Colorado Democratic legislators introduced a four-bill package Tuesday aimed at severing the state’s tax code from recent federal corporate tax breaks, a move they say is necessary to address a $1.2 billion revenue loss in the current fiscal year and an $850 million budget shortfall projected for next year. The bills target executive compensation deductions, software tax exemptions, and international business reporting rules.
The initiative responds to the “One Big Beautiful Bill” passed by Congress, which created hundreds of millions of dollars in new federal corporate tax breaks. Because Colorado automatically conforms its tax code to federal law, those federal cuts flow directly to state revenue unless explicitly decoupled. Democratic sponsors framed the package as “rebalancing” the tax code toward working families, while Republicans and business leaders warned the measures could damage Colorado’s competitive position.
The Four Bills
The first bill would block corporations from deducting executive salaries above $500,000 as operating expenses on state tax returns, down from the current $1 million federal limit. Representatives Yara Zokaie and Emily Sirota, along with Senators Judy Amabile and Katie Wallace, are sponsoring the measure.
A second bill would separate Colorado from four specific business tax breaks in the federal budget, including write-offs and deductions for interest expenses on debt for larger corporations. The measure is expected to generate roughly $150 million in state revenue. Representatives Lorena Garcia and Karen McCormick, along with Senator Cathy Kipp, are backing this legislation.
The third bill would repeal tax exemptions for items like metal bullion and coins, eliminate the space flight purchase exemption, and modify existing tax credits including the Community Food Access Tax Credit and Wildfire Mitigation Tax Credit. Garcia, Representative Kyle Brown, and Senator Mike Weissman are sponsoring this measure.
The final bill would eliminate the downloaded software tax exemption, ensuring consistent sales tax treatment whether software is purchased online or in stores. Representatives Steven Woodrow and Andy Boesenecker, along with Senator Matt Ball, introduced this legislation.
“Whether someone purchases Microsoft Word online or in person, they should not be taxed differently,” Boesenecker said.
Revenue Crisis and TABOR Constraints
Colorado faces unique fiscal challenges due to its Taxpayer’s Bill of Rights, a constitutional amendment that limits government spending and requires voter approval for tax increases. This makes it difficult for the state to raise revenue through traditional means, forcing legislators to find creative solutions within existing frameworks.
Democrats structured the bills to be revenue-neutral under TABOR by directing recovered funds toward tax credits for low-income families—specifically the Earned Income Tax Credit and the Family Affordability Tax Credit—rather than general spending. This approach allows them to argue they are reallocating existing revenue rather than raising taxes.
“Colorado’s tax code should work for the people of Colorado, not provide special treatment for monied interests that aren’t effective in advancing state goals,” said Senator Mike Weissman. “Recent tax and other law changes at the federal level have been devastating. We must use this moment as an opportunity to examine our tax code and re-balance the scales toward working people.”
Republicans countered that years of overspending by the majority party, coupled with government growth and refusal to cut the budget, created the state’s fiscal problems—not federal tax changes.
Business Community Pushback
Colorado business leaders raised concerns that the proposals would further damage the state’s competitive position. A Chamber of Commerce-commissioned study found Colorado ranks as the sixth-most-regulated state in America, and the state is losing ground in national business rankings.
Phil Horwitz, director at Moss Adams and chairman of the Colorado Chamber Tax Council, called the package a “huge deal” for how businesses calculate and pay taxes. He particularly criticized proposed changes to net operating loss deductions, which would reduce them from 80 percent of losses carried forward for up to 20 years to 70 percent carried forward for no more than 10 years.
“There’s nothing inherently negative about the net operating loss. The point is that businesses should be able to recover losses from prior periods,” Horwitz said. “The idea that we should shorten the time they have to recover losses is indefensible.”
Net operating loss deductions are commonly used by startup companies to absorb losses incurred before they can market goods and services profitably. Without lengthy deduction periods, companies could struggle to recoup early losses and sustain themselves during growth phases.
Rhonda Sparlin, Colorado partner-in-charge for tax consulting firm RubinBrown, told The Sum and Substance that the proposals could impact “future investments and future opportunities in the state.” She added: “There’s something in here that will impact every business. This is universal across small businesses and large businesses.”
Nationwide Trend
Colorado is not alone in confronting conformity issues with federal tax changes. Tax policy analysts expect at least five states to decouple from major provisions of the federal budget in 2026, indicating this is a nationwide challenge for states seeking to maintain revenue stability.
The decoupling approach allows states to accept federal tax benefits for their residents while preventing those benefits from eroding state tax revenue. Businesses would essentially “add back” federal deductions when calculating Colorado state income taxes, even if those deductions remain valid for federal purposes.
Senator Cathy Kipp argued the changes would keep the state from “spending our tax dollars on development outside of Colorado, instead putting those benefits toward the well-being of families and children in our communities.”
Representative Yara Zokaie connected the executive compensation measure to household financial struggles: “When people are struggling to juggle their rent, groceries and utility bills, Trump’s corporate tax breaks for million-dollar salaries are a slap in the face for hardworking Coloradans.”
Impact on Different Business Sectors
Early-stage companies would face particular challenges under the shortened net operating loss recovery periods. Startups typically operate at a loss for several years before achieving profitability, relying on the ability to carry forward those losses to offset future taxable income. Reducing the carryforward period from 20 years to 10 years could force some companies to pay taxes before they have fully recovered initial investments.
Companies with international operations may face higher Colorado tax bills if the state adopts worldwide-combined reporting, eliminating the current “80/20 rule” that exempts international income. This change could make Colorado less attractive for multinational corporations considering where to locate operations.
Software companies and retailers would need to adjust to uniform sales tax treatment for digital products. Currently, downloadable software is exempt from sales tax while packaged software purchased in stores is taxed, creating what Democrats call arbitrary differences. The proposed change would subject all software purchases to sales tax regardless of delivery method.
The bills will be officially introduced this week. Democrats hold majorities in both chambers of Colorado’s legislature, giving the package a strong chance of passage despite Republican and business community opposition.