While congressional Republicans and President Donald Trump enacted tax relief for overtime workers nationwide as part of the One Big Beautiful Bill Act (OBBBA), Colorado Democrats are using it as an excuse to squeeze those workers for higher state taxes.
Now that OBBBA has been signed and is the law of the land, over the course of the next year, governors and lawmakers in many states will be seeking to pass legislation that complements some of the changes that OBBBA made to the federal tax code.
In statehouses across the country, lawmakers will take action to provide the same year-one deductibility at the state level for business capital expenditures, along with research and development costs, that OBBBA restored federally. While state lawmakers will seek to conform with some of the changes made by OBBBA, they’ll also work to decouple from other parts, particularly the international provisions.
In addition to full business expensing, expect some state lawmakers to propose emulating OBBBA’s $25,000 tax deduction for tips and overtime pay by providing a similar state deduction. In fact, over the past year, lawmakers in more than a dozen states have introduced legislation that provides some form of state tax exemption for tip income. That trend will likely continue following federal enactment of the tips and overtime exemptions.
Coming state legislation that complements or conforms with OBBBA will typically be done in a way that reduces state tax burdens, but that’s not the case everywhere.
Take Colorado, where Democrats who control state government have gone in the opposite direction, clawing back some of the federal tax relief that OBBBA provided to workers. Voters, however, may soon have an opportunity to undo that maneuver, which was designed to counteract some of the tax relief provided by OBBBA.
“In April, legislators added into House Bill 1296 — a bill that made several changes to state tax exemptions — a requirement for residents to add the amount of overtime pay excluded from their federal income tax revenue to their Colorado taxable income,” Ed Sealover wrote in a July 17 article for The Sum and Substance, a news site published by the Colorado Chamber of Commerce. “This was a defensive move anticipating that Congress could exempt overtime compensation from federal tax income, as state officials said that mirroring federal law would cost Colorado $400 million to $600 million in annual revenue.”
A July 10 Colorado Springs Gazette editorial noted that “Colorado’s Legislature and Gov. Jared Polis decided to gut-punch Colorado workers,” by voting this spring to raise state taxes on overtime pay, “essentially taxing their hard-earned overtime wages.” That state tax hike, the Gazette editorial went on to add, “was buried in an obscure, wide-ranging bill innocuously titled, ‘Tax Expenditure Adjustment,’ which lawmakers passed this spring.”
Advance Colorado, an organization that has a record of running successful ballot measure campaigns, filed paperwork with the Colorado Secretary of State on July 8 to begin collecting the signatures needed to place a measure on the 2026 ballot. That measure, Initiative 119, would undo the provision in the Expenditure Adjustment Act that decoupled from the new federal exemption for overtime pay. What’s more, Initiative 119 would also prevent state taxation of tip income. In order to qualify for the 2026 ballot, Initiative 119 supporters must collect 124,238 valid signatures.
“If they would have done nothing,” Michael Fields, president of Advance Colorado, said about Colorado legislators, “people would have seen this reduction.” Fields added that when people find out about what the legislature did to ensure that enactment of OBBBA would not also result in a new state tax break for workers, “they are going to be upset that the state took a direct action to ensure higher taxes.”
It remains to be seen whether lawmakers in other states will follow Colorado’s lead, changing state tax law as a way to not provide state tax relief that is the same as what their constituents received from OBBBA. Even if Illinois, New York, Oregon, and other blue states follow suit, however, there is a good chance Colorado voters will end up undoing the state tax hike that served as a model for such proposals.
Patrick Gleason is vice president of state affairs at Americans for Tax Reform, a taxpayer group founded in 1985 at the request of President Ronald Reagan.
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