During the recent economic recession, General Fund revenue in current dollars decreased over two consecutive fiscal years. Since the low point of the 2009–2010 when the General Fund fell to $6.4 billion, this number has increased by an average of $0.65 billion over the past four years.A March 2015 estimate projected that General Fund revenue was on track to grow by nearly nine percent in the current fiscal year, but contraction in oil and gas industry-related activity is projected to slow revenue gains. The projected General Fund amounts for the fiscal years beginning in 2014 and 2015 are $9.6 billion and $10.3 billion, respectively. One novel aspect of this year’s budget debate is that economic gains are substantial enough that lawmakers will have to consider tax refunds under TABOR. According to TABOR, which voters ratified in the state constitution in 1992, the state must issue tax refunds if revenues exceed the prior year’s spending after accounting for inflation and population growth. TABOR refunds have not been possible for at least a decade. The governor’s budget includes a rebate forecast in the amount of $167.2 million.Legislators may ask voters to forego refunds in lieu of providing spending in a number of areas. The governor’s budget letter outlines several contingency plans where additional legislation or voter approval may be necessary to enact the spending items it includes. The governor’s 2015–2016 budget proposed increasing appropriations from the General Fund for most state departments. Table 1 provides summary data comparing the proposed budget with spending levels from the prior year.

The first items discussed in the governor’s budget letter concern education,4×8 botanicare tray which is among the governor’s highest priorities. Since Governor Hickenlooper previously campaigned for passage of Amendment 66—a tax increase to fund K-12 education— it is not surprising to see his budget propose increases in education funding in the aftermath of its defeat. Put to voters on the 2013 ballot, Amendment 66 proposed an approximate 10 percent increase in the tax rate on income up to $75,000 and a 25 percent increase on income beyond $75,000. According to the state, the amendment would have raised taxes by $950 million in the first year following adoption. Despite the fact that supporters of the amendment raised in excess of $10 million to promote the measure, Colorado voters overwhelmingly rejected the tax increase with 64 percent of the electorate voting against it. Following this resounding defeat, the governor’s proposed budget seeks to increase education funding. The defeat of the tax increase to fund education could make more modest increases in education spending more acceptable to Republican legislators. Many Democratic lawmakers who supported the tax increase view the governor’s increase in K-12 spending as all the more necessary. Accordingly, the budget for the upcoming fiscal year increases total spending on K-12 education by 8.1 percent , an increase in per pupil funding of nearly $475 that brings total per pupil funding to about $7,500. Spending on higher education will increase by over $100 million after agreement was reached in 2014 on legislation limiting undergraduate tuition increases to no more than six percent in exchange for greater direct support from the state budget.4 General Fund increases for public institutions of higher education was set at about $75 million. This amount allocated to the governing boards of higher education institutions reflects an increase of 12.5 percent in General Fund spending.

An additional $30 million would be allocated to a new Colorado Opportunity Scholarship Initiative, which would go toward student scholarships funded jointly by public and private sources. The budget from the previous year included about $60 million from the General Fund to institutional support with $40 million designated for student financial aid. After education, the second largest increase in spending is proposed to go to the Department of Health Care Policy and Financing where, as in previous years, caseload increases have necessitated greater funding. Accordingly, the budget includes an increase of $82 million from the General Fund. An additional $154.7 million in General Fund spending is pegged for future casework and modernization related to Medicaid, children’s health plans, and other health programs. Another notable increase in health care spending is a proposed increase of $11.4 million for 1.0 percent raises in provider and targeted service rates. Nearly $7 million of a $25 million General Fund increase in Department of Human Services spending is proposed to allow counties to hire 130 additional child welfare caseworkers, and mental health and juvenile correctional institutions are scheduled to hire more than 100 new full-time employees.Interest in directing greater funds to this area grew after the murder of Department of Corrections Director Tom Clements in 2013. The new director, Rick Raemisch, has championed meaningful prison reform. After increasing General Fund spending for the department by more than six percent last year, the 2015–2016 budget proposes a more modest increase of 4.0 percent, or nearly $30 million. The department estimates a small increase in the number of offenders housed in its facilities, and greater funding will allow the department to improve operations and facilities, including the addition of 330 beds.

The state expects to hire more than 20 full-time employees to better assist people in the criminal justice system with mental health issues. A 1.0 percent provider rate increase is also included in the budget. The only departments with proposed reductions in General Fund spending were Public Health and Environment, Public Safety, and Revenue. Funding requested for the Department of Public Safety is 8.5 percent lower due to the absence of nearly $10 million in funding allocated to purchase aircraft and equipment for an aerial firefighting fleet. These funds made it into the prior year’s budget after the state experienced one of the most devastating wildfire seasons in its history. Partially filling this void is a proposed additional $2.7 million in funding to go toward two new Colorado Bureau of Investigation forensic labs and a 1.0 percent increase for state community corrections program providers. Funding proposed for the Department of Public Health and Environment is 28 percent lower largely due to the absence of appropriations made last year to help communities recover from widespread flooding that occurred in September 2013. General Fund spending for the Department of Revenue is slated for reduction with the loss of a one-time appropriation of $6.2 million in the prior year’s budget to help the department modernize its operations. These anomalies explain most of the larger cuts in General Fund spending. The budget preserves the status quo in most areas with a few targeted increases. The marijuana tax revenue makes spending increases more palatable to legislators. In 2012, when nearly 55 percent of Colorado voters cast ballots in favor of legalizing recreational marijuana use by adults over the age of 21 the state’s counties were nearly evenly divided on the issue. Thirty-three of the 64 counties had a majority voting in favor of legalization, while 31 counties were had more no voters. One of many reasons for the ultimate success of the measure was that localities were given the option to prohibit marijuana business.”A year-end analysis in The Denver Post noted that 23 Colorado counties currently permit marijuana cultivation, sales, or both . Within these counties, 53 cities or towns permit recreational marijuana sale. As of March 2015,grow glide racks the state had licensed a total of 341 retail stores to sell marijuana. Including those authorized to sell medicinal marijuana, the number of outlets is over 500 .6 A study by the Marijuana Policy Group found that the demand for marijuana in the state likely far exceeds prior estimates, although the total amount of tax revenue generated by the first year of legal recreational sales fell short of expectations . Using survey data, the study estimates about 13 percent of Colorado’s population used marijuana at least once in 2010 or 2011. Approximately nine percent of adults reported consuming cannabis in some form at least once a month. Based on a survey about frequency of use, Light et al. estimate that the total marijuana demand in the state is 121.4 metric tons annually.

According to their methodology, individuals that consume cannabis daily constitute about one-fifth of marijuana users, but about two-thirds of total demand. Results from this study, when considered in conjunction with tax data, present a paradox. If the demand for marijuana was previously underestimated, why have tax revenues associated with the new marketplace fallen short of expectations? One of many possible explanations is that many individuals continue to take advantage of the black or medical markets to avoid the taxes associated with higher-priced retail marijuana. Given the novelty of recreational marijuana legalization, substantial uncertainty existed regarding the economic benefits that would ensue. Taxes on recreational marijuana include a base sales tax of 2.9 percent, an additional 10 percent sales tax, and a 15 percent excise tax. By the end of 2014, recreational and medicinal marijuana sales totaled nearly $700 million , with about 45 percent of the total from retail sales. During the first month of recreational sales, few retail outlets were operational, and sales of medical marijuana were more than double the nearly $15 million in recreational marijuana sales. Recreational marijuana sales increased every month through August by an average of $2.8 million. August was the first month that recreational sales exceeded medicinal sales. Recreational sales decreased for the first time in September and held steady at about $31 million over the next few months. December brought another increase as recreational sales passed $35 million for the first time. Recreational sales in January 2015 came in at nearly $36.5 million, so it remains yet to be seen at what point sales will plateau . Tax revenue associated with the sales has been well below most prior projections. Figure 1 provides monthly tax, licensing, and fee revenue data for both recreational and medical marijuana in 2014. All data are from the Colorado Department of Revenue. As seen in the figure, revenue from medicinal sales remained relatively constant in 2014, ranging from a low of $1.41 million to a high of $1.87 million. Some expected the number of medicinal marijuana patients to decrease with the roll out of recreational marijuana, but the number of residents with a valid red card actually increased by over 4,000 to reach a total of 115,467 . Governor Hicken looper originally estimated the state would receive $134 million in marijuana tax revenue in the 2014–2015 fiscal year. This figure was revised in April to approximately $114 million . When the final tax revenues from 2014 were tabulated, the state had collected $76 million, $63.4 million in taxes and the remaining revenue from licensing and other fees. The state of Washington collected approximately $22.7 million in tax revenues and fees for marijuana sales that began in July . Under the tax structure approved by voters, the first $40 million in marijuana excise tax revenue is mandated to go toward school construction. Revenue beyond this amount is not designated for particular purposes. In 2014, excise tax revenue totaled $13.3 million, which fell below expectations. January 2015 showed signs of greater optimism as $36.4 million in recreational marijuana was sold, resulting in over $2.35 million in excise tax revenue for schools. This is the first month excise tax revenue exceeded $2 million. In January 2014, excise tax revenue totaled just $200,000 . In sum, revenue from legal recreational and medicinal marijuana continues to grow steadily, despite the fact that revenue levels have not approached what many originally projected. For numerous reasons, the continued unfolding of the recreational marijuana market merits watching. Stricter packaging rules for edible marijuana products were recently adopted. In March 2015, the state had to defend legalized marijuana in federal court for the first time in response to a lawsuit filed by Nebraska and Oklahoma officials. One aspect of the state’s marijuana industry in a nascent phase is marijuana tourism. A recent study estimated that “out-of-state visitors currently represent about 44 percent of metro area retail sales and about 90 percent of retail sales in heavily visited mountain communities. Visitor demand is most prevalent in the state’s mountain counties, where combined medical and retail marijuana sales more than doubled after retail sales were legalized in January, 2014” . In some areas, much of the revenue generated through marijuana sales comes from out-of-state visitors. Regulations initially imposed differentiated sales limits whereby state residents could purchase four times the amount of marijuana per day than an out-of-state visitor.