As a conservative advocacy group moves ahead with a ballot measure to bar state taxation of tips and overtime pay, leaders in Colorado business sectors most affected by the proposal say they are struggling to determine how much the initiative would help them.
Initiative 119, submitted to the Colorado Secretary of State’s Office on July 8, would do two things. It would repeal a recently signed law that decouples Colorado overtime tax policy from federal policy. And it would prevent the state from collecting taxes on earned tips.
President Donald Trump signed into law on July 4 the “One Big, Beautiful Bill” making major changes to federal fiscal policy, among them an exemption on the federal taxation of tips and overtime wages. Colorado law mirrors federal law on taxation unless local officials act proactively to state that certain wages will be treated differently for state taxing purposes.
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. 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.
Proponents argue cut in overtime taxes popular
Legislators have not made a similar move to decouple state policy from federal tax policy on tipped wages, but questions have circulated on whether they could do so in an upcoming special or regular session, which could save the state budget some $30 million. Initiative 119, which wouldn’t go to the ballot until 2026, either would block such a change from taking place or reverse any such move that the Legislature makes before then.
Michael Fields, president of the Advance Colorado Institute and one of the two proponents submitting Initiative 119, said he wants to stop the state from “balancing the budget on the backs of workers.” Both tax cuts have polled well on a national basis, and he believes voters would want to keep the tip tax break in place and to reverse the overtime tax policy once more learn about the decoupling provision from HB 1296.
“If they would have done nothing … people would have seen this reduction,” Fields said about the legislative action in that bill, which was overshadowed by debates over software, insurance and enterprise-zone tax breaks that the bill originally proposed to roll back. “So, I think when people find out, they are going to be upset that the state took a direct action to ensure higher taxes.”
Advance Colorado Institute President Micheal Fields participates in an online debate on property-tax issues in 2024.
Legislators haven’t said much publicly about the Advance Colorado proposal, but Democrats in particular fretted over the services that they had to cut in this year’s budget to close a $1.2 billion shortfall caused by Medicaid cost increases and slowing inflation. It’s likely that a ballot initiative seeking to reduce the budget by as much as $630 million would get pushback.
Could initiative exacerbate restaurant pay gap?
Fields noted that Initiative 119 could help workers in a variety of fields pay less in taxes, including restaurant servers and hairdressers who rely on tips and healthcare and construction professionals who receive overtime. He is more worried about them than about what the cuts could mean to a state budget that has grown substantially in the past decade, he said.
However, both restaurant and construction leaders, while acknowledging that the initiative could produce tax benefits for some in their sectors, said that the taxes on tips and overtime is not an issue of concern they’ve heard from their workers. And they said passage of the initiative could come with drawbacks as well.
The pay gap between higher-compensated servers and bartenders, whose tips can boost their income substantially, and lower-wage cooks and dishwashers has become both a morale and operational issue in the industry. It’s an issue that got attention at the Capitol this year, when legislators rejected an attempt to make cities and counties with minimum wages above the state level roll back the tipped minimum wage to state levels, though they passed a compromise that allows local governments to do this.
Numerous restaurant owners reported having to lay off bussers, hosts and other lower-wage workers in order to give servers and bartenders mandatory hikes in tipped minimum wages, and Denver restaurateur Beth Gruitch said it’s now difficult to move tip earners into management positions because that often involves a pay cut. Giving a tax break to those same tipped workers will exacerbate that pay gap, said both Gruitch, a partner in several eateries, and Delores Tronco, owner of The Greenwich in Denver, in interviews.
Restaurateurs still seeking details
The proposal also has spawned confusion in how it may be applied to some newer tipping models.
Beth Gruitch is a partner in several Denver restaurants.
At Gruitch’s Bistro Vendome, for example, all workers earn at least a standard minimum wage, pool tips and split them evenly between hourly workers in the front and back of the house, and she is unclear if those workers all would get the break. Meanwhile, some establishments have replaced tipping with service fees that are similarly split among hourly wage earners; would those fees be tax-exempt and, if not, would those restaurants be at a recruitment and retainment disadvantage?
Meanwhile, with many restaurants struggling with higher expenses and lower foot traffic — the number of licensed eateries in Denver decreased 22% last year — overtime pay has become much rarer, Colorado Restaurant Association President/CEO Sonia Riggs noted. That creates another gap, as non-tipped workers are unable to benefit from the initiative in the same way that tipped workers can, she said in a statement to The Sum & Substance.
Each of the industry leaders added that the federal tax break of as much as $25,000 to workers making less than $150,000 per year will provide financial benefits, particularly if state legislators don’t decide to decouple state tax law on the exemption. But each said it would have little impact on the businesses in the sector that continue to struggle, and Tronco added that she continues to weigh the upsides and drawbacks as she considers it.
Will construction workers benefit from overtime break?
“It’s not that I wouldn’t want to see my tipped workers do a little better. But if that comes at the cost of other workers … that doesn’t seem fair,” she said. “I am concerned that we are widening the pay gap between front and back of the house once again. And I’m concerned that we are favoring one group of workers over another.”
Fields said that he believes that employers can benefit because workers who can earn tips or overtime will see Colorado as a tax-favorable state and be more likely to move or stay here, which will create a boost in talent. While some other states have affirmed the federal tax cuts legislatively, Colorado may be the first that has a chance to do so via ballot initiative, he said.
But Jeff Barratt, president/CEO of the Associated General Contractors of Colorado, said that member companies have not expressed that same optimism that the ballot initiative will give them a boost. And he, like restaurateurs, said that a tax break on overtime wages is likely to have only a minor impact, if any at all, on the manual-labor sector.
First, construction firms are doing their best to limit overtime, both to contain project costs but also to boost safety, as tired workers are more likely to make critical mistakes, Barratt said. In addition, more younger workers eschew the long-hours-more-pay mindset of past generations and prefer a work-life balance, which has led contractors and subcontractors to limit weekend and overtime shifts because they’re unpopular, he said.
What’s next for initiative
Construction workers fix up the 16th Street Mall in Denver in early 2025.
Much like restaurateurs, Barratt acknowledged that the initiative could benefit certain workers who do get the OK to put in overtime, and he didn’t feel it would have negative repercussions in his sector. But he also doesn’t see it as a boon to business or something that will be such a priority that organizations will take an active position anytime soon.
“There might be a greater willingness” to work overtime with tax benefits, Barratt said. “But you’re seeing more and more desire for work-life balance.”
Initiative 119 is scheduled to have its first review and comment hearing from state officials on Tuesday. It then must get approval of a title from another state board and, if that occurs, proponents must collect 124,238 valid signatures to get it onto the 2026 statewide ballot.