek to look at and see both how the Colorado economy is doing, and how the Colorado Legislature is managing it. I’ll dig in here in the next day or two, but here are some interesting tidbits so far.

colorado economic forecast

Marijuana Taxes Aren’t Everything

Despite what the uninformed and misinformed might think, tax collections on marijuana just aren’t that big of a thing compared to the overall budget. If you thought pot taxes would solve all of the governments budgetary needs you were duped, or sorely mistaken.

While December isn’t finished yet, it looks like Colorado’s pot tax revenue will come in at about $250 million. That is real money, but it isn’t difference making making. Colorado’s state budget is $29.9 BILLION. That means the $250 million from marijuana taxes doesn’t even make the budget figure unless you carry out more decimals.

$250 million is just 0.08% of the State of Colorado’s overall budget. In other words, it’s a blip on the radar. It costs more than that just to pave I-25 in the Denver Metro area.

The good news is that for smaller cities and counties, the money actually adds up a bit faster. If your small town budget is just $2 million annually, a new inflow of $300,000 is actually the difference between paving Main Street or not.

TABOR Refunds For 2018

Initial figures show that there were enough tax collections to trigger a TABOR refund for the 2017-2018 Colorado fiscal year. However, the amount is so small (around $130 million for the whole state) that individual taxpayers won’t see any sort of refund on the 2018 taxes they file in early 2019. Instead, the State will reimburse counties for property tax reductions they give to seniors and disabled veterans.

However, if current projections hold, the amount of a TABOR refund for the 2018-2018 FY would be big enough to generate and actual refund on Colorado income taxes for 2019, filed in early 2020.

Not so fun fact: Colorado income taxes are filed in January in order to piggy back off of federal income tax filing. However, Colorado’s own government works off of a July to July fiscal year.

That means that the first part of 2018 was part of “last year” and the second part of 2018 is part of “next year,” so to speak. Or, if you prefer, December is the middle of the 2018-2019 year. Stuff happening right now, economy-wise won’t affect your taxes until Jan-Apr, 2020.

Nobody Knows How the New Tax Law Shakes Out

Like a lot of other states, Colorado bases its income tax on a taxpayer’s federal income tax return. This has two advantages. First, the state doesn’t have to mess with HOW income gets calculated for things like small businesses, dividends, and so on. All the Federal rules apply.

Second, the State doesn’t have to play the enforcement game. Since Colorado income taxes are based on Federal income taxes, the only way to cheat on Colorado taxes (for the majority of taxpayers) is to cheat on your federal taxes. And, if you cheat on your federal taxes, then the IRS (or its computer) will come looking for you. If they catch you, any adjustments they make to your return become adjustments to your Colorado return too.

Boom! Outsourced tax-collection enforcement for free.

However, that also means that Colorado is at the mercy of the U.S. Government when it comes to how taxes are calculated. With the new Trump tax law that is coming online, forecasters really have no idea how some of those big changes in tax law and calculations will affect the overall collection of taxes in the State of Colorado.

Forecast estimates are subject to a higher margin of error than usual
due to recent changes in federal tax law. Unusual shifts in taxpayer behavior occurred as a result of the passage of the federal Tax Cuts and Jobs Act.

Neutral Interest Rates

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Fed Chairman Jerome Powell made some very interesting remarks where he said he thought that interest rates were “just below” neutral.

This is bizarre on many levels.

First and foremost, neutral interest rates are perfect interest rates unless your economy is in a recession in which case you want stimulating interest rates, or if you are trying to control inflation in which case you want interest rates that have a constricting effect on the economy to stop price increases. So, if interest rates were close to neutral, and inflation was not increasing, then wouldn’t you want to keep interest rates at neutral?

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But, Powell and the rest of the Fed have been telegraphing a December rate increase as loudly as possible. In other words, event though interest rates are “just below” neutral, Powell and company want to raise them. Why?

Economy is Teetering

on the edge

The other weird bit is that everyone can see the economy is slowing down, and quickly.

Housing starts are way down. Housing sales are decreasing. Both are very much affected by higher rates.

The stock market is falling, having erased the whole year’s gains. Also, in very large part due to rising rates and their affects on customer spending and corporate profits.

Then, for added fun, the automotive industry has begun announcing big layoffs, and major plan closures. Why? Falling car sales. Anyone want to guess what makes it tough to sell a product that most buyer depend on a loan to purchase? Rising rates!

So, in other words, all of the signs point to interest rates having a negative, or constricting affect on just about every part of the economy that is sensitive to interest rates. How in the world can that possibly be construed as “neutral”.

Fed Going to Start the Recession

I’ve gotten closer and closer to saying it over the last few months, without actually saying it, because predicting things isn’t really what I do, but now I’m going to say it.

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The Fed will cause the next recession with its compulsive interest rate increases. If the December rate increase doesn’t do it, one of the ones next year will. The time for the Fed to pull back and be cautious is now. No one is sure if the inflation is real, but everyone can see that the coming slowdown is real. In that case, the prudent thing is to wait and see, but the Fed doesn’t want to wait and see, it wants to be “hawkish,” and so it will over-raise rates, and dunk the economy.

If they don’t change course, the only thing we can hope for is that the recession is light.

Fed Raises Rates On Schedule

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The Fed has been telegraphing a September rate hike for quite some time now, and they followed though with another 0.25 increase today. They also anticipate a December rate hike still this year as well.

I mentioned last time, this increase marks the end of the “free” rate increases that really didn’t do much to affect the economy as the rates were laughably low so much so that getting any commercially available rate meant a lot of “padding” in the rate from the Fed rates. This rate increase pretty much ends that.

From here on out, ever quarter percent increase goes right into the economy as an increasing headwind. Between political uncertainty, a burgeoning trade war, and an economic expansion getting long in the tooth, it’s my opinion that the Federal Reserve is acting recklessly here pushing ahead with its rate increase timeline without any evidence of inflation, and no evidence of wage growth. In other words, the Fed is raising rates despite there being almost no inflation.

Traditionally, this does not work out for the American economy. Every time the Fed starts raising rate for reasons OTHER than fighting inflation, the result is a recession, often a big one. There is no reason to believe this time will be any different. If the Fed follows through with a December rate hike, things will start to wobble. Another one in the first quarter next year is probably pushing the donkey cart off the ledge. Unfortunately, we’re all still attached to the cart.

Someday, we’ll get around the “my Dad is stronger than your Dad,” version of being an inflation hawk and go back to managing for full employment with a 2 percent inflation target (meaning that’s were we want inflation to be) rather than forgetting all about employment and looking at any increase in inflation, no matter how small, or how far away from 2 percent, as a command to act.

Time to play defense, financially speaking.

Stock Market Is a Leading Indicator

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Remember, the stock market is a leading indicator.

What Is a Leading Indicator?

This should probably get its own post, along with what is a lagging indicator, but that isn’t the point of this article, so let’s hit the highlights.

At the most basic level there are leading indicators and lagging indicators. A leading indicator is a measurement of what is to come. A lagging indicator is a measurement of what has already happened. At a metaphorical level, the display on your car that says you have 80% of the life of your oil left is a leading indicator. It is measuring the future. Note that it does NOT predict the future. It’s a best guess effort based on available data.

Contrast that with a lagging indicator, which measures something in the past. Metaphorically, this might be the sticker on the windshield that says the mileage of the last oil change, or your maintenance log.

In the world of economics, most lagging indicators are big data compiled by the government. You may have noticed that the June Labor Report comes out in July. That’s because you have to wait until the end of June for all the data to even exist. Then, you have to compile it into a report.

This doesn’t mean it has no value. On the contrary, it is a valuable piece of information about how the economy is doing.

A leading indicator is one that is a measurement of the future. Since the future is unknown, leading indicators are, by definition, not 100% accurate. The stock market is a leading indicator. It is a measure of the expected value of business and companies. So, while the stock market is moving up, it means that investors think the economy is still growing.

Are they right?

Based on the data right now, probably so, but what people forget is that things change. Not just the market being wrong, but the actual world around the market changing. Things like new tariffs change the status quo. Things like rising deficits, tax changes, and interest rate moves all change the status quo. So far, the investors in the stock market think things still look fine.

But, it won’t take much to change their minds. Everyone has one eye on the exits at this point. Whether or not they need to use them, and when, is anyone’s guess.

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