Colorado state budget writers have another tough year of spending cuts ahead of them amid rising program costs and a slowing economy.

The state could be about $841 million in the hole next year in a budget scenario that accounts for the budget obligations currently in statute and certain transfers requested by Gov. Jared Polis, according to nonpartisan legislative staff. The Legislature’s bipartisan Joint Budget Committee heard the quarterly economic forecast from Legislative Council Staff and the governor’s office Monday.

At the same time, those state economists expect the state to collect 7.4% more in revenue in the next fiscal year. That will get eaten up by increased Medicaid costs and other programs.

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“We’re no strangers to difficult budget decisions here in Colorado,” JBC Chair Sen. Jeff Bridges, an Arapahoe County Democrat, said in a statement. “Years of thoughtful, bipartisan budgeting puts us on solid financial footing, but with the devastating impacts of H.R.1 along with tariffs continuing to create uncertainty and raise prices for Colorado families, more tough budget decisions are most certainly ahead.”

H.R.1 refers to the federal tax cut and spending bill that Congress passed earlier this year. The measure reduced income tax revenue in Colorado and will eventually put massive new administrative pressures on safety net programs like Medicaid and nutrition assistance.

State economists from the Legislature and the governor’s office both estimated a decrease in state general fund revenue in the current fiscal year when compared to a June economic forecast. The Governor’s Office of State Planning and Budgeting revised its estimate down by about $756 million to $17 billion.

Mark Ferrandino, who heads OSPB, told lawmakers that Medicaid cost increases drive “a significant portion of the structural deficit” and that the federal law will make it worse as the state absorbs more cost. He said Medicaid spending has been growing at about 9% over the past year, while growth in the amount the state can spend under the Taxpayer’s Bill of Rights has grown at about 4.5%. TABOR is a state constitutional amendment that limits the amount of revenue the state can retain and spend. 

“A growth rate of greater than the entire TABOR amount of growth rate in Medicaid is not something we can sustain, and so we will be coming forward with options, and look forward to working with you on that,” Ferrandino said.

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Without a big policy change, Medicaid could take up the whole state budget within 15 years and leave no room for education and other expenses, he said.

“There’s got to be conversations of how we change that — not that we’re going down in funding, but that we’re growing at a slower rate more in line with either general fund growth or with the TABOR spending cap,” he said.

Those soaring Medicaid costs drove lawmakers to cut about $1.2 billion in the budget for the current fiscal year, which began July 1.

Polis, a Democrat, called lawmakers into a special session in August to raise more tax revenue to soften the blow of H.R.1’s impact. He also ordered midyear spending cuts and dipped into the state’s reserve funds to help fill the gap. Democrats passed a series of bills during the special session to end tax breaks for some businesses and create a tax credit sale scheme. Legislative staff said Monday those policies will bring in about $252 million this fiscal year, $164 million during the next one and $226 million in the 2027-2028 fiscal year.

Both legislative staff and the governor’s team agree that revenue will not fall above the TABOR cap for this fiscal year, eliminating mandated refunds to taxpayers. There could be modest TABOR surpluses in upcoming years.

Economists worry about a near-term recession driven by high household borrowing, a weakening labor market and impacts from tariffs imposed by the federal government. LCS did not put a probability on a recession, but the governor’s office estimates a 50% chance.