Colorado Budget Deficit: Causes, Cuts, and What Was Protected

Colorado’s budget deficit for fiscal year 2026-27 came in at roughly $1.5 billion, the second consecutive billion-dollar shortfall, and Governor Jared Polis signed a $46.8 billion balanced budget on May 8, 2026 that closed the gap through Medicaid cuts, fund transfers, reserve drawdowns, and forgone taxpayer refunds.¹² K-12 education was largely protected. Almost everything else was not.

What Caused the Shortfall

Three forces converged. The first was federal. The “One Big Beautiful Bill Act” (H.R. 1), signed by President Trump on July 4, 2025, reduced Colorado’s projected revenue by roughly $1.2 billion in its first year.³ Colorado uses rolling conformity, meaning federal tax code changes flow automatically into state tax calculations, so the law’s expanded standard deduction, corporate cuts, and new exemptions for overtime and tip income immediately shrank the state’s tax base.⁴

The second was Medicaid. The Department of Health Care Policy and Financing saw its budget grow an average of 19% annually between FY 2021-22 and FY 2024-25.⁵ Between 2015 and 2025, HCPF spending doubled from $8 billion to $16 billion, while the rest of state government grew 64%.⁶ Medical inflation ran near 8%, expanded coverage and increased benefits pushed costs higher, and none of it was slowing down.

The third is structural: the Taxpayer’s Bill of Rights, or TABOR, a 1992 constitutional amendment that caps annual state revenue growth at inflation plus population growth. Service costs consistently rise faster than that formula allows. In FY 2025-26, Medicaid costs were growing at nearly 9% while the TABOR cap permitted only about 3.2% growth.⁷ The result is a peculiarity: the state can owe taxpayer refunds on a “surplus” while also running a real shortfall. That is what happened in FY 2025-26, when Colorado had a $108 million TABOR surplus alongside a $1.2 billion deficit.⁸

The federal tax law hit mid-year, throwing the already-passed FY 2025-26 budget out of balance by about $783 million and forcing an August 2025 special session that produced partial decoupling from federal tax provisions, closed business tax exemptions, and $252 million in emergency department cuts.⁹¹⁰ Those were stopgaps. By the time the Joint Budget Committee turned to FY 2026-27, the hole was $1.5 billion.²

How the FY 2026-27 Gap Was Closed

Colorado’s constitution forbids carrying a deficit or borrowing to cover operating expenses, so every dollar had to be found through cuts, transfers, or new revenue.¹¹ House Bill 26-1410, totaling $46.87 billion with $17.4 billion in general fund spending, took effect July 1, 2026.¹

The Colorado House Democrats’ breakdown of how the deficit was closed:

Roughly $270 million in Medicaid reimbursement rate cuts, on top of $90 million cut earlier in the year
$570 million reallocated from previous state programs
$340 million drawn from reserves
$150 million in cuts across smaller departments
$120 million from holding contractor rates flat and reducing state employee compensation
Various targeted program reductions⁷

The JBC also voted to forgo approximately $306 million in taxpayer refunds over the next two budget cycles.² State reserves dropped from 15% to 13% of the general fund. The March 2026 Legislative Council Staff forecast projected the reserve would sit at 6.5% under the JBC’s scenario, about $1.47 billion below the 15% statutory requirement.¹²

Where the Cuts Landed

Medicaid Providers and Services

Medicaid took the heaviest hit. The JBC imposed a 2% across-the-board cut to provider reimbursement rates, saving an estimated $95 million, though maternal health, neonatal intensive care, and pediatric autism care providers were exempted.² Adult dental benefits were capped at $3,000.¹³ The waitlist for 24/7 services for adults with developmental disabilities is expected to roughly double to about 14 years, saving $6.6 million. Paid family caregiving for individuals with disabilities was capped at 56 hours per week.

Cover All Coloradans

The program that provides health insurance to immigrant children and pregnant women was scaled back on multiple fronts. Enrollment was capped at 25,000 children, eligibility was reduced from age 19 to 18, long-term care services ended for new enrollees, and a fiscal guardrail was set to halt enrollment if costs exceed $96 million.²¹³

State Workers and Programs

State employees were denied a 3.1% cost-of-living raise that would have cost $35 million.² The Teacher Recruitment Education and Preparation program was phased out.¹⁴ The Office of Sustainability was defunded. Grants for officer mental health support dropped 10%, and subsidies for adoptive families and kinship guardians were reduced by $4.8 million. Funding was also cut from the Colorado Bureau of Investigation, the Behavioral Health Administration, and the Department of Military and Veterans Affairs.

Higher Education

Colleges and universities were squeezed from both directions. Polis had already implemented about $12 million in state-level higher education cuts in August 2025. Federally, the U.S. Department of Education withheld $350 million in grants nationally in September 2025, citing concerns about DEI-related programs. Colorado institutions lost over $15 million in that round, with rural and community colleges hit hardest: Adams State University lost roughly $4 million and eliminated its College Assistance Migrant Program, and Lamar Community College lost $3 million.¹⁵

To compensate, the FY 2026-27 budget allowed resident undergraduate tuition increases of up to 3.5% and community college increases of up to 5%. Those tuition hikes are projected to account for $160 million of the $164 million increase in the higher education budget. Lawmakers also removed about $14 million in state support previously provided for Colorado residents attending private institutions.¹⁶

Counties and Cities

State cuts for FY 2025-26 cost local governments nearly $140 million through redirected severance and marijuana tax revenue, eliminated grant programs, and reduced infrastructure funding. The state House voted to reduce the local share of marijuana sales tax revenue from 10% to 3.5%.¹⁷

What Was Protected

K-12 education came through largely intact. Statewide school spending rose to approximately $10.2 billion, about $180 million more than the prior year, and per-pupil funding increased $449 to $12,325.¹⁸¹⁹ Lawmakers deliberately avoided using the Budget Stabilization Factor, a mechanism that has historically allowed the state to withhold constitutionally mandated K-12 funds during tight years.¹⁶

The phase-in of the new school funding formula adopted in 2024 continued, with $150 million invested for 2026-27, roughly 30% of the formula’s eventual $500 million annual cost.¹⁹ Even so, independent adequacy studies released in early 2025 found that fully funding Colorado’s schools would require $3.5 billion to $4.1 billion more than current levels.²⁰

Universal preschool, the senior homestead property tax exemption funded at $200 million, and emergency management infrastructure also received maintained or increased funding.⁷

What Comes Next

The FY 2026-27 budget is balanced on paper, but it leans hard on one-time moves: reserve drawdowns, fund transfers, and deferred obligations that cannot be repeated year after year.²¹²²¹²

Two questions could reach voters in November 2026. The legislature referred SB26-135, which asks voters to let the state retain TABOR surplus funds and direct them toward K-12 education, effectively raising the TABOR cap by an amount equal to the state’s annual K-12 spending, currently about $4.6 billion. If it passes, retained surplus would first fund a 2% annual increase in K-12 spending, with at least half of all retained funds going to schools and the remainder to early childhood programs.²³ It passed both chambers on party-line votes with no Republican support, and nonpartisan analysis projects the average taxpayer would forfeit $7,381 in refunds over the measure’s first decade.²⁴ Colorado voters have consistently rejected efforts to raise or lift the TABOR cap over the past decade, including Proposition HH in 2023.

A separate campaign led by progressive groups is working to place a graduated income tax measure on the same ballot. It would repeal Colorado’s flat income tax rate and replace it with a tiered structure projected to raise $3.6 billion annually for education, healthcare, and childcare. The initiative faced a legal challenge before the Colorado Supreme Court on single-subject grounds, and as of early 2026 the court had not ruled on whether it can proceed to the ballot.²⁵ The legislature also passed a bipartisan resolution, HJR26-1028, committing to develop a multi-year plan to phase in the $3.5 billion to $4.1 billion in additional school funding identified by the 2025 adequacy studies.²⁶

The gap between what Colorado’s services cost and what TABOR lets the state collect is not new. What is new is how little cushion remains: a reserve projected at 6.5%, one-time transfers already spent, and Medicaid still growing faster than the revenue cap. The November 2026 ballot is the next real test of whether the state’s fiscal structure changes or the cuts keep coming.

1
Colorado Newsline. Gov Jared Polis Signs $46.8 Billion State Budget
2
Colorado Sun. Colorado Budget Draft Billion Shortfall 2026
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Colorado Sun. Colorado Special Session Big Beautiful Bill Explained
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Governing. Trump’s Tax Cuts Cost Colorado a Cool Billion
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Colorado Department of Health Care Policy and Financing. Sustainability
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Common Sense Institute. Colorado Budget How Did We Get Here
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Colorado House Democrats. Signed! FY 2026-2027 Budget
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Colorado Newsline. Polis Emergency Spending Cuts
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Colorado Newsline. Colorado Special Session 2025
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Colorado General Assembly. March 2026 Economic and Revenue Forecast
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Aspen Times. Colorado New Budget Cuts Medicaid
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CPR News. Human Impact of Colorado Budget Cuts
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Colorado Sun. Higher Ed Funding Cuts DEI Colorado Community Colleges
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Chalkbeat Colorado. Colorado Lawmakers Release 2026-2027 Budget
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Colorado Sun. How State Federal Budget Cuts Affect Local Governments Colorado
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Colorado Sun. Colorado Schools Dodge Budget Cuts Proposed Funding Measures
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Steamboat Pilot. Colorado School Finance Act Signed Funding Adjustments
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American Institutes for Research. Equity and Adequacy of Colorado School Funding Executive Summary
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Colorado Politics. Colorado Governor Signs $47 Billion Budget in Which Nobody Won
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Governor’s Office of Colorado. March Forecast Shows Colorado’s Economy Resilient Despite Increased Costs Tariffs International
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Colorado Sun. Colorado TABOR Refunds Ballot Question 2026
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Colorado Politics. Colorado Legislators Ask Voters to Forfeit Thousands in TABOR Refunds Redirect Money to School Spending
25
Colorado Judicial Branch. TABOR Foundation Ballot Initiative #193
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Colorado General Assembly. HJR26-1028