Colorado legislative Democrats are pushing forward three tax-break rollbacks that will cost businesses some $580 million annually, boosting tax credits for lower-income families while increasing corporate income-tax collections by roughly 50% each year.
The tax package, which was introduced on Feb. 17 and which passed out of the House Finance Committee Monday on a largely party-line vote, comes in reaction to the federal enactment of House Resolution 1, also known as the “One Big Beautiful Bill,” in July. That measure expanded and made permanent a wide range of business-focused tax breaks, reducing Colorado revenues by about $1 billion a year and throwing the state budget out of whack in the process.
The three bills that received their first approval Monday don’t help to balance the budget, as any change in tax policy that generates more than de minimis revenue for the state must be approved by voters under the rules of the Taxpayer’s Bill of Rights. So, rather than putting the new revenue to the general fund, sponsors would put the half-a-billion dollars in new funds, much of them generated by decoupling state tax law from federal tax policy, to a new Family Affordability Credit, which would mirror the state’s now-paused Family Affordability Tax Credit that benefitted roughly 330,000 families in 2025.
“Suggesting priorities for the state”
That tax credit is on ice because the 2024 law that created it funded it only in years when state revenue exceeded the TABOR cap — a mark it’s not expected to hit this year because of the reduction in income from the federal tax changes. Thus, legislators are looking to create a new, permanent tax credit and fund it specifically with money that several said would do more good going to families making less than $100,000 annually than to typically larger employers.
“We are merely suggesting priorities for the state of Colorado,” said Rep. Emily Sirota, a Denver Democrat and sponsor of one of the three bills. “These businesses are receiving hefty federal tax breaks, and they still get them … In order to keep children out of poverty, it is better to not deliver them even greater tax breaks than they are already receiving at the federal level.”
But Patrick Boyle, a lobbyist for the Colorado Competitive Council, warned that this “unholy trinity of bills” will cost the state particularly in economic-development opportunities by taking away so many employer tax benefits. With the state bringing in about $1 billion annually from corporate income tax now, the trio of proposals represents a roughly 50% increase in those taxes — a huge hike that will be noticed by companies considering where to grow jobs, he and others said.
“That should remove any shred of doubt we have about Colorado’s friendliness to corporate investment,” Boyle told the committee. “When you increase your corporate income tax by 50%, that sends a message that you don’t want investment in Colorado.”
What the tax bills do
House Bill 1221, sponsored by Sirota and Democratic Rep. Yara Zokaie of Fort Collins, makes two changes that will cost businesses $167.4 million annually when implemented fully. It reduces the net-operating-loss tax deduction from 80% of losses to 70% for companies and cuts the carry-forward time from 20 years to 10 years. And it limits a tax deduction on salaries for c-level executives from $1 million a year to $250,000.
HB 1222, sponsored by Democratic Reps. Karen McCormick of Longmont and Lorena Garcia of Adams County, decouples four tax breaks that were expanded or launched under HR 1, meaning that businesses must add those savings back into their income on the state level when determining the amount of income on which they pay state taxes. Those breaks, which total $329.2 million when fully implemented, are:
- A bonus depreciation deduction that allows companies to write off the cost of new equipment or property in the year of purchase rather than depreciating its value over a number of years;
- An accelerated depreciation scheduled for new manufacturing facilities that allows their cost to be written off in one year as well;
- An acceleration of a tax deduction for research and development costs that allows them to be written off in one year instead of five; and,
- A removal of the cap on business deductions of interest for loans and mortgages, which is now set at 30% of those companies’ taxable income.
Benefits of the Family Affordability Credit
HB 1223, sponsored by Democratic Reps. Steven Woodrow of Denver and Andy Boesenecker of Fort Collins, eliminates a 15-year-old state sales-and-use-tax exemption on downloadable software, which is estimated to cost purchasers $90.7 million. Seventeen of the 20 largest home-rule cities in Colorado do not have such an exemption when it comes to municipal sales tax, and the exemption also does not exist for prepackaged computer software.
The newly generated revenue would go to a refundable Family Affordability Credit that, like the paused FATC, would go to Colorado families with children aged 17 or younger when the tax filer makes less than $85,000 individually or $96,000 as a joint filer. The credit provides as much as $3,273 per child for most kids now — though it’s expected to provide less under these new sources of revenue — with higher amounts for kids aged five years or younger.
Supporters like the Colorado Fiscal Institute framed their arguments around the need to restore the FATC in this new form, noting that in its one year of existence, it got to 44% of Colorado families and cut childhood poverty by 37% in combination with the state’s Earned Income Tax Credit. Families who benefitted from it — and won’t be able to benefit next year without these new bills — put the money back into the local economy, spending it on clothes and other needs for their kids, Woodrow told the committee.
“I think we have all discussed the necessity of the Family Affordability Tax Credit, and if we believe in those investments, we should believe in funding it,” Zokaie said.
Huge drawbacks to business atmosphere
Opponents didn’t question the good that can be done by the FATC, but they warned that taking this much money from employers will cause a slew of other problems, including a slowing in the creation of jobs that can help to lift those families out of poverty.
The net-operating-loss deduction being pared back in HB 1221 is an essential benefit for startup companies that may go for a decade or longer without turning a profit, banking on letter tax benefits that they can use to grow the company when they have taxable revenues. Eliminating it discourages innovative companies in fields from technology to bioscience from making that early investment in Colorado and will make other states more attractive as a permanent home for them, said Phil Horwitz, state and local tax director for Baker Tilly and chairman of the Colorado Chamber of Commerce Tax Council.
Decoupling from federal tax breaks that incentivize the purchase of new equipment and facilities also discourages expansion and it could make Colorado less competitive for growing businesses than states where the federal savings are reflected in their taxable state income, several business leaders said. The accelerated research-and-development deduction is used by companies in fields from infrastructure to life sciences to energy, said Steve Betts, CFO of Colorado-based engineering firm Merrick & Company.
Who gets hurt by tax changes?
Marco Guzman, a senior analyst for the Institute on Taxation and Economic Policy, pushed back that the expanded federal tax breaks impacted by HB 1222 tend to benefit companies making those investments out of state. The business-interest deduction is commonly taken by private-equity firms seeking to leverage debt to reduce tax bills, and the bonus depreciation lets highly profitable companies lower tax liabilities by constructing buildings and buying equipment, he said.
But Horwitz and Alicia Gelinas, CEO of the Colorado Society of CPAs, noted that legislators decided in 1987 to couple the state’s tax law to federal law in order to simplify the tax system, which has helped make the state more attractive to businesses. Diverging those tax policies in numerous ways now will make tax calculations more expensive for businesses of all sizes and will add to rising operational costs as well, they said.
At issue with HB 1223 is not just the impact it will have on businesses and individuals who purchase downloadable software — though not customized software, which would remain tax-exempt — but the legality of the proposal under TABOR.
A September decision from the Colorado Supreme Court determined that governments cannot expand the goods they are taxing under current law without voter approval. Woodrow argued that because prepackaged software is now taxed, the bill doesn’t tax new items so much as it removes an existing limitation on that tax, which is permissible.
New products getting taxed?
But Meghan Dollar, Colorado Chamber senior vice president of governmental affairs, noted that HB 1223 would apply the tax also to software as a service, in which a provider hosts the software on a remote server and the customer accesses it over the Internet. That is a new item that is being taxed — a distinction that Boyle said will likely lead to lawsuits being filed against the bill.
Rep. Ken DeGraaf, R-Colorado Springs, questioned also whether the state still could be violating TABOR with the bills. While legislators would not grow state revenue through the changes because the money will go ultimately to taxpayers via the new family credit, he said, the state still must take that money in, meaning it is increasing its revenue from certain taxpayers before it sends it back out to other taxpayers, he argued.
Each bill advanced to the House Appropriations Committee on largely Democrat-led partisan lines, with Democratic Rep. Bob Marshall of Highlands Ranch joining all the committee’s Republicans in opposing HB 1221 and HB 1223. No date has been set yet for their next hearings.