Colorado’s budget is a complicated quilt of revenues and expenditures stitched together with constitutional restrictions that dictate its shape and limit its reach. It can be a talking point for those who oversimplify and willfully distort how it has changed over the years. It’s also a pain point for those who want to provide Coloradans with the services they need.
Know this: Colorado’s general fund — the part of the budget over which legislators have the most discretion — has grown quite modestly over the last two and a half decades. Even as the state has added new services critical to Colorado’s future, we have failed to keep up with basic needs, such as K-12 public education and transportation. That’s owing to restrictions imposed by the Taxpayer Bill of Rights, or TABOR. The graph below shows how per capita general fund revenue, when adjusted for inflation, has ebbed and flowed but ultimately barely moved since FY 1999-2000.
Current Budget Basics
For FY 2025-26, Colorado state legislators passed a $43.9 billion budget to pay for everything from road and highway maintenance to schools, public safety, healthcare, human services, and more. This number includes federal and cash funds, which have strict spending rules. Lawmakers had to close a $1.2 billion gap to do it, reducing expenditures on social programs, transportation funding, and more. The primary driver of the budget shortfall was the rising cost of Medicaid, and the restrictions posed by TABOR in paying those costs. The federal budget cuts recently approved by federal lawmakers are going to exacerbate those challenges in Colorado’s budget going forward.
Revenues
Colorado’s budget woes begin with revenue and are exacerbated by the limits that TABOR places on using that revenue to serve Coloradans. Colorado collects less revenue per capita relative to personal income than most other states. The Centennial State ranked 44nd among states in 2020, with only $40 in total state tax revenue per $1,000 of personal income, according to Colorado’s 2024 Tax Profile and Expenditure report. When local taxes are added, a significant portion of which take the form of sales taxes, the total tax cost is regressive. That means that lower-income households pay a greater proportion of their income in taxes than do higher-income households.
Unfortunately, repeated proposals for across-the-board income tax rate cuts threaten to diminish even further the state’s ability to pay for education, health care, and other services. A graduated income tax has the potential to solve those problems, but the state constitution — again, a component of TABOR — currently prohibits it.
Colorado’s revenues come from three primary sources: state taxes, state fees, and federal funds. As they move through the budget process, those revenues are categorized into four areas:
- General fund: Used for areas such as healthcare, human services, education, corrections, K-12, and higher education. It’s the area of the budget that legislators have the most power to influence. State sales taxes and individual income taxes are the General Fund’s primary sources of funding.
- Cash Funds: These are funds that are collected for a particular purpose and earmarked for specific expenditures. An example of a cash fund revenue is college or university tuition.
- Federal Funds: This is money from the federal government that goes toward specific programs or uses. A prominent example is federal Medicaid funding, which requires a state match.
- Reappropriated Funds: These are funds that have been appropriated at least once. An oft-used example are funds that go to the Governor’s Office of Information Technology (OIT). Initially, money for technology is appropriated to individual departments, but then they are reappropriated to OIT to pay for technology-related work.
Expenditures: Needs Outstrip Constitutionally Constricted Budget
TABOR caps the amount the state is allowed to spend, regardless of the amount of revenue that Colorado collects. That cap is allowed to increase every year by inflation, as measured by the Consumer Price Index (CPI) plus population growth.
The problem is that government spending needs cannot be measured by inflation or population. In Colorado, our two biggest expenditures are healthcare – including Medicaid and children’s healthcare – and K-12 education.
Inflation in the cost of healthcare has consistently increased by more than CPI, as a whole. While CPI outpaced medical inflation during the high inflation era in the early 2020s, the broader trend has already impacted our budget and will continue to do so going forward, putting significant strain on Colorado’s budget and the state’s ability to fund important programs. As a result, the cap has not been able to keep up with the spending needs of the state.
And yet, the needs have increased tremendously.
Medicaid
Medicaid is one of the largest expenditures in Colorado’s state budget. But the amount being spent on this program is rising – and rising quickly. Much of that is due to Colorado’s rapidly aging population, a demographic that is growing three times faster than the population as a whole.
Older Coloradans are more likely to need long-term services and supports (LTSS) – a classification of services that includes in-home support to care in a nursing or assisted living facility. As it relates to our state’s fiscal situation, these services are both expensive and are most often accessed through Medicaid.
Over the past several years, the number of older adults using Medicaid-provided LTSS has grown, increasing by 20 percent between FY 2014-15 and FY 2022-23. As expected, higher enrollment, due in part to a greater number of older adults living in the state, has led to increased costs. Some of these increases were masked over the past several years by federal Medicaid spending, which increased to allow management of the COVID public health emergency. But that money is no longer available, and now the state is on the hook for more spending, further constraining our budget.
Looking at the issue with a broader lens, we note that the state-funded Medicaid caseload has more than tripled from FY 2000-01 to FY 2023-24, increasing from 275,000 people to 920,000 people, according to Colorado’s nonpartisan Legislative Council Staff. A recently-passed federal budget reconciliation bill likely will affect the number of Coloradans who can access Medicaid due to decreased funding and increased administrative burdens. The reality is that Colorado doesn’t have the resources to backfill federal cuts. The exact impact of the federal actions will come into focus in the coming months and years, but they will assuredly diminish Colorado’s ability to offer its residents the care they need.
K-12 Funding
In terms of population, younger Coloradans and older Coloradans have more need for government services, which impacts spending. K-12 education is one of the largest components of the state budget, comprising 16.7 percent of total spending and 27.9 percent of the general fund in FY 2025-26, according to the legislature’s Joint Budget Committee..
The state and local school districts share responsibility for K-12 public education funding. Local property taxes for school districts are a main source of funding for schools. When property tax rates are cut or housing values go down, the state is constitutionally required to fill the gap and contribute more toward K-12 funding. Shifts in local revenue and the housing market have caused some of the bigger fluctuation in state education funding over the last two decades.
The FY 2025-26 state budget includes about $256 million more in state spending than the prior year. Legislators approved a spending plan for FY 2025-26 that will, when combined with local contributions, add up to an average of $11,852 in per pupil funding, which is an increase of $412 over the $11,440 average this year. That’s good news for Colorado children.
However the needs of schools have increased dramatically over time. Two examples are the need for more school security and mental health professionals. Those needs and others have caused a significant strain on education resources. And, that’s why modest per pupil funding increases have not come close to covering K-12 needs.Studies commissioned by the Colorado Department of Education found that Colorado underfunds K-12 education by about $3.5 to $4.1 billion. Clearly, given the competing critical needs and status of state revenue and expenditures, Colorado policy makers need to reset the budget table.
What's next?
There is no easy answer to Colorado’s budget woes. Given that TABOR has been in place since 1992, this is a long-term problem that requires long-term solutions, all of which must be decided by the voters, not the state legislature. Whether that is a change to TABOR to allow for more spending with current revenue, a new stream of sustainable money to help reduce the gaps in our budget, or something else, it is clear that Colorado will need to make some changes to the current fiscal system so that legislators do not have to make significant budget cuts year after year. Having adequately funded programs across our state is crucial to economic mobility.
