Unless Congress acts before January 1, 2026, the expiration of the 2017 Tax Cuts and Jobs Act (TCJA) will trigger widespread tax increases for 80% of Americans, significantly impact state economies, and disrupt state tax structures.
For federal taxes, the expiration of the 2017 TCJA would:
- Halve the federal standard deduction
- Reduce the federal child tax credit
- Reintroduce higher federal tax brackets
- Lower the federal estate tax threshold
- Eliminate key business tax benefits like federal Section 199A and full expensing
Altogether, individual and business taxes would rise by $500 billion annually, reducing U.S. GDP by 1.1% and wages by 0.5%.
TCJA Expiration Consequences for Colorado Taxpayers, Businesses, and State Government
- Average Tax Increase: If TCJA expires, Colorado taxpayers will face an average tax increase of $3,795 per filer.
- Rolling Conformity: Colorado automatically follows the federal tax code, so any federal action (or lack of action) will automatically apply to the state tax code. Policymakers should consider preserving elements of the current tax code in case TCJA expires.
- Federal Taxable Income Starting Point: States using this starting point automatically adopt any federal tax exclusion, exemption, or deduction. States that use taxable income as a starting point could, to avoid state tax increases on their own residents, consider continuing current policy on the standard deduction or Section 199A, or at least clarifying what happens if there is any temporary lapse or retroactive re-enactment of the federal taxable income definition.
- Generous Standard Deduction: An expiration of the expanded federal standard deduction would automatically sharply reduce the state standard deduction, which would mean a tax increase for most taxpayers. To avoid this tax increase if Congress does not act, policymakers in these states could consider establishing that the standard deduction in their state is the larger of federal law or the inflation-adjusted amount from this year.
- GILTI Inclusion: The federal minimum tax on Global Intangible Low-Tax Income (GILTI) is part of a mechanism of taxes and credits to deter cross-border profit-shifting. The income is not earned domestically and should not be taxed by any state, but Colorado does so. Policymakers should review how their provisions interact with the scheduled change in GILTI rates, whether they would be impacted by a modification or extension of TCJA, and whether the complexity caused by their inclusion of GILTI is justified.
- Business Expensing Conformity: Colorado conforms to federal Section 168(k), which means only 60% expensing for business investments this year and less in future years. State policymakers could adopt 100% full expensing, particularly since the state conforms to the Section 163(j) limit on interest expense and the two provisions were meant to work together.
- Monitor Proposals on Tips, Overtime, Social Security, and Auto Loans: Depending on how these proposals are structured in any federal enactment, they could automatically flow through to the state tax system.