Gov. Jared Polis on Wednesday ordered state lawmakers back to the Colorado Capitol on Aug. 21 for a special legislative session aimed at addressing the nearly $1 billion hole punched in the state budget by the so-called big, beautiful bill, congressional Republicans’ federal tax and spending measure.
In his executive order calling the special session, Polis also ordered state agencies to implement a hiring freeze through the end of the year.
“If it were to be dealt with in February or March of next year, it would be very, very harsh cuts for those final three or four months of the year,” the governor said of addressing the budget shortfall in an interview with The Colorado Sun. “It would be devastating to the services we offer. Much better to spread everything (around).”
Polis also directed the General Assembly to attempt to tweak Colorado’s first-in-the-nation law regulating artificial intelligence or delay its start. Right now, the statute is set to take effect in February, much to the chagrin of the tech industry, which warns the policy will stifle innovation and hit their bottom-line.
The hole in this year’s state budget, estimated to be between $680 million and $783 million, is caused by changes to the federal tax code made by the big, beautiful bill that reduce the tax burden on individuals and corporations.
The governor’s office predicts the bill will reduce the state’s corporate income tax revenue by up to $950 million. Its exemption on income taxes for the first $25,000 on overtime earned by families (or $12,500 for individual tax filers) is expected to result in a hit to state coffers of up to $290 million. That’s a big part of the up to $460 million in projected reductions in state individual income tax collections caused by the Republican federal tax and spending bill.
Colorado’s tax code is written to mostly mirror federal law, which makes it one of a handful of states particularly susceptible to the tax changes in the Republican bill. As federal tax collections fall, so will Colorado’s.
Nonpartisan Legislative Council Staff and the Office of State Planning and Budgeting each forecast that the big, beautiful bill will reduce state tax revenues for the current fiscal year, which started July 1, by $1.2 billion.
Legislative Council Staff believes there will be a slightly bigger revenue impact from individual income tax reductions and a slighter smaller impact from corporate income tax revenue reductions, but they agree on the $1.2 billion overall hit.
After accounting for revenue expected to be collected by the state this year in excess of the Taxpayer’s Bill of Rights cap on government growth and spending, that still leaves a gap in the $750 million range in Colorado’s current, $43.9 billion spending plans. (The hole was estimated last week by the governor’s office to be larger, at more like $1 billion, before it found a math error.)
The governor’s office now believes the budget hole is $783 million. Nonpartisan legislative staffers have consistently said it’s about $680 million.
The revenue hit in the current fiscal year is separate from how Medicaid and other social safety net changes made through the GOP tax and expenditure bill will affect state finances. Most of those new eligibility requirements and spending reductions won’t take effect until the end of 2026, so the legislature can wait until next year, when it returns for its normal lawmaking term, to take on the effects of those provisions.
To close the gap, lawmakers will likely look to close existing tax loopholes for businesses. They can also dig into the state’s reserves, though they will have to repay those dollars in the future. Finally, they can slash existing spending plans.
Mark Ferrandino, who leads the Governor’s Office of State Planning and Budgeting, said how much money has to be cut from existing spending plans depends on how many tax loopholes the legislature closes.
The hiring freeze is expected to save between $3 million and $7 million.
“We are looking at all the options,” Ferrandino said of where the cuts, which are expected to be hundreds of millions of dollars, will be made. “Our goal is to protect K-12 education. But outside of that, we’re looking at all options.”
While it will ultimately be the legislature’s decision on how to close the budget gap, the governor’s office offered suggestions:
- Draw down the state’s budget reserve by between $200 million and $300 million, which would drop the reserve to no more than 13% from 15%. The reserve is there to cushion the budget when there’s an economic downturn, and economists have warned that even 15% is too low should there be a severe recession.
- To raise revenue, the governor’s office wants the legislature to continue decoupling from the federal qualified business income passthrough exemption for business owners. They also want lawmakers to expand the list of countries where corporations are prohibited from shielding their income from taxes, eliminate a roughly $80 million cumulative tax break provided to insurance companies that have a regional office in Colorado, and remove a tax benefit given to retailers meant to compensate them for the cost of collecting and paying sales taxes. Finally, Polis wants to let some large taxpayers, namely insurance companies, prepay their future taxes in exchange for a discount in future years.
- Cut somewhere in the range of $250 million and $300 million in spending on existing programs and services.
House Speaker Julie McCluskie, D-Dillon, said the Democratic majority in the legislature will “work hard to minimize the fallout on our communities.”
“But that requires us to act now to mitigate the harm this bill has caused our state,” she said in a written statement.
Republicans in the legislature Wednesday accused Democrats of mismanaging the state’s finances, but they did not offer any suggestions on how the General Assembly should address the spending gap. They have said, however, that they oppose closing tax loopholes to fill the gap.
“This isn’t our issue to fix,” said Laurel Kruse, a spokesperson for the Colorado House Republicans.
Kruse pointed to how GOP state lawmakers proposed cuts during the regular legislative session that ended in May, but many of those were political statements against Democratic priorities and wouldn’t have covered the current gap. Republicans also proposed new spending during the budget process.
The governor also wants lawmakers to use the special session to try to mitigate health insurance costs that are expected to rise sharply in Colorado because of tax credits eliminated by the big, beautiful bill.
Polis also directed the legislature to change state law to allow patients on Medicaid to get care at Planned Parenthood using state dollars now that congressional Republicans have banned federal Medicaid dollars from being used to pay for care from the provider.
Rebooting AI negotiations
When it comes to the AI law, tech groups and the governor have been griping about the bill since the legislature passed it in 2024 to prevent AI technology from discriminating against people based on age, race, ethnicity or other traits. The plan was for lawmakers to tweak the policy this year, but negotiations between the bill sponsors and industry fell apart in the final days of the legislative session that ended in May.
The governor and some Democrats in the legislature tried a last minute maneuver to delay the law until 2027, but that, too, fell short.
The law, unless it is changed, will require companies to assess and disclose, to regulators and consumers, when AI is being used for consequential decisions, like employment, loans and housing. It will also require companies to provide an explanation of how their technology works to consumers who don’t like how AI made a determination. The Colorado Attorney General’s Office would enforce the law, which carries a fine of up to $20,000 per violation, and field complaints. Right now, it’s set to go into effect Feb. 1.
Closing the nearly $1 billion hole in the budget may be easier than tackling the AI law.
Senate Majority Leader Robert Rodriguez, a Denver Democrat who sponsored the 2024 bill creating the law, has been unwilling to give in to the tech industry’s demands. He controls the calendar in the Senate, which means Polis likely can’t go behind his back to cut a deal.
“I don’t know how we pass an AI bill in three days,” Rodriguez said earlier this summer, referencing how most special sessions in Colorado last just three days, the minimum time it takes to pass a bill.
Rodriguez said negotiations this summer on the law had “stalled.”
The governor said he included the artificial intelligence law in the special session call because he wants the legislature to at least have the chance to address the policy. He didn’t take a position on whether it should be delayed or tweaked — or both.
“We just want to give them the space to debate that and figure out a good outcome for Colorado,” Polis said.
The length of the special session will be up to the legislature.
“It’s really up to the legislators how long they want to debate these important topics,” Polis said.
This is a developing story that will be updated.
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