Passage Thursday of the budget-cutting “One Big Beautiful Bill” essentially mandates that the Legislature will return to the Capitol for a special session this summer to deal with aspects of the federal law impacting Medicaid funding and artificial-intelligence regulation.
Gov. Jared Polis’ Office of State Planning and Budgeting estimates the bill’s reductions to Medicaid spending, food assistance and other benefits that are largely or partially federally funded will cut state revenues $500 million and boost state costs another $500 million. That will necessitate legislators to come back and re-balance the budget, likely by reducing funding to a number of other programs.
And before passing the bill, a bipartisan group of U.S. senators stripped from it another provision that some state officials and business leaders had hoped to see stay in it — a 10-year moratorium on states enacting artificial-intelligence regulations beyond federal law. That move is likely to restart talks between tech-industry executives and consumer advocates over how to soften regulations passed by General Assembly in 2024 — a subject that the Democratic governor has hinted we would add to any special-session agenda.
Polis and other elected officials joined with health-care leaders in recent days to plead with Republicans in the state’s congressional delegation to reduce the estimated $1 trillion in Medicaid cuts in the bill or just to reject the bill altogether. And while the requests were heavy with criticism of the general policy of the bill hurting the poorest Americans, they also carried undertones of another message: Colorado, specifically, cannot afford this.
How the federal bill upends Colorado’s budget
Much of the Medicaid savings will come from work requirements for Medicaid recipients that are expected to lead to 150,000 or more of those recipients losing their benefits — an exodus that likely will increase the number of uninsured patients getting care in hospitals. That will create economic costs: U.S. Sen. John Hickenlooper estimated that six or seven rural Colorado hospitals could close under the strain of drastically reduced Medicaid reimbursements, and Polis said it will shift costs to privately insured patients.
U.S. Sen. John Hickenlooper, the former governor of Colorado, speaks during a virtual news conference on Wednesday.
But the bill also cuts from 90% to a much lower percentage the portion of costs the federal government will pay for “emergency-only” Medicaid services for otherwise-ineligible non-citizens. And the bill limits the amount that states can charge in provider taxes such as the Colorado hospital provider fee that health centers levy upon themselves to draw down more federal money and enroll more people in Medicaid — a change that is expected to cost the state $10.4 billion in federal funding over five years, Colorado Hospital Association President/CEO Jeff Tieman said in a newsletter this week.
Plus, states must now investigate and re-certify the eligibility of Medicaid recipients at least twice a year to continue getting federal funding. Polis said that Kim Bimestefer, executive director of the Colorado Department of Health Care Policy and Financing, estimated this will require hiring several hundred more state workers and upgrading state computer systems at a cost of $57 million.
“That money doesn’t come from nowhere,” the governor said during a Wednesday news conference. “It means taking money away from patients, hospitals and doctors and sending it to government bureaucrats processing paperwork.”
Legislators detail potential budget cuts
Another provision of the bill reducing the SNAP food-assistance payments going to states is expected to cost Colorado $175 million. Again, state legislators must determine whether to eliminate those benefits or shift money from elsewhere.
Colorado House leaders and Democratic Joint Budget Committee members sent a letter Tuesday to Republican members of the state’s congressional delegation laying out what they said were unpleasant options to have to try to make up for the loss of federal funding. Those include reducing the state’s earned-income and family-affordability tax credits, scaling back the state’s reinsurance program and increasing tuition for higher education after the school year has begun, they wrote.
Gov. Jared Polis speaks during a virtual news conference on the federal spending bill Wednesday.
Polis has not yet made the official call for a special session, but legislative observers say they believe it is imminent, and JBC Chairman Sen. Jeff Bridges said in a news release Thursday that the federal bill “will almost certainly force us into a special session.” Because President Donald Trump is expected to sign the bill in the near future, the special session is likely to occur as soon as August, several people said.
And when it comes, Polis has told several media outlets, it is very likely that he will include artificial-intelligence reform among the subjects on which legislators can introduce bills.
AI reform as part of the special session
After signing the 2024 law that creates the most comprehensive AI regulation in the nation, Polis immediately worked with legislative leaders to put together a task force to discuss how to loosen some of the rules in the bill. Industry leaders say provisions — including proactive reporting requirements on potential discriminatory threats by AI programs and the creation of a right for consumers to appeal any substantial decision made by an AI program — are so onerous as to drive some companies out of Colorado.
While the task force labored for nine months to suggest consensus changes, bickering between industry and consumer-advocacy groups ended efforts to pass such changes this session, and a separate effort to extend the timeline to implement the law failed too. The new regulations are set to go into effect on Feb. 1, giving legislators little time to pass a clean-up bill after the Jan. 14 start of the session and leaving tech leaders concerned that companies facing uncertain liability could move research and development to other states.
A laptop user plugs away on a keyboard.
Major technology groups have signaled support to Polis for including the topic on any special-session call. And it’s likely that with such a call likely to come soon, dormant negotiations on potential changes could kick into high gear as soon as next week.
Polis could include any subjects he chooses on the special-session call, though governors tend to keep such lists fairly tight in order to limit the duration of sessions and keep them very focused. But one other provision of the newly approved federal spending bill could stir some consideration, especially as legislators look for savings and new revenues.
State taxation of tips to be discussed in special session?
The federal bill eliminates taxes on tipped wages and overtime pay. Back in April, sponsors of a Colorado tax bill, House Bill 1296, added a provision to that legislation decoupling state tax policy from federal policy on overtime pay. Thus, Colorado will still collect state income taxes on money people earn for extra hours and retain the $400 million to $600 million in annual revenue that stream now produces.
However, the state has not decoupled from federal policy on taxation of tipped wages — a smaller pool of revenue but one that, nonetheless, will throw the state budget out of whack if not addressed. An unsuccessful 2020 legislative proposal to allow workers to deduct tips from their income taxes would have cost the state as much as $30 million annually, a fiscal note determined at the time.
Legislators could choose to do nothing, meaning that they’ll likely have to find a way to cut another $30 million from the budget or reduce state reserves to make up for that pending loss of tax revenue. Or they could seek to decouple that policy from federal policy like they did with overtime pay — and face potential backlash from servers and bartenders who will be able to keep less of their take-home pay because of it.
One thing is clear, though: The passage of the federal bill is going to leave legislators scrambling in what was supposed to be their offseason to adjust the state’s budget for the new federal rules. And the special session that is coming because of that could be very consequential for hospitals, technology companies and possibly more employers throughout Colorado.