Just when we thought Colorado’s budget was on solid ground, the state has been hit with a significant new challenge. Although the new fiscal year started on July 1 with a balanced budget, it didn’t last long.
On July 4, the enactment of HR 1 (the federal budget reconciliation bill, formally the “One Big Beautiful Bill Act”) immediately created a deficit for Colorado. This happened because of Colorado’s “rolling conformity” policy which automatically incorporates federal tax code changes into state law, meaning the corporate and individual tax provisions of HR 1 took effect immediately. The retroactive nature of these changes means there was no phase-in period, causing immediate revenue losses for the fiscal year 2025–2026 budget cycle.
As a result, the state anticipates a revenue loss of $1.2 billion this fiscal year. This does not mean the budget is $1.2 billion short, however. Because the state’s revenue was already projected to be above the Taxpayer’s Bill of Rights (TABOR) cap, some of the lost revenue simply reduces a potential tax refund. This results in a smaller but still significant immediate budget shortfall of between $680 million and $783 million.
This is not a one-time issue. Experts anticipate a continued drop in tax revenue, with forecasts suggesting the state will remain below the TABOR cap for the foreseeable future. The long-term fiscal picture is further complicated by expected cuts to federal funding for programs like Medicaid. These cuts will likely require the state to cover more of the costs, potentially leading to a larger structural deficit over the next several years and a total deficit of up to $3 billion over five years.
The State’s Proposed Solutions
To address this shortfall, the state is considering a three-part strategy:
Using Reserve Funds: The fastest way to close the immediate gap is to use the state’s budget reserve. The proposal is to draw between $200 million and $300 million, which would drop the reserve from its current 15%. This action, which would put the reserve below the legally required amount, would leave the state vulnerable to a forecasted mild recession.
Enhancing Revenue: The governor’s office is proposing a number of measures to increase state revenue. These include closing various corporate and business tax loopholes and ending certain tax benefits. The state is also considering a plan that would allow some large taxpayers to prepay their future taxes in exchange for a discount.
Departmental Budget Cuts: The final part of the strategy involves cutting between $250 million and $300 million in previously-approved spending on existing programs and services.
The state will need to navigate these significant financial challenges by carefully considering the proposed strategies. The decisions made will not only affect the current fiscal year but will also shape the state’s economic landscape for years to come. We will continue to monitor the situation and provide updates as the state works to address this substantial budget shortfall.
