Colorado lawmakers returned to the Capitol this week for yet another special session, their third in three years.
While the prior two special sessions focused on property tax reform, this year’s revolves around a nearly $800 million hole that opened up in the state budget as a result of the federal tax bill passed by Congress and signed by President Donald Trump last month.
Here’s how that happened and how lawmakers intend to fix it during the session, which began Thursday and is expected to continue through the weekend.
So, what’s up with the budget?
On July 1, the state’s new fiscal year started, with the government funded by a budget that lawmakers passed — and Gov. Jared Polis signed — in the spring. A few days later, Congress passed — and President Donald Trump signed — a massive tax-and-spending bill that cut federal taxes by $4.5 trillion.
For Colorado, the new law ripped an estimated $1.2 billion hole in expected state revenue. That’s because the state income tax system relies heavily on the federal system’s treatment of income.
Projections from state economists indicate that most of the lost revenue is due to tax cuts for corporations, though some is also due to the federal tax bill’s temporary tax cuts on income from overtime and tipped wages.
Part of that revenue loss will be eaten up by the state’s previously expected surplus, which was due to be refunded to taxpayers through various means.
Ultimately, lawmakers — who overcame a $1.2 billion shortfall in the original budget earlier this year — will have to raise, cut or find between $680 million and $783 million, depending on which projection is used, to close the new budget gap.
How are they going to do that?
Democrats have laid out a three-pronged plan — one they’ve largely followed so far:
- First, they can raise the money by adjusting the state’s tax code (but not by raising taxes on individuals or businesses). Democrats have put targets on some corporation-friendly tax credits and deductions. That includes eliminating one for insurance companies that have offices here (after a recent audit found they still reduced jobs despite collecting the credit). Another bill would expand the state’s efforts to tax income that companies stash in foreign countries. A third would eliminate a cut the state allows businesses to keep for collecting and sending along sales tax revenue. The governor’s office proposed finding about $250 million worth of such revenue raisers.
- Second, lawmakers can borrow money from the state’s piggy bank. The governor’s office recommends taking 2% — roughly $300 million — from reserves to help cover this year’s deficit. That’s a somewhat tricky proposition, since any money taken has to be paid back, and the reserve exists so the state can weather economic downturns.
- And third, there’s spending cuts, with between $100 and $300 million left to trim if the above ideas pan out. As for where to trim spending, Polis would largely be given the authority to decide under existing — but soon-to-be tweaked — statutory authority.
What the governor decides to cut will depend on how much money lawmakers are able to raise or borrow over the next several days. He then plans to release his spending reduction plan before the end of the month.
Are Republicans on board with this plan?
They definitely don’t want to target corporate tax credits or raise revenue. Indeed, they proposed an increase in the sales tax handling fee given to businesses and cuts to other taxes, which would deepen the state’s hole.
They also want to classify some of the Democrats’ revenue-raisers as falling under the Taxpayer’s Bill of Rights, which would mean they’d require voter approval to advance. So far, Republicans’ bills have been assigned to “kill” committees.
Are other states getting hit hard like this?
Not in this way, and not right now.
Colorado has what’s called “rolling conformity” with the federal tax code. Generally speaking, that means that when the feds change the tax code, Colorado mirrors that change immediately. That makes it easier for you to file your taxes each spring, with the federal and state forms aligned more closely, but it also means that these sorts of mega-changes from Washington, D.C., hit quickly.
Another reason the tax bill is hitting harder here: Colorado also uses federal taxable income to determine a resident’s state liability.
What is the role of TABOR here?
The state’s budget is dictated, in large part, by the TABOR Amendment in the state constitution. State revenue is allowed to grow based on the state’s population increases and the rate of inflation, but not more. That sets limiting thresholds for the general fund, which is the legislature’s primary spending account to pay for state services.
Democrats have debated whether to seek an adjustment to TABOR that would allow the state to keep more revenue rather than having to refund excess money above the TABOR threshold.
As inflation and population growth have both slowed, budget growth has slowed, too — which is partially why the legislature had to curb spending by $1.2 billion earlier this year in the original budget. Reform-minded Democrats argue the state should be able to keep more money, particularly given that health care costs typically rise faster than inflation.
Republicans, who backed TABOR when it passed 33 years ago, oppose those reform efforts.
That’s the crux of the long-standing debate over the state’s structural deficit: Democrats argue that TABOR’s caps created the structural deficit, while Republicans counter that Democrats should better prioritize spending and live within their means.
All of that is largely separate from what’s happening now. TABOR’s interplay here is that the legislature can’t raise taxes without asking the state’s voters — which means lawmakers can’t, say, hike the income tax on top earners now to rake in some more cash and go on home.
But the current shortfall is a direct result of the tax bill. The bipartisan Joint Budget Committee created a budget for this fiscal year based on revenue expectations that the tax bill later undercut. Now, lawmakers have to figure out how to adjust to ensure that the state has enough money to cover its bills through the end of June.
Why do this before the regular legislative session?
Lawmakers are set to return in mid-January for their regular session and could, theoretically, wait until then to handle this problem. Some Republican lawmakers have questioned the need for a special session at all.
But waiting would mean the state would have spent a significant portion of this year’s budget by then. The governor’s office and Democratic legislators have argued that coming back now gives them the maximum amount of options, both to raise revenues by closing certain tax loopholes and to cut spending with a (nearly) full budget still ahead of them.
There are other reasons, too.
During the special session, lawmakers have moved to adjust a ballot measure that’s intended to raise money for the state’s school meals program. The tweak would make it so that excess revenue could also help pay for a food assistance program that was slashed by the Republicans’ federal tax bill. That’s going on the November ballot, so time is short.
Polis also really wants to water down or delay new artificial intelligence regulations, which are set to take effect in February. Even if lawmakers agreed to do so and immediately passed a bill in the early days of the January session, industry interests have said that’s too late for them to adjust accordingly.
So, a budget-focused special session also offered a convenient avenue for solutions there, too.
Is Medicaid involved in this?
Not at this point. Though KFF, a national health care think tank formerly known as the Kaiser Family Foundation, estimates that Colorado will lose between $9 billion and $15 billion in Medicaid funding by 2034 as a result of the tax bill’s Medicaid cuts, those changes won’t come into effect for more than a year.
That means lawmakers mostly won’t be talking about Medicaid during this special session. But it will pose a significant problem for them to solve soon, likely starting next year.
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