Last Thursday, Aug. 21, the Colorado General Assembly reconvened for its 2025 Extraordinary Session, mostly focused on addressing the $750‒$800 million state budget shortfall created by the federal government’s passage of the One Big Beautiful Bill Act (OBBBA) (also known as H.R. 1).
In his Aug. 6 executive order calling the legislature back to the Gold Dome, Gov. Jared Polis broadly outlined four areas of required legislative action, with the first three—fiscal, health care and food security—having a direct nexus to OBBBA. Correspondingly, the vast majority of the 30 bills introduced during the special session addressed these topics. And, perhaps unsurprisingly, only Democratic-led measures ultimately survived the turbulent six-day lawmaking period that concluded yesterday evening.
Some proposals—such as House Bill (HB) 25B-1002 (Corporate Income Tax Foreign Jurisdictions), HB 25B-1003 (Insurance Premium Tax Rate for Home Offices) or HB 25B-1005 (Eliminate State Sales Tax Vendor Fee) reconfigured or otherwise eliminated certain tax or other business incentives in order to raise state revenues, squarely fitting within the “fiscal” portion of the call. Other bills designed to tackle the “health care” and “food security” aspects of the governor’s order, including HB 25B-1006 (Improve Affordability Private Health Insurance) and Senate Bill (SB) 25B-003 (Healthy School Meals For All), also moved through the legislative process apace.
However, what likely could have been a three- to four-day lawmaking period continued to languish on because of the fourth aspect of Gov. Polis’ call: artificial intelligence (AI). For context, the end of the 2025 regular session became colored by last-minute gambits to revise or otherwise extend the effective date for SB 24-205 (Consumer Protections for Artificial Intelligence), a first-in-the-nation state-level regulatory framework for the development and deployment of so-called “high-risk” AI systems. Those efforts were ultimately unsuccessful so—with a Feb. 1, 2026, effective date for the AI law looming—the governor included it as part of the budget-focused call, citing implementation and compliance costs for both public entities and private companies as his rationale.
However, it quickly became clear that consensus on how to best reform SB 24-205 would be a challenge, at best. On one side, state Senate Majority Leader Robert Rodriguez (D)—the original architect of the 2024 AI bill—introduced SB 25B-004 (Increase Transparency for Algorithmic Systems), a measure that would have repealed and replaced SB 24-205 in favor of regulating a broader category of “algorithmic decision systems,” which was supported by consumer advocacy organizations and labor groups. Conversely, the technology industry and business community largely coalesced around HB 25B-1008 (Consumer Protections for Artificial Intelligence Interactions), which was amended shortly after introduction to merely propose delaying SB 24-205’s effective date to Oct. 1, 2026.
Negotiations between stakeholders largely stalled on the two competing bills until late Sunday, when a tentative deal to incorporate provisions of SB 24-205 into SB 25B-004 materialized. However, that agreement—which hinged on requiring disclosure to consumers of the use of algorithmic decision systems (ADS) starting Feb. 1 of next year (but delayed other provisions coming online)—did not sufficiently resolve concerns, particularly around the liability of operators deploying ADS/AI.
The deal completely fell apart by Monday morning and, following a day of frantic but ultimately futile negotiations, Rodriguez opted to use SB 25B-004 to solely extend the effective date for the AI law to June 30, 2026. While some progressive and labor-aligned members objected to the extension, Rodriguez’s bill then fully passed the House yesterday, leaving SB 24-205 and the broader issue of what role states should play in regulating AI to be relitigated during the 2026 regular legislative session.
Please find below a digest of the 11 bills (as well as links to the full bill language) that will advance to the governor’s desk for signature:
1. HB 25B-1001: Qualified Business Income Deduction Add-Back makes permanent existing state tax policy that requires taxpayers filing an annual gross income (AGI) of over $500,000 or joint filers with AGI over $1 million to add back the federal Qualified Business Income deduction when calculating their Colorado taxable income. The bill applies to income tax years beginning on or after Jan. 1, 2026.
2. HB 25B-1002: Corporate Income Tax Foreign Jurisdictions updates Colorado income tax law by expanding the list of foreign jurisdictions presumed to be used for tax avoidance to include Hong Kong, Ireland, Liechtenstein, the Netherlands and Singapore. Starting Oct. 1, 2026, corporations must add back any federal deduction claimed for Foreign Derived Deduction Eligible Income (FDDEI) to their Colorado taxable income. It also allows all foreign subsidiary dividends to be subtracted from federal taxable income for state tax purposes, regardless of jurisdiction. Additionally, the executive director of the Department of Revenue may determine, without corporate proof, that a company is not incorporated in a listed jurisdiction for tax avoidance.
3. HB 25B-1003: Insurance Premium Tax Rate for Home Offices repeals the existing insurance premium tax rate reduction of 1% for companies that maintain a home office or regional home office in Colorado. Beginning on Jan. 1, 2026, companies with a home or regional office in Colorado will be taxed at the standard 2% rate. This bill is effective Dec. 31, 2026.
4. HB 25B-1004: Sale of Tax Credits authorizes Colorado’s Department of the Treasury to sell up to $125 million in insurance premium and corporate income tax credits during fiscal year 2025–26, with proceeds deposited into the Tax Credit Sale Proceeds Cash Fund and transferred to the General Fund. Insurance companies with qualified home or regional offices in Colorado receive first priority in purchasing these credits. The credits are nonrefundable, may be carried forward through 2033 and are available to C corporations and insurance companies with state tax liabilities. Credits may be transferred or assumed in the event of mergers, acquisitions or divestitures provided the resulting entity is authorized to do business in Colorado and has applicable tax liability. The program is set to be repealed effective Dec. 31, 2040.
5. HB 25B-1005: Eliminate State Sales Tax Vendor Fee eliminates the sales tax vendor fee that retailers are currently allowed to retain for collecting and remitting sales tax. Previously, retailers with taxable sales under $1 million could retain a small percentage (up to $1,000 per filing period) to offset administrative costs. The bill also requires that 1.65% of net sales tax revenue be credited to the Housing Development Grant Fund. The bill goes into effect Jan. 1, 2026.
6. HB 25B-1006: Improve Affordability Private Health Insurance modifies the Colorado Health Insurance Affordability Enterprise to prepare for the possible expiration of the federal enhanced premium tax credit. If Congress does not extend the credit, the bill authorizes up to $100 million in funding sourced from tax credit sale proceeds (HB25B-1004), an interest-free loan from the Unclaimed Property Trust Fund, and a backfill from the General Fund if needed. The funding includes $50 million for the Reinsurance Program, $50 million to carriers to reduce costs for individuals purchasing plans through the Colorado Health Benefit Exchange, and up to $5 million for other enterprise programs. Additionally, it allows reallocation of up to $20 million in previously collected but unspent enterprise funds. The bill requires that the loan from the Unclaimed Property Trust Fund be repaid by Dec. 31, 2045. It also includes a sunset provision repealing the program effective Dec. 31, 2040.
Senate Bills
7. SB 25B-001: Processes to Reduce Spending During Shortfall requires the governor to notify the Joint Budget Committee (JBC) and hold a hearing with either the governor, the Office of State Planning and Budgeting (OSPB) or both when revenue forecasts indicate a significant shortfall. The bill mandates a hearing if spending would dip into the General Fund reserve by the lesser of 3% of appropriations or 50% or more of the required reserve, or if the reserve is projected to fall below $1 billion. The governor’s plans to reduce General Fund expenditures may not include reductions in the Judicial Department, the Legislative Department or among elected officials other than the governor.
8. SB 25B-002: State-only Funding for Certain EntitiesSB25B-0002: State-Only Funding for Certain Entities requires the Department of Health Care Policy and Financing (HCPF) to use state-only funds to reimburse entities that have been prohibited from receiving federal reimbursements. These reimbursements apply only for covered services provided on or after July 1, 2025, and only when the claim is not eligible for federal reimbursement.
9. SB 25B-003: Healthy School Meals for All modifies Proposition MM, which was referred to the legislature and became HB 25-1274. The bill would allow revenue raised under the measure to support access to food via the Healthy School Meals for All (HSMA) Program and the Supplemental Nutrition Assistance Program (SNAP). Allowable allocations of revenue for SNAP include the following:
- Implementing SNAP;
- Providing outreach related to SNAP; and
- Providing community-based nutrition education.
10. SB 25B-004: Increase Transparency for Algorithmic Systems repeals and reenacts standards and requirements for the development and use of artificial intelligence systems established in SB 24-205 to take effect on June 30, 2026, versus SB 24-205’s original Feb. 1, 2026, effective date.
11. SB 25B-005: Reallocate Department of Natural Resources Wolf Funding to Health Insurance Enterprise reduces on Sept. 1, 2025, General Fund appropriations to Colorado Parks and Wildlife (CPW) by $264,268 and transfers these funds to the Health Insurance Affordability Cash Fund within the Division of Insurance under the Department of Regulatory Agencies (DORA).
What’s Next?
Before the special session began, policymakers devised what has offhandedly since been referred to as the “a third, a third, a third” approach to closing the state’s FY 25-26 budget deficit resulting from OBBBA. Broadly, it refers to the plan to reduce the $750‒$800 million shortfall in the following three ways:
- Raising revenue by reforming or otherwise eliminating certain tax or business incentives ($150‒$250 million)
- Leveraging approximately 2% of the state reserve ($200‒$300 million)
- Programmatic cuts across state agencies and other state obligations ($220‒$300 million)
The first reductions were achieved through some of the bills, outlined above, that successfully advanced to the governor’s desk during the special session; meanwhile, plans to leverage the state’s reserve to further bring down the deficit are expected to proceed without issue. However, one bill—SB 25B-1001 (Processes to Reduce Spending During Shortfall)—has set the stage for the third source of reductions, namely cuts to existing programming or other obligations funded through state moneys. Using the process established by HB 25B-1001, the governor’s Office of State Planning and Budgeting (OSPB) is expected to present a spending reduction plan to the Colorado General Assembly’s Joint Budget Committee (JBC) tomorrow at 1:30 p.m.
Exact details on the sources of the cuts remain under a close hold, but the spending reduction plan is expected to be released in the form of an executive order that will go live shortly before tomorrow’s presentation. Importantly, both executive and legislative branch decisionmakers have reported that the cuts will not take effect until after the conclusion of the JBC’s customary fall supplemental budget process, creating an opportunity for the JBC to react to the executive order and otherwise revise or modify the governor’s spending reduction plan. Members of the Brownstein team will be at tomorrow’s hearing to evaluate and report back on this dynamic process as it occurs.
