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It’s time for another Forecast Five, where CFI gets down in the details so you don’t have to. Check out our top five takeaways from the Legislative Council’s presentation on the economic and fiscal outlook for Colorado.
Even after deep cuts this year, the next budget still starts in a sizable hole. Lawmakers made significant reductions to balance the current budget, but the March forecast added a complication: next year’s revenue is about $800 million short of simply maintaining today’s already lean budget. And that is before factoring in caseload growth, inflation, and other built-in cost pressures. Once those are included, the shortfall for the fiscal year starting in July lands closer to $1.5 billion.
Much of the downward revision in revenue comes from corporate income taxes falling well below expectations, largely due to expanded federal tax loopholes. Legislative Council projects revenue dropping from $2.62 billion in FY 2024-25 to $1.63 billion in FY 2025-26, driven mainly by H.R. 1 business tax provisions, especially expanded bonus depreciation and other deductions that let corporations shield more income from taxation. So while federal tax cuts may have provided some economic lift, this forecast suggests the bigger story is that they also made it easier for corporations to avoid paying taxes. Because Colorado uses federal taxable income as its starting point, the state automatically absorbs these changes, which are now showing up as added strain on the budget.
The March forecast shows that the Family Affordability Tax Credit (FATC) and expanded Earned Income Tax Credit (EITC) will be unavailable not only for tax year 2026, as projected in the December Governor’s Office of State Planning and Budgeting (OSPB) forecast, but also for tax years 2027 and 2028. That shift is one reason the individual income tax forecast rises in later years: when the credits are unavailable, refunds are lower and state revenue is higher. Put simply, the substantial tax credits that reached working families over the past two years are no longer part of the picture.
Under current law, the new school finance formula is set to increase from 15 percent of the formula difference in FY 2025-26 to 30 percent in FY 2026-27. However, one of the statutory stop conditions is triggered if the March forecast used for budget balancing shows the Amendment 23 diversion to the State Education Fund declining by 5 percent or more year over year. Legislative Council Staff now projects that diversion will fall by 5.3 percent in FY 2025-26. If the Joint Budget Committee adopts this forecast and determines the stop condition is met, the phase-in would remain at 15 percent, pupil counts would stay on four-year averaging instead of shifting to three-year averaging, and total program funding would be $51.8 million lower, with state aid $49.3 million lower, than if the phase-in continued as scheduled. There is a modest upside: revenue for Healthy School Meals for All is coming in stronger than expected, and the school food and SNAP components appear to be fully funded.
State economists describe the risks to the forecast as “elevated and bidirectional,” but note that the downside risks are more severe, including historically high tariffs, weaker household finances, possible AI overvaluation, and escalating conflict in the Middle East that could disrupt oil supplies and trade flows. There is also a familiar Colorado dynamic at play: even when there is upside risk, the General Fund often does not see much benefit. For FY 2026-27, revenue is projected to exceed the Referendum C cap by just $276.4 million. That means if revenue comes in lower, the budget takes the hit. If revenue comes in higher, a meaningful share is returned to taxpayers as TABOR refunds rather than available for schools, health care, or other General Fund priorities. In effect, Colorado bears the full downside of uncertainty, but under TABOR, it does not fully capture the upside.
