Stronger-than-expected revenue does not change the bigger picture: Colorado’s budget still needs a long-term fix.

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.

1. Colorado is staring at another $1.6 billion budget hole

Colorado lawmakers spent the last legislative session wrestling with a difficult state budget. They should probably keep their wrestling shoes nearby. Legislative Council Staff (LCS) estimates that Colorado will have about $686 million more available to spend or save in fiscal year 2027-28 than it budgeted this year.

The problem is that this number doesn’t account for what it will actually cost to maintain existing services, including Medicaid, school finance, capital spending, and other obligations under current law. Factor those in, and Colorado faces a $1.58 billion shortfall in next year’s budget.

Health care is the biggest piece. The Colorado Department of Health Care Policy and Financing (HCPF) is projected to need an additional $443 million this year and another $860 million next year compared with the current appropriation. Beginning next year, Colorado also faces $158 million in new Supplemental Nutrition Assistance Program (SNAP) costs because of changes enacted under H.R. 1. Before H.R. 1, food assistance benefits were fully funded by the federal government. Capital and controlled maintenance obligations add another $315 million.

So, when you hear that Colorado has hundreds of millions of dollars available next year, remember the important second half of that sentence: before paying for the things Colorado already knows it has to pay for.

2. The economy is increasingly K-shaped

Since 2023, inflation-adjusted spending by higher-income households has grown considerably faster than spending by middle- and lower-income households. Federal tax cuts from H.R. 1 may have temporarily boosted spending across income groups in the second quarter, but the forecast expects that effect to be shorter-lived for lower-income households.

Meanwhile, household balance sheets are flashing warning signs. The national personal saving rate fell to just 3% in July, down from 4.4% in January and well below its historical average of 5.7%. Credit card and auto loan delinquencies are rising. That is the K-shaped economy in a nutshell: Overall consumer spending can look healthy because households at the top are doing very well, even while families further down the income distribution are saving less and increasingly falling behind on debt.

3. Inflation isn’t gone

Inflation in the Denver area is running at 3.9%, compared with 3.4% nationally. Both are above the Federal Reserve’s 2% target. Energy has been an especially large culprit. National energy prices were up 16% year over year in the forecast’s latest data, while Denver-area energy prices were up even more.

Persistent inflation has also changed the interest-rate outlook. Rather than cutting rates, the Federal Reserve raised the federal funds rate by 25 basis points in September, and LCS expects another 25-basis-point increase later this year. For households, that means the cost-of-living squeeze doesn’t end when inflation slows. Higher interest rates make mortgages, car loans, credit cards, and business borrowing more expensive. Prices went up. Then the cost of borrowing money to pay those prices went up. Not good economic news.

4. Barring changes at the ballot box, TABOR refunds and portions of two major family tax credits are coming back

There was no Taxpayer’s Bill of Rights (TABOR) surplus in fiscal year 2025-26. Revenue finished $176 million below the Referendum C cap. That means taxpayers won’t receive TABOR refunds in tax year 2026. But the forecast expects TABOR surpluses to return quickly. Revenue is projected to exceed the Referendum C cap by $827 million in fiscal year 2026-27, about $579 million in fiscal year 2027-28, and $652 million in fiscal year 2028-29.

The forecast also contains important news for the Family Affordability Tax Credit (FATC) and Colorado’s expanded Earned Income Tax Credit (EITC). These refundable credits were fully available in 2024 and 2025 but are unavailable in 2026. The September forecast expects them to remain unavailable in 2027 before becoming partially available in 2028 and 2029.

That’s an important reminder about Colorado’s fiscal system: Under current rules, revenue growth doesn’t simply translate into additional money for the budget. Depending on where revenue lands relative to various triggers, additional dollars can generate TABOR refunds, activate tax credits, or both, even when the state faces a significant budget shortfall.

5. Colorado’s General Fund has basically been running in place

Colorado collected roughly $17.7 billion in General Fund revenue in fiscal year 2021-22. Then $18 billion. Then $17.3 billion. Then $17.2 billion. Then $17.2 billion again in fiscal year 2025-26. In nominal dollars, General Fund revenue has barely moved for several years, even as Colorado’s population, wages, prices, and costs of providing public services have continued to grow.

Three major policy changes help explain the pattern.

First, voters reduced Colorado’s individual and corporate income tax rate from 4.55% to 4.4%, reducing an ongoing source of General Fund revenue.

Second, Colorado created and expanded the FATC and EITC. Those credits were fully available in tax years 2024 and 2025. At full availability, the two credits can reduce state revenue by roughly $1.2 billion annually.

Third came federal tax policy. Because Colorado uses federal taxable income as the starting point for its income tax, federal tax cuts can automatically reduce Colorado revenue unless state lawmakers decouple from them. H.R. 1 changed several business deductions, including bonus depreciation, and those provisions contributed to a remarkable 40.9% decline in Colorado corporate income tax collections in fiscal year 2025-26.

That brings us back to the $1.6 billion budget hole. Colorado’s economy didn’t stop growing, but our broken fiscal rules and upside-down tax code prevented that growth from producing enough revenue to keep pace with rising needs. At the same time, changes at the federal level are reducing state revenue and shifting new costs onto Colorado.

Without structural change, Colorado’s budget will remain a broken record: growing demand, recurring shortfalls, and another round of painful cuts.

Proposition NN and Amendment 87 would address different parts of that problem. Proposition NN would allow Colorado to invest more existing revenue in public schools. Amendment 87 would cut income taxes for 97% of taxpayers, raise them on the wealthiest 3%, and generate new revenue for K-12 schools, health care, and child care. Neither would fix every challenge in Colorado’s fiscal system, but both would begin changing the rules that keep producing the same budget crisis.