Colorado Projects $1.2 Billion Deficit After Federal Tax Reform: What Tax Pros Should Watch

Adam Tahir
2 days ago
2 min read

Introduction: When Federal Tax Cuts Trigger State Budget Gaps

Federal tax reform doesn’t happen in a vacuum and for Colorado, the fiscal consequences of the One Big Beautiful Bill Act (OBBBA) are already taking shape.

According to new reporting from Axios Denver, Colorado’s Office of State Planning and Budgeting is forecasting a $1.2 billion revenue shortfall for the fiscal year. The driving cause? Provisions in OBBBA that alter how state taxable income is derived from federal AGI, including:

Expanded deductions for tips and overtime
SALT cap increases from $10,000 to $50,000
Partial exemption of retirement and small business income

The state’s flat individual income tax is directly linked to federal definitions, so even tax relief at the federal level can mean less revenue for the state.

Key Revenue Impacts from OBBBA

Colorado’s tax system conforms to federal AGI for both individuals and businesses. As a result, these OBBBA provisions shrink the state tax base:

Provision	State Revenue Impact
No-tax-on-tips (up to $25K)	High concentration in service-heavy regions (Denver, Boulder)
SALT deduction expansion	Reduces state tax owed for high earners
Overtime deduction	Cuts reported wages for compliance purposes
New pass-through relief	Shrinks state business tax base from partnerships and S corps

These reductions come amid rising healthcare, education, and wildfire prevention costs, increasing pressure on state lawmakers.

What Happens Next?

Gov. Jared Polis is expected to call a special legislative session in August. Possible responses include:

New state-level income addbacks
Suspension of inflation-indexed deductions
Consideration of broadening the sales tax base

The state may also revisit proposed increases to cannabis excise taxes or luxury service fees.

What CPAs and Advisors Should Do Now

Prepare for Mid-Year Tax Logic Changes
Any special session outcomes could alter Colorado income tax calculations for Q3 and Q4 estimates. Update payroll systems, estimated tax planning, and software triggers accordingly.
Advise High-Income Clients Proactively
Clients benefiting from OBBBA’s federal cuts may see state offsets decline or phase out if lawmakers pursue clawbacks.
Stay Ready for Addback Legislation
Similar to how California handles IRC nonconformity, Colorado could introduce state-specific adjustments to federal AGI.

Final Thoughts

Colorado’s projected shortfall is a case study in how federal tax relief can produce state-level strain. For multistate businesses and advisors, the lesson is clear: state coupling rules matter.

Bizora’s state tax engine keeps you ahead of legislation that breaks or reinforces federal-state alignment. Whether you’re tracking addbacks, tax base erosion, or new surcharges, our AI helps you plan, not just react.