Colorado state legislators plan to address part of their $750 million budget gap caused by federal tax changes by changing the state’s business tax policy.
In a special session, lawmakers said the new changes will generate approximately $244 million in new revenue. The Democratic-controlled legislature this week passed five bills aimed at business tax deductions and credits in an effort to close some of the gap.
Democratic lawmakers said the cuts were made as part of an agreement with Gov. Jared Polis (D-CO).
The largest source of revenue will come from selling tax credits by allowing insurance companies and other corporations to prepay taxes in exchange for future financial benefits. The measure is estimated to generate $100 million immediately but will cost Colorado $125 million over the next decade.
The state will additionally add back two business deductions on federal tax returns, which is estimated to generate an additional $73.5 million in state tax revenue.
Insurance companies will lose a tax deduction rate originally established to encourage job growth. This is estimated to generate another $44 million in state tax revenue.
Lawmakers also eliminated a provision that allowed businesses to keep a portion of state sales tax dollars for collecting the sales tax, which is estimated to generate $26 million in state tax revenue.
In total, these tax changes are estimated to generate $243.9 million of the state’s $750 million gap.
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The deficit was caused by tax policy changes from the One Big Beautiful Bill Act, the Republican federal tax and spending measure signed into law by President Donald Trump in July. Colorado uses the federal tax code as its state tax code, so the law will leave the state with a large drop in tax collections.
The remainder of the budget shortfall is expected to be addressed through reserve funds and funding cuts.