Colorado Wrote a Tax on Your Overtime Before Congress Cut It

What happens to a federal tax cut when it crosses into Colorado?

If the tax cut is for overtime, Colorado takes it back.

Colorado's income tax starts with the income on your federal tax return. The state then makes adjustments. It adds some things back in and subtracts others. So when Congress changes what counts as taxable income, your Colorado tax usually changes the same way, unless Colorado lawmakers write a rule that adds it back.

On July 4, 2025, Congress passed a new federal tax deduction for overtime. From 2025 through 2028, workers can deduct the extra part of their overtime pay, the "half" in time-and-a-half, up to $12,500 a year, or $25,000 for a married couple filing together. The break shrinks for people earning more than $150,000, or $300,000 for couples.

Colorado had already written its response. Seven weeks earlier, on May 16, 2025, Governor Jared Polis signed HB25-1296. One section adds a new line to the list of things Colorado taxpayers must add back to their income: "the amount of any overtime compensation excluded or deducted from federal gross income." It took effect January 1, 2026. In 2026, lawmakers passed another bill, HB26-1289, which confirms the rule applies to every tax year starting in 2026. It has no end date.

Picture an ICU nurse in Grand Junction who picks up extra shifts all year. Her federal return lets her deduct her overtime premium. Her Colorado return adds it right back.

HB25-1296 changes several tax breaks. Besides the overtime rule, it:

1. Taxes long-distance phone service. It ends the sales tax exemption for interstate telephone service, meaning calls that cross state lines. Starting July 1, 2025, that service is taxed when a call starts or ends in Colorado and is billed to a Colorado address.
2. Ends a business tax credit. A tax credit for businesses that pay property tax on equipment and furniture can no longer be claimed starting with tax year 2026.
3. Caps a jobs credit. A tax credit for businesses that invest in certain struggling areas, called enterprise zones, is capped at $2 million per business starting in 2026.
4. Trims a historic building credit. It removes a 5 percent bonus for fixing up historic commercial buildings in disaster areas.
5. Gives some back. It extends a tax credit for businesses that invest in child care centers, removes sales tax on medical marijuana bought with a government benefits card, and loosens the rules for a credit for care workers.

Every tax increase in this bill came with the same statement. Lawmakers wrote that the money raised by the bill's changes "is clearly de minimis and incidental." "De minimis" is a legal term meaning too small to matter. Lawmakers cited a 2018 Colorado Supreme Court case about the Denver-area transit district, TABOR Foundation v. Regional Transportation District, to argue that none of it needed a public vote under TABOR, the Taxpayer's Bill of Rights in Colorado's constitution.

Now look at the fiscal note, the estimate of the bill's cost that lawmakers had in front of them. It estimated the whole bill would raise $5.4 million in the 2025-26 budget year and $10.7 million in 2026-27. The overtime rule was not in those numbers. The estimate explained why: overtime pay was "not excluded from federal income tax revenue under current federal law." The rule would only matter "if in the future" Congress made overtime tax-free.

So lawmakers called their bill "clearly de minimis" at a moment when its most important provision was counted at zero, because the federal tax cut it was aimed at did not exist yet. Seven weeks later, it did. Starting with tax year 2026, the rule that was worth nothing on paper in May reaches every Colorado worker who claims the federal overtime deduction. The bill itself makes the point. Nobody writes a tax on a deduction that does not exist unless they expect it to exist, and expect it to bring in money.

Supporters make a real argument. Because Colorado's tax starts from federal income, every change Congress makes affects the state budget without a vote in Denver. States often "decouple," or separate their tax rules from federal changes, to protect their budgets. A state that must balance its budget cannot let Congress decide how much money it collects, and lawmakers could see a federal overtime deduction coming.

Decoupling is a real tool, and Colorado is not the only state to use it. Still, decoupling from a tax cut is a choice to collect money a worker would otherwise keep. TABOR requires a public vote on any "tax policy change directly causing a net tax revenue gain." A rule that exists only to capture the value of a federal tax break is designed to raise revenue. It cannot be a side effect of its own purpose.

The Colorado Supreme Court has since tightened the rule lawmakers relied on. On September 8, 2025, in MetroPCS California, LLC v. City of Lakewood, all seven justices agreed that Lakewood needed a public vote to extend its tax to phone companies that had not been taxed before. The court said the 2018 exception fit laws that both add and remove taxes. HB25-1296 does both, which may be why it bundles a few tax breaks with its increases. Its new sales tax on interstate phone service, though, is the same kind of expansion to a service that was not taxed before. No court has applied the MetroPCS ruling to HB25-1296, and as of September 24, 2026, we found no lawsuit challenging it.

The federal overtime deduction runs through 2028. Colorado's add-back has no end date. If Congress extends the federal break, Colorado's rule will cancel it out for Colorado taxpayers automatically. A proposed ballot measure to exempt tips and overtime from state income tax was filed in 2025, but it is not among the 14 measures on Colorado's November 2026 ballot.

HB25-1296 passed the House 39-25 and the Senate 23-12. The House accepted the Senate's changes 42-22 and passed the final version 40-24. Its lead sponsors were Representatives Lorena Garcia and Yara Zokaie and Senator Michael Weissman, all Democrats. Governor Polis signed it May 16, 2025. It carried a "safety clause," which makes a law take effect right away and blocks citizens from putting it on the ballot.

Colorado called the overtime tax too small to need a vote. It only looked small because the tax cut it was built to cancel had not been signed yet.

This is our read of the law. We encourage you to read it yourself and reach your own conclusions.