What the Colorado legislature did during its special session to tackle a $750M budget hole

Democratic state lawmakers voted this week to increase the tax bills of Colorado businesses and business owners by about $150 million to help close a roughly $750 million hole in the state budget.

But they deferred to the governor for perhaps the hardest part of addressing the gap: cutting as much as $300 million in state programs and services.

Those were among the most notable decisions made by lawmakers during a six-day special legislative session to address the effect of tax policy changes made by the One Big Beautiful Bill Act, the Republican federal tax and spending measure signed by President Donald Trump in July. Because of how Colorado's state tax code matches the federal tax code, the changes dramatically reduced state revenue starting this fiscal year.

But that wasn't all that happened during the special session.

There was an attempt to change Colorado's first-in-the-nation law regulating artificial intelligence, but it fell flat amid a massive lobbying effort by tech companies. (Read about that here.) The legislature's Democratic majority also used its brief return to the Capitol to shore up funding for Planned Parenthood, health insurance subsidies and food assistance.

Eliminating and cinching business tax breaks

To bring in more revenue, lawmakers changed four tax provisions affecting businesses and business owners.

To raise about $45.9 million for this fiscal year, which began July 1, Democrats nixed a tax break for wealthy owners of so-called "pass-through businesses" that would have taken effect in January.

Single filers earning more than $500,000 of profits or joint filers earning more than $1 million will not get the break.

Pass-through businesses, like sole proprietorships, S corporations and partnerships, don't pay corporate income taxes because their profits "pass through" to their owners. The "qualified business income" tax break, which originated with the Tax Cuts and Jobs Act signed by Trump in 2017, during his first presidency, was aimed at helping owners of pass-through businesses get an income tax break similar to what companies received when Congress cut the corporate income tax rate.

To bring in about $44 million this fiscal year, Democrats passed a bill ending a tax break for insurance companies that have a "regional home office" in Colorado. The incentive is aimed at boosting the insurance workforce, but Democrats say some insurers that claim the credit have actually cut jobs in the state.

Democrats also passed a bill adding Hong Kong, Ireland, Liechtenstein, Netherlands and Singapore to the list of countries that corporations can't route their revenue through without proving to the state that they aren't shielding their earnings from taxation. That's expected to raise about $36 million in the current fiscal year.

Perhaps the most controversial change made by Democrats was to end a state sales tax vendor rebate that lets businesses with up to $1 million in taxable sales per filing period (generally monthly) keep up to 4% of their sales tax collections each month, up to $1,000. The measure is forecast to generate about $28 million in the current fiscal year.

Democrats also passed a bill that will let the state sell up to $125 million in tax credits to large companies, mainly insurance corporations, for as little as 80 cents on the dollar. That's expected to raise $100 million for the current fiscal year.

The credits will effectively let the companies that buy them prepay their taxes through 2033 at a discount.

After tapping into as much as $300 million in the state's budget reserves, addressing the rest of the $750 million deficit will be left to the governor under another measure passed by Democrats during the special session.

Gov. Jared Polis' office is scheduled to present its plans to slash state programs and services to the legislature's Joint Budget Committee on Thursday. Those cuts will take effect Sept. 1.

Polis hasn't said exactly where he will make cuts. But the governor said his previous savings proposals should be an indication of where he will make up the difference — meaning services like autism treatment could be on the chopping block.

Republicans were uniformly opposed to the Democratic proposals, arguing that the state budget should be cut instead of increasing businesses' tax bills.

Boost to health care and food assistance

To blunt the blow of the One Big Beautiful Bill Act's cuts and other changes to SNAP, the Supplemental Nutrition Assistance Program commonly known as food stamps, Democrats passed a measure that aims to increase state funding for the program. Polis signed the bill into law Tuesday.

The federal changes to SNAP, namely work requirements for recipients, are predicted to cost Colorado $50 million to implement in their first year. To cover those costs, Democrats want to repurpose some of the revenue the state collects for Healthy School Meals for All, Colorado's free school meal program, by tweaking a pair of ballot measures going before voters in November.

Proposition MM and Proposition LL would raise more money for school meals by increasing taxes on Coloradans who earn more than $300,000 per year, and would allow the state to retain and spend all the revenue it collects for the program, rather than return some of it to taxpayers under the Taxpayer's Bill of Rights.

Money would only go to SNAP if there is enough tax revenue collected to fully fund the Healthy School Meals for All program.

Another measure passed during the special session will allow state Medicaid dollars to pay for all Planned Parenthood services.

The reason for the measure is that the One Big Beautiful Bill Act prohibits federal Medicaid dollars from going to Planned Parenthood for non-abortion services, like screening for sexually transmitted diseases and cancer. That provision isn't active while it is being challenged in court, but Democrats in the legislature are bringing this bill anyway in case the lawsuit fails.

Federal law already prohibits federal dollars from being used to pay for abortions. Colorado law was recently changed to allow state dollars to be used for abortions.

Jack Teter, vice president of government affairs for Planned Parenthood of the Rocky Mountains, which serves Colorado, New Mexico and Wyoming, said the provider sees more than 10,000 Coloradans on Medicaid every year.

Blunting a rise in health insurance prices

Lawmakers also passed a bill to fund health insurance discounts, predominantly for low-income Coloradans. The discounts are expected to expire at the end of the year unless Congress steps in to renew them. That will happen by selling another $125 million in tax credits to insurance companies and other corporations.

Like the tax credits being raised for the state budget, they will be sold for as little as 80 cents on the dollar, and are predicted to ultimately raise about $100 million. (Again, the credits will effectively let the companies that buy them prepay their taxes through 2033 at a discount.) If all the credits aren't sold, the legislature will tap the state's budget reserves to make up the difference.

Without the funding, insurance prices for people who get coverage through the individual market are expected to rise an average of 28% next year.

The bill also moved $10 million that was earmarked for a bridge project near the Capitol in celebration of the state's 150th anniversary that Polis axed to the efforts to drive down health care prices.

Finally, about $250,000 was sent to the health insurance premium discount initiative that would have otherwise gone toward Colorado's wolf reintroduction efforts. Colorado Parks and Wildlife will have to find the money elsewhere.