In Brief:
- Under Colorado’s tax code, changes to federal tax rates immediately affect the state. Major tax cuts from Congress left Colorado with a surprise shortfall.
- Other Colorado policies make its revenue especially vulnerable to income tax changes and limit opportunities for finding new funding streams.
- A special session to address the budget saw lawmakers eliminate some tax credits and grant the governor authority to make spending cuts. Gov. Jared Polis has reduced funding for higher education and health care.
Changes in the federal tax code affect many states but few of them feel the effects as quickly as Colorado. Tax cuts signed into law by President Donald Trump in July had the effect of immediately plunging Colorado’s revenues $1.2 billion below projections, creating a $750 million budget gap.
Last month, Democratic Gov. Jared Polis summoned legislators back for a special session to address “the havoc” federal changes had wreaked on the state’s budget.
Democrats, who control the legislature, passed several measures that addressed business taxes, covering about a third of the budget hole. The state will use reserve fund money to cover another portion. With the legislature going out of session until January, lawmakers chose to give the executive branch power to start making spending cuts to cover the rest.
Polis has announced about $103 million in cuts to health care, state grant programs and higher education. The state is also imposing a hiring freeze.
“We can take legislative action if we disagree with him during the normal legislative session,” says Rep. Shannon Bird, vice chair of the Joint Budget Committee. “But we did want to give the governor some authority to start reducing some spending right now, so that we don't put ourselves in a deeper hole.”
Changes for Businesses
“What we're seeing now is just out of step with historical precedent,” Bird says. “At least not in my days have I ever seen a federal government be so unpredictable.”
Tax cuts for corporations under the One Big Beautiful Bill Act will cost Colorado $950 million in the first year alone. Individual income tax cuts, meanwhile, will cost the state an estimated $460 million. Other aspects of the bill will increase revenue but the state will be left short $1.2 billion on net. The changes passed by the legislature should bring in $250 million.
Those changes drew fire from some Republican lawmakers who argued it violated the state constitution, which prohibits tax increases without voter approval. Democrats argued that they weren’t creating new taxes, only eliminating tax credits and incentives while closing loopholes.
They scrapped a tax break for pass-through businesses such as LLCs and eliminated a break for insurance companies with regional offices in the state. Colorado also will stop giving retailers a rebate to compensate them for the administrative work of collecting sales tax.
Lawmakers also expanded a list of countries where corporations must prove they are not shielding income from taxation. Finally, they also passed a bill letting large companies prepay future taxes at a discounted rate, giving the state money now while saving companies money in the long run.
