LCS March forecast lowers revenue outlook, warns TABOR shortfall could pause school finance phase'in

Legislative Council Staff told the Joint Budget Committee on March 19 that new filing'season data and tax'law changes have forced a downward revision to the state'level revenue outlook and left Colorado below the TABOR revenue limit for FY26.

For the record, Greg Sobetzky, chief economist with Legislative Council Staff, said LCS reduced its current'year general fund revenue estimate by roughly $350 million relative to December, which translates to a dollar'for'dollar hit to the budget while the state remains below the TABOR cap. Amanda Little, LCS economist, presented the accompanying economic outlook and described a slow'to'moderate path of growth and a “bifurcated” labor market with weak job gains and pockets of strong spending.

Why it matters: Because Colorado is forecast to be below the TABOR limit in FY26, even modest forecast revisions have immediate budget consequences. Sobetzky told the committee a 5% drop in Amendment 23 transfers to the State Education Fund would satisfy statutory language in House Bill 24'1448 that pauses the school finance formula'phase'in, keeping the phase'in at 15% rather than advancing to 30%.

LCS emphasized large uncertainty driven by three factors. First, tax'law changes associated with the federal and state policy package (referred to in presentations as OBAA/HR1) have materially altered taxable income and filings. Second, LCS said large refunds and timing effects in early filing season complicate projections: the staff'estimated net refunds and cash with returns for the March'June window are a principal source of variance. Third, geopolitical events that elevate oil prices remain an upside risk to inflation and a downside risk to household purchasing power.

On household finances and consumption, Little said the personal savings rate fell to 3.6% (from a high of 5.5% in April 2025) and that credit card delinquencies are at multiyear highs (LCS cited 12.7%), which could tighten consumer demand over the forecast period. On business side, LCS noted that a large increase in software and information processing investment'much of it AI related'offset declines elsewhere, but cautioned that if AI investment fails to translate into broader consumer demand a market correction could hurt business investment and revenue.

Budget scenarios: LCS presented two scenarios to the committee. Scenario A uses current appropriations and shows a sharp reserve downgrade for FY26 (the presentation described an 8.7% reserve under LCS'midpoint, versus the statutory 15% target). Scenario B layers in committee supplemental actions and certain executive requests; under those assumptions LCS estimated a larger FY27 hole (roughly $1.47 billion relative to a 15% reserve requirement). Sobetzky noted that some cost items (for example, Pinnacle conversion or affordable housing transfers from Prop 1_23) were not baked into Scenario B unless the committee had formally approved them for introduction.

Committee questions focused on three linked uncertainties: how much of the early refund spike reflects timing versus permanent changes in tax liabilities; how corporate estimated payments are evolving after HR1; and whether the FTSE and expanded EITC trigger credits will be available for tax years 2027 and 2028. Sobetzky said LCS'on balance'expects those credits to be turned off in tax years 2027 and 2028 under its baseline, an assumption that improves estimated revenue in later years but is contingent on December 2026 forecast outcomes.

What comes next: LCS and OSPB will reconcile key differences before the committee selects a forecast to use for balancing; the June forecast will reveal which near'term filing'season assumptions were more accurate. Sobetzky urged the JBC to treat the March product as a midpoint with substantial downside risk.

Ending: The committee recessed after LCS'presentation and returned to hear OSPB's alternate outlook.