Colorado legislators wrapped up a special legislative session this August with a clear focus: protecting the state budget from deepening federal impacts by rolling back outdated, inefficient, and unfair business tax breaks. With Congress’s passage of H.R. 1 creating a $783 million hole in the state’s budget, lawmakers faced the urgent task of raising revenue without cutting deeply into schools, health care, or essential community services. CFI played a leading role in shaping and supporting a package of bills that together raised about $250 million this fiscal year to help stabilize funding for Colorado communities.

These bills weren’t about raising taxes on everyday families or small businesses. They were targeted reforms to eliminate loopholes and subsidies that benefit a narrow slice of large corporations and wealthy taxpayers—breaks that no longer serve Colorado’s economy or its people.

“This session, lawmakers put people first. Within tight constitutional limits, they closed ineffective tax giveaways and softened the blow of painful budget cuts that would harm all Coloradans. It’s one piece of a much bigger problem, but protecting nearly $300 million for schools, health care, and essential services is a responsible step toward keeping working families ahead of profitable corporations,” said Kathy White, executive director of the Colorado Fiscal Institute. Read what other Colorado leaders are saying about the 2025 Legislative Session.

Ending the FDII Deduction and Cracking Down on Tax Havens

One of the most important measures passed was HB25B-1002, which tackled two corporate tax maneuvers head-on. First, it decouples Colorado from the federal Foreign-Derived Intangible Income (FDII) deduction. FDII was created in Washington to encourage multinational corporations to keep patents, trademarks, and other intangible assets in the U.S. In practice, it allows corporations to pay a lower tax rate on profits they attribute to overseas sales. For Colorado, automatic conformity to this federal carveout meant less revenue for services communities rely on.

The bill also updates Colorado’s list of known tax havens—jurisdictions like the Cayman Islands where multinational corporations often report inflated profits despite having little or no actual economic activity. This commonsense step prevents Colorado from losing revenue when corporations shift income overseas on paper to avoid taxes. As CFI testified, small businesses and working families don’t have the option of hiding their income in Bermuda. They pay what they owe, and big corporations should too.

Preserving Limits on the Qualified Business Income Deduction

HB25B-1001 focused on the Qualified Business Income (QBI) deduction, a federal tax break created in 2017 that allows pass-through business owners—like LLCs, S corporations, and partnerships—to deduct 20% of their income. In Colorado, the deduction skews heavily toward the wealthiest taxpayers: those earning over $1 million a year represent less than 2% of filers but capture nearly one-third of the benefit.

Colorado already acted in 2020 and 2021 to limit the deduction for high earners while protecting farmers and genuine small businesses. The special session bill extended that limitation, ensuring this tax break remains targeted where it belongs. By holding the line, lawmakers prevented millions of dollars from flowing to millionaires while preserving revenue for priorities like K-12 education, health care, and infrastructure.

Repealing the Vendor Fee Credit

CFI also supported HB25B-1005, which repealed Colorado’s vendor fee credit—a relic of 1935. Nearly a century ago, when businesses manually tallied receipts and filed taxes by hand, the state gave retailers a small credit for collecting and remitting sales tax. Today, point-of-sale systems and electronic filing make compliance fast and cheap. Yet the credit continued to cost Colorado tens of millions each year.

As CFI pointed out, 18 other states—including neighbors like New Mexico, Oklahoma, and Kansas—have state sales taxes without offering this outdated credit. Even after 2021 reforms capped the benefit for the largest retailers, the State Auditor found that for many businesses the value of the credit far exceeds their actual costs. With the state facing a permanent revenue shortfall from H.R. 1, it was time to eliminate an expenditure that no longer justified its price tag.

Rolling Back the Regional Home Office Rate Reduction

The fourth major measure, HB25B-1003, repealed the Regional Home Office (RHO) rate reduction for insurance companies. Created in 1959 to encourage insurers to locate in Colorado, the subsidy allows companies to pay a lower tax rate if they maintain an office in the state. But as CFI testified, insurers can claim the break even if 97.5% of their employees work outside Colorado. In 2023, only 46 insurers claimed it—yet it drained $97 million annually from state coffers.

CFI argued that this money could be better spent filling potholes, funding rural fire districts, or restoring cuts to transportation—real spending that keeps insurance rates low. Research by the State Auditor confirmed that the RHO subsidy hasn’t boosted insurance employment in Colorado or other states that offer it. With only two states still carrying this tax break, repealing it put Colorado on firmer fiscal ground.

A Step Toward Fiscal Stability

Together, these bills raised about $250 million and created long-term savings by stripping out ineffective tax breaks. While this fills only part of the $783 million gap left by federal tax changes, it represents a principled step forward: closing loopholes for large corporations and wealthy individuals rather than cutting into classrooms, health care, or food assistance.

CFI is proud to have worked alongside legislators and coalition partners to advance these reforms. As we emphasized throughout the session, Colorado’s tax code should reflect today’s economy, not outdated subsidies or federal giveaways. Every dollar we spend through the tax code should work as hard as possible for the people of Colorado.

Join Us

The work doesn’t stop here. Colorado still faces long-term fiscal challenges, and we need bold, fair solutions to build a budget that truly meets our communities’ needs. Join us as we continue to fight for a more just tax system—sign up for CFI updates, share this blog with your networks, and add your voice to the call for fairness and fiscal responsibility.