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?
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 One Big Beautiful Bill Act (OBBBA) enacted several federal tax reforms earlier this year, including:
Colorado currently conforms to most federal tax changes, but lawmakers are now considering decoupling from select OBBBA provisions to preserve state revenue.
Implications:
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:
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.
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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