Colorado officials are divided over whether the state can legally recoup $306 million in taxpayer refunds triggered by federal tax cuts that took effect four days into the current fiscal year. The dispute centers on how to account for retroactive revenue losses under the state’s strict constitutional spending limits.
Gov. Jared Polis asked the legislature in his annual budget request to recover the money by reducing future refunds under the Taxpayer’s Bill of Rights. That could help close Colorado’s $1 billion budget gap and avoid deeper cuts to education and health care programs.
Legislative budget analysts and attorneys question whether the state has legal authority to make the adjustment. They warn the move could violate accounting standards and expose Colorado to lawsuits it might lose.
“The logic of the request makes some sense to me,” JBC Staff Director Craig Harper told lawmakers at a February meeting. “I think both legally and in terms of practice, we have bigger challenges.”
President Donald Trump signed H.R. 1 into law July 4, 2025, four days into Colorado’s 2025-26 fiscal year. The measure, known as the One Big Beautiful Bill Act, cut federal income taxes by trillions of dollars.
Those federal cuts automatically reduced Colorado’s state income tax collections because the state tax code ties to federal definitions of taxable income. The changes apply to the entire 2025 calendar year, which means they affected tax revenue collected in the 2024-25 fiscal year that ended June 30.
Standard accounting practices don’t recognize the tax cuts on paper until the current fiscal year because H.R. 1 wasn’t law when the previous budget year closed. Under normal circumstances, that timing quirk wouldn’t matter much.
But Colorado’s TABOR amendment makes those four days critical. The constitutional provision caps annual revenue growth at the rate of inflation plus population change and requires the state to refund excess collections to taxpayers.
State auditors certified a $296 million TABOR refund for 2024-25 based on revenue figures as of June 30. The state’s comprehensive financial report later increased that to $306 million.
Budget analysts for both the legislature and governor’s office now agree those figures no longer reflect reality. Because of the federal tax cuts, the state didn’t actually exceed the TABOR cap last budget year.
“It’s frustratingly close that it was only four days,” Harper said. “Everyone that I’ve talked to agrees that it has to inherently reduce the revenue that could reasonably be attributed to fiscal year 24-25.”
Most of the refund money will go to local governments to cover $183 million in costs for the homestead property tax exemption for seniors and disabled veterans. The remainder will go out as sales tax refunds when Coloradans file their tax returns this year.
Taxpayers who earn the median income of around $95,000 will receive about $25 each, or $50 if they file jointly. Those refunds represent a small fraction of the $2.2 billion Colorado has returned to taxpayers under TABOR from 1997 through 2023.
State law allows Colorado to reduce future TABOR refunds when excessive refunds occur. Polis proposes doing exactly that, with a twist—he wants to recoup the money over the next two fiscal years rather than all at once.
In each of the next two budgets, he proposes spending $153 million to cover most of the senior property tax break. That money would otherwise have to come from the general fund, forcing cuts to state agency budgets.
“H.R. 1 clearly and indisputably retroactively impacted revenue in FY 24-25, and that can be reflected in the TABOR surplus calculations if the legislature chooses to,” Eric Maruyama, a spokesperson for the governor, said in a statement.
If the legislature rejects the proposal, it would throw the governor’s budget out of balance. Lawmakers would need to find an additional $306 million in cuts to public services.
Legislative analysts say the timing issue doesn’t meet legal criteria for an excessive refund, which relies on the auditor’s certification of financial reports. Retroactively changing last year’s books to reflect a law that wasn’t in effect could violate generally accepted accounting principles.
In a memo to the Joint Budget Committee, Harper wrote that a retroactive change could threaten the auditor’s opinion that the state’s financials are clean. It could also put Colorado at risk of having to repay the disputed refunds with interest.
The maneuver might not generate any budget relief even if lawmakers approve it. That depends entirely on how much TABOR surplus the state generates this year and in future years.
“We won’t even know if this is a thing that would do anything until we have a TABOR certification for this year,” Harper told lawmakers.
The Joint Budget Committee declined in February to introduce legislation to recover the funding. But state Rep. Emily Sirota, a Denver Democrat who chairs the committee, questioned whether accounting rules should override economic reality.
“Because of the accounting rules, you’re saying you can’t accrue it back—not because of the reality of the facts that everyone can plainly see?” Sirota asked Harper at the meeting. “So it means that because of our accounting rules, what is being presented is false, and we just have to live with the falsity of it because of the rules?”
“Madam chair, I think that’s a more blunt, but potentially accurate, encapsulation of what I’m saying,” Harper replied.
Colorado’s budget pressures extend beyond the TABOR refund dispute. The state is operating $308 million under the Referendum C cap, a voter-approved exception that allows some revenue above TABOR limits for education and transportation.
The Joint Budget Committee has proposed multiple cuts for the 2026-27 fiscal year. Those include a $110 million reduction in income tax diversions to the State Affordable Housing Fund, though $77.76 million would remain. Agencies face 2.5 percent general fund trims, with the Department of Public Health losing $2.5 million.
Total recommended changes include $27.3 million in net general fund increases but deeper cash fund cuts of $1.8 million. The proposals also adjust PERA unfunded liability payments by $382,639.
Colorado is one of 27 states where conformity to federal tax definitions created budget shortfalls after H.R. 1 passed. Those states collectively face $10 billion to $15 billion in projected revenue losses for 2025-26, according to the National Conference of State Legislatures.
The dispute highlights tensions between TABOR’s strict revenue limits and the state’s ability to respond to unexpected federal policy changes. Colorado voters approved TABOR in 1992 via Amendment 1, requiring voter approval for tax increases and mandating refunds of excess revenue.
Small corrections to TABOR refunds occur regularly, but the $306 million discrepancy would be unprecedented in size. The timing of H.R. 1’s passage—just four days into a new fiscal year—created a unique accounting challenge that existing procedures weren’t designed to handle.
Polis indicated he’s willing to work with lawmakers on alternative approaches if they reject his refund recoupment plan. “The governor looks forward to working with JBC to find other thoughtful avenues to balance the budget if they decide not to move forward with this particular proposal,” Maruyama said.
For Colorado taxpayers, the outcome will determine whether they receive the certified refunds this year or see those amounts deducted from future TABOR refunds. Local governments relying on the homestead exemption funding face uncertainty about whether the state will cover those costs from general funds if the refund is reversed.
State agencies preparing budgets for the next two fiscal years must plan for potential scenarios. If lawmakers can’t recoup the $306 million, deeper cuts to education, health care, and other services become more likely as the state works to close its $1 billion shortfall.
The state auditor’s office has not publicly commented on whether retroactive adjustments would affect its certification of Colorado’s financial statements. That opinion matters for the state’s credit rating and ability to issue bonds at favorable rates.
Taxpayers expecting refunds should file their returns as normal. The sales tax refunds are scheduled to be issued with 2025 tax returns regardless of the ongoing budget debate. Any future recoupment would affect subsequent years, not current payments.
The legislature’s March 2026 revenue forecast will provide updated projections for TABOR surplus calculations. Those figures could change the political calculus around whether recoupment is necessary or feasible.
Source: Colorado is about to refund $300M to taxpayers that it may not have to | The Colorado Sun