Trump Cut Federal Taxes on Overtime Pay. A Lawsuit Demands Colorado Do the Same.

As President Donald Trump's One Big Beautiful Bill Act temporarily cuts federal taxes on overtime pay, some Colorado Republicans are seeking to force the state to follow suit.

The conservative advocacy group Advance Colorado filed a lawsuit on Thursday, July 24, challenging a new law that will continue taxing overtime pay at the state level, regardless of federal changes. The lawsuit was filed in Denver District Court against Governor Jared Polis and the head of Colorado’s tax agency. Other plaintiffs attached to the suit include Republican State Senator Barbara Kirkmeyer and Fremont County Commissioner Kevin Grantham.

The lawsuit targets House Bill 25-1296, which Polis signed into law in May, two months before Trump signed the Big Beautiful Bill. House Bill 1296 decoupled Colorado's tax code regarding overtime pay from the federal tax code, requiring overtime pay to continue to be subject to Colorado income tax starting next year, even if it is no longer subject to federal income tax.

The law maintains the status quo for Colorado taxes, functionally continuing the same state tax on overtime income. But because the law effectively prevented a tax cut from happening at the state level, the lawsuit argues that it qualifies as a tax increase and, therefore, requires voter approval under the Taxpayer’s Bill of Rights.

"Legislators can’t just raise taxes whenever they want. They have to ask permission from voters," said Michael Fields, president of Advance Colorado, in a statement. "We filed this lawsuit to stand up for working families. HB25-1296 is clearly a $500 million violation of TABOR."

The lawsuit asks a judge to invalidate House Bill 1296. Advance Colorado is also seeking to run a ballot measure that would exempt overtime pay and tips from state taxes, said Fields. Under his leadership, Advance Colorado has successfully passed many conservative policies through ballot initiatives, and at times forced legislative compromises and special sessions.

The sponsors of House Bill 1296 disagree with the lawsuit's claims, arguing that the law does not raise taxes, but maintains an existing tax by changing the collection mechanism. The tax break for overtime pay in the Big Beautiful Bill only applies to federal income tax, but it would have spilled over into the Colorado income tax as a sort of unintended domino effect, because the state tax code was aligned with the federal tax code.

"This is not a new tax," said Democratic Representative Yara Zokaie, a sponsor of House Bill 1296, during a House debate on April 25. "Many parts of our state tax statutes reference federal laws, and there are times when we need to decouple that to ensure that we have robust laws that fund our state adequately."

If Colorado followed the federal government's lead in cutting income taxes for overtime pay, the state would lose $400 to $600 million in revenue per year, according to Zokaie. "This truly isn't a 'want to do,' it's something that we absolutely have to do to ensure that we can continue to have a state budget that meets the very basic needs of our state," she added.

Under the Big Beautiful Bill, up to $12,500 (or $25,000 for joint filers) in overtime pay is deductible from federal income taxes per year. The deduction starts this year and is set to expire after 2028.

"Colorado families were promised meaningful tax relief, but state Democrats increased taxes and fees, broke their promise and made life less affordable for working families," Kirkmeyer said in a statement. "I will stand up for the people Democrats have left behind and fight for a state that works for everyone."

The issue may also be brought back to state legislators, as Polis has said he is considering calling a special legislative session next month dedicated to managing the budgetary fallout of the Big Beautiful Bill.