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Colorado is one of just four states that use federal taxable income to determine how much people pay in state taxes and have what’s known as “rolling conformity” with the federal tax code.
That’s one of the biggest reasons state economists say Colorado’s tax revenue, and thus the state budget, will be so affected by the passage of the One Big, Beautiful Bill Act, the federal tax and spending measure passed by Republicans in Congress and signed into law by President Donald Trump.
Lawmakers must plug an estimated $750 million hole in the state budget when they return to the Capitol on Aug. 21 for a special session as a result of the tax code changes in the measure, also known as the OBBBA.
This gets wonky, but in order to understand Colorado’s budget situation as it pertains to the bill, you have to dive into the details.
Federal taxable income is calculated by adding up all of the money someone or a couple earns in a year, including capital gains, minus any investment losses and any standard or itemized deductions. Most states use federal adjusted gross income, which doesn’t include standard or itemized deductions and thus is a higher amount, to determine how much people pay in state income taxes.
For instance, the so-called big, beautiful bill expanded the standard deduction, which will reduce every individual taxpayer’s federal taxable income.
“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. “Most states with an income tax instead use federal adjusted gross income as a starting point. The OBBBA impacts on federal taxable income are much greater than those for adjusted gross income.”
Meanwhile, Colorado’s decision to use rolling conformity with the federal tax code means that changes to the federal tax code immediately affect Colorado’s tax code.
Other states use what’s known as static conformity, which is where they adapt to the federal tax code, but on a specific date as opposed to immediately. That slows the effect of federal tax changes on their revenue. Some states use selective conformity, which means they only adopt parts of the federal tax code.
The $43.9 billion state budget for the current fiscal year, which started July 1, was passed by the legislature in April. Lawmakers budgeted for as much as they are allowed to spend under the Taxpayer’s Bill of Rights, which caps the annual increase in state spending to population and inflation increases.
On July 1, the budget was balanced — as is required by Colorado law — with the exception of typical variations caused by tax revenue forecast errors. When President Trump signed the bill July 4, the budget became roughly $750 million out of balance because of the projected reduction in tax revenue caused by the measure’s tax code changes.
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MOVING AWAY FROM ROLLING CONFORMITY AND FTI
Colorado has used federal taxable income and has had rolling conformity with the federal tax code for longer than TABOR, which was passed by voters in 1992, has been around.
Colorado lawmakers can try to opt out of parts of the federal tax code, but doing so is complicated and may run afoul of the Taxpayer’s Bill of Rights, which requires voter approval for tax increases.
State Sen. Judy Amabile, a Boulder Democrat who sits on the legislature’s Joint Budget Committee, asked Mark Ferrandino, the governor’s budget chief, this week why Colorado couldn’t move away from rolling conformity.
“It is definitely something that could be done,” Ferrandino said. “It is not something that can be done quickly.”
Ferrandino, the former head of the Colorado Department of Revenue, said the state’s taxation system would have to be overhauled and new tax rules and forms would have to be drafted. He added that states that use rolling conformity but use federal taxable income to determine taxes have double to two-thirds more staffing in their revenue departments.
But Gov. Jared Polis said Wednesday that he’s opposed to changing Colorado’s rolling conformity status.
“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. “That’s an advantage for Colorado. We are not going to become that kind of state.”
The governor said another benefit to rolling conformity is that Colorado taxpayers whose income is below a certain threshold won’t have to pay taxes on up to $25,000 in tips immediately.
In 2021, the Tax Policy Center, an initiative of the Urban Institute and Brookings Institution, and the governor’s office gave a presentation to state lawmakers explaining what would happen if Colorado switched to become an adjusted gross income state.
The bottom line: It would exchange simplicity in filing taxes for control.
The move would let lawmakers set new amounts of standard deductions, personal exemptions and itemized deductions. It would also let the Colorado legislature decide whether to continue the pass-through deduction for business owners.
Minnesota and Vermont are states that recently abandoned federal taxable income in favor of adjusted gross income to calculate how much people pay in taxes.
The Tax Policy Center, at the time it presented to Colorado lawmakers, projected that Colorado could increase tax revenue by up to $500 million by switching to adjusted gross income. Depending on how the change was structured, a small fraction of taxpayers could see an increase in their taxes or a majority of filers could pay more.
“There are countless ways you can make this work — depends on what you want to achieve,” the presentation said.
WHY COLORADO IS SO UNIQUE
Oregon, North Dakota and Iowa are the only other states that used federal taxable income to calculate how much people owe in income taxes and that have rolling conformity with the federal tax code. (Oregon, however, has some variations that make it an outlier among the group.)
Oregon and North Dakota have biennial budgets. Iowa, like Colorado, has an annual budget.
None of those states seem to be having the same five-alarm budget fire as Colorado as a result of the federal tax and spending bill.
The vast majority of the budget in Colorado and Oregon is funded by income tax revenue, which is most affected by the big, beautiful bill. That’s not the case in North Dakota and in Iowa.
But what really sets Colorado apart is TABOR.
In Oregon, North Dakota and Iowa, state lawmakers can raise or lower taxes without a vote of the people. In Colorado, lawmakers must ask voters to sign off before taxes are raised.
WHAT TO WATCH IN THE WEEK AHEAD
THE NARRATIVE
The Colorado GOP’s $104,813 legal debt
Those closely examining the Colorado GOP’s first campaign finance filing under chair Brita Horn may have stumbled across the $104,813 legal debt on the document submitted last week.
That’s been leading to a lot of questions about how Horn racked up such a massive legal bill in her first three months leading the state party.
Her answer: Dave Williams.
Horn said the debt owed to Klenda Legal stems from the party’s attempt to move on from a lawsuit filed by Williams when he was still chair of the Colorado GOP seeking to punish those behind an attempted takeover of the party orchestrated by Horn, former U.S. Senate candidate Eli Bremer and other Republicans.
Williams’ opponents, led by Bremer and Horn, tried unsuccessfully to depose him as chairman in the lead-up to the 2024 election in a conflict that was ultimately settled in the courts. But in February, Williams and the party sued the group alleging breach of contract, abuse of process, civil conspiracy, defamation, civil identity theft, negligent misrepresentation and fraudulent misrepresentation.
The lawsuit, filed in El Paso County, came as the Colorado GOP was preparing to elect Williams’ successor. On March 29, Horn was chosen as the new party chair. Unsurprisingly, one of her first orders of business was to dismiss the party’s lawsuit against herself and her allies. She filed to do just that April 3, but that wasn’t before attorney Matt Arnold, a Williams ally known as a prolific filer of campaign finance complaints, sought to intervene in the case to keep it going.
Arnold filed a motion to intervene in the lawsuit April 2 on behalf of the “Colorado Republican State Party Controversy Investigative Committee.” The “committee’s” members weren’t listed in court filings.
On April 23, El Paso County District Judge Amanda Philipps denied Arnold’s motion, finding that the Colorado Republican State Party Controversy Investigative Committee lacked standing.
That wasn’t the end of the story, however.
On April 24, Eric Grossman and Cody LeBlanc, two other Williams’ allies, filed a motion to intervene in the case. Philipps rejected their motion on July 11 as she dismissed the case in its entirety.
Horn, in an open letter this week, alleged that Williams was behind the attempts to keep the case alive, saying that he “set us on a crash course.”
“My motion to dismiss this lawsuit should have put an end to this senseless vindictiveness,” she wrote. “But former-Chairman Williams, in his final days in office, attempted to rule from the dead.”
You might still be wondering how all of that legal tangle cost the state party $104,813. The Colorado GOP declined to release its legal bills, but Executive Director Alec Hanna said the price doesn’t include Horn’s personal legal costs incurred in the case before she became chair.
The party said the lawsuit was complex and difficult to defend, which is what drove up the expense.
The party plans to file a motion seeking to recover its legal fees. But in the meantime, the $104,813 debt remains on the Colorado GOP’s books.
That’s a problem given the party only had $84,500 in the bank to start July after raising a meager $78,741.35 in Horn’s first three months as chair. And we hear potential donors aren’t happy about the debt.
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THE POLITICAL TICKER
ATTORNEY GENERAL’S OFFICE
Colorado Attorney General Phil Weiser on Thursday informed his employees that he’s instituting a hiring freeze through Dec. 31 to match the executive branch hiring freeze enacted by Gov. Jared Polis to help close a nearly $1 billion hole in the state budget.
Weiser called it the “responsible and ethical action to take.”
“This is not a decision I’ve made lightly, because I know how hard each and every one of you work for Colorado. But it’s one I believe is necessary,” Weiser wrote in a letter to employees. “I understand this news adds a layer of uncertainty at a time when all of you are already working hard to serve the people of Colorado with excellence and integrity. Like in all times of fiscal belt-tightening, there will be uncertainties ahead. And it’s possible that the General Assembly may take actions that impact our personnel.”
MEDIA
Democratic strategists Tanya Nathan and Sarah Andrews have launched a new podcast focusing on millennial moms working in politics.
One of the first guests on “Momarchy” was state Sen. Lindsey Daugherty, D-Arvada.
“We knew there was a want and need for real, relatable political conversations, especially from moms who feel left out of today’s extremes,” said Nathan, who works at Hilltop Public Solutions.
Andrews, who is married to state Sen. Dylan Roberts, D-Frisco, was most recently the federal and gubernatorial campaigns director for Emily’s List. Before that, she ran Gov. Jared Polis’ 2022 reelection campaign.
READ MORE
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THIS WEEK’S PODCAST: Colorado lawmakers are called into a special session
YOU HEARD IT HERE
Crow, a Centennial Democrat, was talking about how national Democrats move forward after their disastrous 2024 election cycle. He’s in charge of recruiting Democratic candidates for the House in districts where Trump won where his party is trying to flip a seat.
You can watch the whole Real Time with Bill Maher segment here.
THE BIGGER PICTURE
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