Colorado’s state Senate cleared two bills Wednesday that would restructure business taxes to raise revenue for an expanded working families tax credit.
One of the measures (HB26-1223) would narrow Colorado’s sales and use tax exemption available on downloadable software. The bill, which passed 22-13, stipulates only custom software developed for use by a particular user and software governed by a negotiable license agreement is exempt from taxation. All other forms would be subject to sales and use tax beginning in 2027.
By the same 22-13 margin the Senate passed a measure (HB26-1289) that expands the tax base by revising several tax credits, deductions, and exemptions. The bill also changes the corporate income tax code by allowing affiliated corporate groups to make a water’s edge election under Colorado’s combined reporting regime beginning in 2027. The water’s edge election generally taxes the state’s portion of the business’s income within the US and excludes income from most foreign affiliates.
Both bills would generate revenue that will flow into the state’s new family affordability credit, which would be codified under HB26-1223. Senate Democrats estimated the credit would offer up to $260 for each child under 6, and up to $195 for each child between 6 and 16. In 2025, the credit was available to joint filers with income below $96,000.
The tax restructuring measures previously passed the House, but now return for concurrence votes because the Senate added amendments.
A fiscal analysis found the narrowing of the exemption for downloadable software would generate $44.4 million for tax relief in fiscal year 2027, and $92.2 million the following year. The changes under HB26-1289 were expected to generate just over $7 million, according to a fiscal analysis.
Colorado’s state auditor analyzed the exemption in 2022, finding it was being inconstantly applied across the state. The auditor recommended the legislature “clarify its intent for the exemption by providing a purpose statement and corresponding performance measure(s) in statute.”
“At the end of the day, tightening up ineffective tax laws to continue impactful tax credits for working families is an easy choice,” Sen. Mike Weissman (D), sponsor of HB26-1289, said in a statement.
Two separate bills that also would have brought in revenue for the family affordability credit collapsed in the state Senate after Colorado Gov. Jared Polis (D) said he would likely veto them. The Senate Finance Committee dumped both Monday at the request of their sponsors.
One of the dropped bills (HB26-1222) would have decoupled Colorado from four tax-cutting features of President Donald Trump’s 2025 tax law, requiring businesses to add the federal benefits to their state bases. The other (HB26-1221) would have limited corporate taxpayers’ ability to deduct salaries of certain highly-compensated executives.
Ally Sullivan, a spokesperson for Polis, said the governor is broadly supportive of the new affordability credit, but preferred using any rollback of business tax benefits on a broader income tax rate reduction.