Colorado bill would block federal overtime tax cut from reaching workers

DENVER — A 70-page tax bill moving through the Colorado legislature would prevent workers from keeping federal tax savings on overtime pay, burying the provision in a sweeping omnibus measure that modifies dozens of tax expenditures.

House Bill 26-1289, titled “Modification of Certain Tax Expenditures,” adds a new subsection to Colorado’s income tax statute requiring taxpayers to add back “the amount of any overtime compensation excluded or deducted from federal gross income” to their state taxable income. The provision, found in Section 3 of the bill, takes effect for tax years beginning on or after Jan. 1, 2026.

What the bill does

The overtime add-back is one provision among 39 sections in the bill, which also repeals the precious metals sales tax exemption, eliminates corporate wage deductions, restricts enterprise zone credits, and creates new tax credits for electric vehicles and geothermal energy projects.

Susan Kochevar, owner of the 88 Drive-In Theater in Commerce City and a small business advocate, raised the alarm about the bill on The Kim Monson Show.

“There’s a bill going through the legislature now to make people add back whatever amount they would have saved from the federal government into their taxes so that Colorado can then tax them on that amount,” Kochevar said. “That is absolutely infuriating. What a terrible thing to do to your citizens.”

The bill is sponsored by Rep. Lorena Garcia, Rep. Kyle Brown, and Sen. Mike Weissman, all Democrats. It is assigned to the House Finance Committee with a hearing scheduled for March 16 at 1:30 p.m.

Why it matters for Colorado workers

The federal government is moving to exempt overtime compensation from income taxes under the so-called “Big Beautiful Bill.” If enacted, workers could exclude up to $12,500 in overtime pay from their federal taxable income, or $25,000 for married couples filing jointly.

Colorado’s tax code typically follows federal definitions of taxable income. Without action by the legislature, those federal savings would automatically flow through to Colorado returns. State officials have estimated that conforming to the federal overtime exemption would cost Colorado $400 million to $600 million in annual revenue, according to the Denver Post.

The legislature began blocking this pass-through in 2025, when Governor Polis signed HB25-1296, which decoupled Colorado from the federal overtime exemption. The Institute on Taxation and Economic Policy estimated that decoupling saved the state $119 million in 2026. HB26-1289 continues that approach by codifying the overtime add-back within a broader tax expenditure overhaul.

Small business under pressure

Kochevar connected the overtime provision to a broader pattern of rising costs for Colorado small businesses. Her property taxes on approximately seven acres in Commerce City jumped from $13,000 four years ago to $60,000 this year.

“So we got rid of the Gallagher Amendment and made taxes evenly, property taxes supposedly fair,” Kochevar said. “So what has happened is in the last four years, property taxes have skyrocketed.”

She warned the cumulative burden of property taxes, utility costs, minimum wage increases, and payroll taxes is pushing small businesses to the breaking point.

“It’s not going to be long. There will not be any more small businesses in Colorado,” Kochevar said. “It’s just too hard to start them and manage them.”

Kim Monson noted that larger companies have more mobility to escape the business climate. She cited a Colorado Sun report that Palantir, the largest publicly traded company in Colorado, is relocating its headquarters from Denver to Miami.

The legislative landscape

HB26-1289 is not the only measure touching overtime taxation. Senate Bill 26-056, introduced in the current session, would move in the opposite direction by conforming Colorado with the federal overtime exemption at an estimated cost of $235 million, according to The Center Square.

Separately, Initiative 119, a proposed ballot measure, would undo the overtime decoupling and prevent state taxation of both tips and overtime pay. The measure needs 124,238 signatures to qualify for the November 2026 ballot.

Michael Fields, president of Advance Colorado, told the Denver Post that Coloradans “are going to be upset that the state took a direct action to ensure higher taxes.”

The Colorado Union of Taxpayers, where Kochevar’s fellow guest Dave Evans serves as a board member, is analyzing the 70-page bill ahead of the March 16 hearing.