Colorado Eyes New Tax Measures Amid $1B Budget Gap

Adam Tahir
Aug 12
3 min read

Updated: Oct 27

Colorado lawmakers are confronting a projected $1 billion budget deficit, and a new set of revenue-raising proposals is now on the table including measures that could have direct tax implications for businesses, employees, and advisors statewide.

The two most controversial proposals?

Ending the state's conformity with certain federal tax cuts under the OBBBA Act
Reinstating state taxation on tipped income

Both proposals are early in the legislative cycle, but tax professionals serving Colorado clients should begin preparing now for possible midyear compliance shifts and client questions.

The Proposals: Two Major Tax Shifts in Play

1. Decoupling from OBBBA Provisions

The One Big Beautiful Bill Act (OBBBA) enacted several federal tax reforms earlier this year, including:

A temporary exclusion of tipped income from federal taxation (pending final IRS guidance)
Expanded deductions for certain business expenses
Changes to pass-through entity taxation

Colorado currently conforms to most federal tax changes, but lawmakers are now considering decoupling from select OBBBA provisions to preserve state revenue.

Implications:

Taxpayers could owe Colorado tax on income that’s exempt federally.
Pass-through entities may face conflicting treatments between federal and state returns.
Clients relying on OBBBA’s federal relief (e.g., in the hospitality or gig sectors) may see unexpected state-level liabilities.

2. Reintroducing Tax on Tipped Income

Although the IRS has yet to finalize guidance on the federal "No Tax on Tips" policy, Colorado legislators are preemptively considering a move to explicitly tax tips at the state level, regardless of federal treatment.

This would reverse potential relief for hospitality workers and could place withholding and reporting burdens on employers across restaurants, salons, and rideshare platforms.

Implications:

Payroll systems may need to track and report tipped wages separately for state vs. federal treatment.
Tax prep software for both individuals and businesses would need rapid updates.
Employee communications and compliance documentation would grow more complex especially if IRS rules remain vague into Q4.

Political Backlash and the TABOR Constraint

Both tax proposals are running into strong resistance from taxpayer advocacy groups, especially those citing Colorado’s Taxpayer’s Bill of Rights (TABOR). TABOR limits the state’s ability to raise taxes without voter approval and may block or slow down direct revenue changes.

However, decoupling and base-broadening measures often avoid TABOR triggers, meaning legislators could implement changes without a formal ballot initiative an increasingly common workaround.

What Tax Professionals Should Do Now

Review Client Exposure:
- Identify clients in tip-heavy industries or pass-through entities operating in Colorado.
- Flag those who may have assumed full OBBBA conformity in planning.
Monitor Withholding and Filing Complexity:
- Alert payroll clients that changes may affect withholding, reporting, and quarterly estimates.
Prepare for Mid-Year Guidance:
- Build contingencies into 2025 tax strategy conversations and tax software planning.
Educate Your Clients:
- Publish alerts or blog content that frames this issue clearly for Colorado-based employers and employees.

Looking Ahead

The fiscal pressure is real and Colorado is just one of several states that may back away from OBBBA conformity as they face post-pandemic structural budget gaps. While nothing is finalized, the compliance risk is immediate, and tax professionals who get ahead of these shifts can add real value.

We'll continue tracking the legislative developments. For now, stay alert, document assumptions, and prepare clients for possible divergence between state and federal tax outcomes in 2025.

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