Colorado lawmakers could be looking at a smaller budget gap in 2027 when they return for their annual legislative session, according to a recent update from state economists. 

The forecast, presented on June 18 to lawmakers on the Joint Budget Committee, is welcome news for legislators who have had to contend with billion-dollar deficits for the past two years, which have forced cuts to healthcare, housing and other social programs. One factor behind the rosier outlook: a smaller-than-expected drop in tax revenue as a result of President Donald Trump’s and congressional Republicans’ One Big Beautiful Bill Act. 

The sweeping legislation, passed last summer, extended and expanded a suite of tax cuts for individuals and businesses. While the tax cuts reduced Colorado’s income tax revenue by about $1 billion in the last fiscal year budget, economists don’t expect the impact to be as extreme next year. 

“I think that the (One Big Beautiful Bill Act’s) impacts on individual income taxes were a lot smaller than we had expected, and the (act’s) impacts on corporate income may have been quite a bit larger than we had expected,” said Greg Sobetski, chief legislative economist for the Legislative Council Staff. 

Because Colorado essentially mirrors the federal tax code, the One Big Beautiful Bill Act’s impacts were immediately felt by the state when it became law last July. Tax breaks that were retroactive applied to the start of 2025. That led to a $1 billion reduction in tax revenue and a roughly $800 million deficit in the 2025-26 fiscal year budget, which lawmakers had to plug during a special session in August. 

The tax law’s reduction to individual income tax revenue next year is expected to be less than previously projected, though reductions to corporate income taxes could be greater. Because the state’s general fund relies more on income taxes from individuals than corporations, the revenue hit won’t be as severe. 

Other factors are also affecting the state’s budget outlook. 

Those include increased inflation, which has raised the state’s revenue cap under the Taxpayer’s Bill of Rights, or TABOR. Passed by voters in 1992, TABOR is an amendment to the state constitution that limits state tax collection to the rate of population growth plus inflation. Any revenue collected above that limit must be returned to taxpayers in what is known as TABOR refunds. 

TABOR surpluses are expected to return in the next budget year, meaning refunds would be paid out in the 2028 tax year. Economists for the Legislative Council Staff said the state could owe $329.9 million next budget year, $206.1 million of which would go to covering a program that provides property tax breaks to senior homeowners. The year after, the state is projected to owe $521 million, nearly half of which would cover the property tax cuts for seniors. 

Lawmakers this year also lowered the required threshold for the state’s reserve, which serves as its rainy day fund. State law previously required the reserve to be no less than 15% of the general fund, but that was lowered to 13%. 

If lawmakers restored the reserve to a 15% threshold, they’d be looking at a $315 million shortfall for the 2027-28 fiscal year budget, down from the $1 billion shortfall that lawmakers had to close in the current 2026-27 budget. If they choose to keep the reserve at 13%, economists said that would effectively mean no deficit next year. 

“This is the best that your budget might look,” Sobetski said. 

Republican lawmakers remain skeptical of how much Trump’s tax law is affecting the state budget. While Democrats have pointed to the tax cuts and subsequent reduction in revenue as a key driver of the state’s budget woes, Republicans have largely defended the tax law and say the state’s fiscal challenges are due to overspending and money mismanagement. 

Rep. Rick Taggart, a Grand Junction lawmaker and one of two Republicans who sit on the six-member Joint Budget Committee, said attributing the state’s revenue shortfalls to the tax law is a “misrepresentation.”

“Corporate America has also seen, and Colorado, significant increases in regulations,” Taggart said. “It bears the brunt of inflation when it tries to absorb those inflationary costs and it absorbs, in many cases, increases in tariffs.”

Skyler Schuck, a principal economist for the Governor’s Office of State Budgeting and Planning, said despite those challenges, corporate profits in the U.S. “remain strong.”

While the One Big Beautiful Bill Act may not have as severe an impact on income tax revenue as initially assumed, economists warned that its other provisions could still strain the state’s general fund. 

Starting next year, the law will reduce federal funding for administering Medicaid and the Supplemental Nutrition Assistance, or SNAP, and shift more of those programs’ costs to states. 

In Colorado, that could increase state costs by $251.5 million next year, and by over $1 billion the following year, according to the Governor’s Office of State Budgeting and Planning. 

Mike Ferrandino, executive director for the planning office, said lawmakers will have to decide how much they want the state to absorb those costs, much of which would likely come from the general fund. 

“This will be a big conversation, I think, going into the next legislative session,” he said.