Colorado lawmakers are facing a fiscal reckoning after the passage of the One Big Beautiful Bill Act (OBBBA), a sweeping federal tax and spending measure signed into law by President Donald Trump on August 4, 2025. The legislation, which was intended to overhaul the nation’s tax code and deliver relief to taxpayers, has instead left Colorado with an unexpected and daunting budget shortfall. The state’s unique tax structure, closely tied to the federal tax code, means that changes made in Washington ripple through Denver’s finances almost instantly—sometimes with dramatic effect.
On July 1, 2025, Colorado’s $43.9 billion budget for the new fiscal year was balanced, as required by state law. But that equilibrium proved short-lived. Just days after the OBBBA became law, state economists and legislative staffers revealed that the new federal standard deduction and other tax changes would slash Colorado’s tax revenue by an estimated $750 million, according to a report in The Colorado Sun. That’s because Colorado is one of only four states—alongside Oregon, North Dakota, and Iowa—that use federal taxable income as the starting point for calculating state taxes and practice what’s called “rolling conformity.” In plain English, that means when the federal tax code changes, Colorado’s tax code changes right along with it, without delay.
“The impacts of the OBBBA on Colorado’s income tax revenue may be larger as a share of total state revenue than that for many other states because Colorado’s state tax base begins with federal taxable income,” nonpartisan legislative staffers wrote in a document to lawmakers last month, as cited by The Colorado Sun. Most other states use federal adjusted gross income instead, which isn’t as dramatically affected by changes to the standard deduction or other federal tweaks. For Colorado, the immediate effect was a budget that went from balanced to deeply in the red overnight.
The governor’s office predicts that the OBBBA will reduce state corporate income tax revenue by up to $950 million and cost up to $290 million more from the new exemption on overtime income. Individual taxpayers will also see changes: the bill’s exemption on the first $25,000 in overtime for families (or $12,500 for individuals) is expected to result in up to $460 million less in state individual income tax collections. Nonpartisan Legislative Council Staff pegs the total tax revenue hit at $1.2 billion, with the current year’s budget impact estimated between $680 million and $783 million after accounting for the Taxpayer’s Bill of Rights (TABOR) cap on government growth and spending.
So, what makes Colorado’s situation so dire compared to the other three states with similar tax systems? The answer, in large part, is TABOR. Passed by voters in 1992, TABOR places strict limits on how much the state government can spend and requires voter approval for any tax increases. In Oregon, North Dakota, and Iowa, lawmakers can raise or lower taxes without such hurdles. As a result, when federal tax changes shrink state revenues, Colorado legislators can’t simply adjust tax rates or create new revenue streams on their own—they have to ask voters first.
Governor Jared Polis, speaking to reporters on August 6, 2025, made it clear he opposes moving away from Colorado’s rolling conformity with the federal tax code. “We, in my opinion, don’t want to be a state where every individual has to file two entirely different sets of taxes, one for state and a separate one for federal, because there’s different deductions or rules,” Polis said, as reported by The Colorado Sun. “That’s an advantage for Colorado. We are not going to become that kind of state.” He also highlighted a benefit for lower-income workers: “Colorado taxpayers whose income is below a certain threshold won’t have to pay taxes on up to $25,000 in tips immediately,” a provision expected to reduce tax revenue by up to $90 million in the current fiscal year.
Still, the state must now find a way to plug the $750 million hole before the fiscal year ends. The governor’s office has floated several options. These include drawing down the state’s budget reserve by $200 million to $300 million—though that would reduce the reserve to just 13%, below the 15% some economists recommend for economic downturns. Other proposals involve cutting $250 million to $300 million from existing programs and services (with a stated goal of protecting K-12 education), and raising revenue by tightening tax policy. That could mean continuing to decouple from the federal qualified business income pass-through exemption for business owners, expanding the list of countries where corporations can’t shield income from taxes, eliminating an $80 million tax break for insurance companies with regional offices in Colorado, and removing a retailer tax benefit. There’s even talk of letting large taxpayers prepay future taxes in exchange for a discount down the road.
As lawmakers prepare to return to the Capitol for a special session on August 21, 2025, there’s a sense of urgency and, for some, cautious optimism. The budget crisis comes at a time when Congress is also wrestling with farm policy. At FarmFest on August 9, House Ag Committee member Angie Craig (D) reaffirmed her commitment to farm bill negotiations, emphasizing the need to reauthorize vital programs like the Conservation Reserve Program and agricultural loan initiatives. Senate Ag Committee Ranking Member Amy Klobuchar noted that bipartisan legislation in the Senate could help pave the way for a “skinny” farm bill—a pared-down version focused on essential priorities.
Ag Secretary Brooke Rollins, speaking in Nebraska, acknowledged that while many priorities were included in the One Big Beautiful Bill, some remain unfinished, citing Prop 12 and year-round E-15 as examples. House Ag Committee member Don Bacon (R) of Nebraska lamented that the budget reconciliation process had “poisoned the well for bipartisanship,” but urged Democrats to participate in negotiations: “We need them to get it done.” Senate Ag Committee member Deb Fischer (R) expressed optimism that committee leadership understood the need to bring both parties together to pass the legislation.
Through all this, the stakes for Colorado remain high. The state’s reliance on income tax revenue, combined with the constraints of TABOR and its unique tax conformity, means that what happens in Washington doesn’t stay in Washington—it lands squarely in the laps of Colorado’s lawmakers and taxpayers. While some see the current crisis as a wake-up call to reconsider the state’s tax structure, others argue that the simplicity and predictability of rolling conformity outweigh the risks.
As the special session approaches, all eyes are on the Capitol. Lawmakers must make tough choices—drawing down reserves, cutting programs, or seeking new revenue—to restore balance to the budget. The outcome will shape not only Colorado’s fiscal future but also the lives of millions of residents who depend on state services. For now, the only certainty is that the debate over taxes, spending, and the state’s financial stability is far from over.
