Bill review: Colorado Expand Deduction for Retirement Benefits (CO HB1062)

[PavelMakarchuk]

Bill Review: Colorado Expand Deduction for Retirement Benefits (HB1062)

Reform ID: co-hb1062 | State: CO
Bill text: https://leg.colorado.gov/bills/hb26-1062
Description: Eliminates the $20,000 (age 55-64) and $24,000 (age 65+) caps on Colorado's pension and annuity income subtraction, allowing taxpayers age 55+ to deduct all qualifying retirement income (pensions, annuities, IRA distributions, Social Security) from state taxable income, effective tax year 2027. Bill was postponed indefinitely (killed in committee, vote 7-4) on 02/09/2026.

Merging this PR will publish the bill to the dashboard.

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What we model

Provision	Parameter	Current	Proposed	Bill Reference
Pension/annuity subtraction cap (age 55-64)	gov.states.co.tax.income.subtractions.pension.cap.younger	$20,000	Unlimited	Section 1, amending C.R.S. 39-22-104(4)(f)
Pension/annuity subtraction cap (age 65+)	gov.states.co.tax.income.subtractions.pension.cap.older	$24,000	Unlimited	Section 1, amending C.R.S. 39-22-104(4)(f)

What we don't model

• Triggered tax credit interaction: The fiscal note reports that the revenue reduction makes the family affordability tax credit and expanded EITC totally unavailable in TY2027-2028 (offsetting ~$308-481M). This is a structural interaction not capturable by changing pension subtraction parameters.
• HB24-1142 AGI thresholds: Current law has income thresholds ($75K single / $95K joint) for the Social Security subtraction for ages 55-64; these are not modeled in PE and are not affected by our parameter changes.

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Validation

External estimates

Source	Estimate	Period	Link
CO Legislative Council Staff fiscal note	-$530M (gross deduction impact)	TY2027	Fiscal Note
CO Legislative Council Staff fiscal note	-$565M (steady-state annual, after triggered credits)	Annual	Fiscal Note
SB25-136 fiscal note (predecessor)	-$513M (gross, TY2026)	TY2026	Fiscal Note
2021 Tax Expenditure Report	$506M (existing capped deduction, TY2018)	Annual	Report

Back-of-envelope check

Affected taxpayers: 610,000 (age 55+ with qualifying retirement income exceeding current caps)
Additional deductions: $12.05B (retirement income currently above the $20K/$24K caps)
CO flat income tax rate: 4.40%
Revenue impact: $12.05B × 4.40% = **$530M/year**

PE vs External comparison

Source	Estimate	vs PE	Difference
PE (PolicyEngine)	-$397M	—	—
Fiscal note (gross deduction)	-$530M	-25.1%	Review range
Back-of-envelope	-$530M	-25.1%	Review range
SB25-136 (predecessor, TY2026)	-$513M	-22.6%	Acceptable

Verdict: PE estimate (-$397M) is 25% below the fiscal note's gross deduction impact (-$530M). The gap reflects PE's Enhanced CPS microdata undercounting Colorado retirees with pension/annuity income relative to CDOR's actual tax return data. PE captures ~$9.0B of the $12.05B in additional deductions the fiscal note identifies (75% of the deduction base). This is at the boundary of "acceptable" (10-25%) and "review needed" (25-50%), consistent with the systematic CPS-vs-tax-return data gap seen in other states. The fiscal note is based on CDOR statistics of income data with projections using the state demographer's population forecast for ages 55+.

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Key results (TY 2027)

Metric	Value
Revenue impact	-$397,101,471
Poverty rate	17.35% → 17.35% (0.00%)
Child poverty rate	13.07% → 13.07% (0.00%)
Winners	4.8%
No change	95.2%
Losers	0.0%

Decile impact (TY 2027)

Decile	Relative Change	Avg Benefit
1	0.00%	$0
2	0.00%	$1
3	0.00%	$0
4	0.00%	$3
5	0.02%	$16
6	0.03%	$37
7	0.03%	$43
8	0.04%	$72
9	0.13%	$293
10	0.23%	$2,037

District impacts (TY 2027)

District	Avg Benefit	Winners	Losers	Poverty Change
CO-1	$143	3%	0%	0.00%
CO-2	$267	5%	0%	0.00%
CO-3	$205	7%	0%	0.00%
CO-4	$161	4%	0%	0.00%
CO-5	$218	5%	0%	0.00%
CO-6	$200	5%	0%	0.00%
CO-7	$200	6%	0%	0.00%
CO-8	$128	4%	0%	0.00%

Parameter changes

Parameter	Period	Value	Bill Reference
gov.states.co.tax.income.subtractions.pension.cap.younger	2027-01-01+	$1,000,000,000 (unlimited)	C.R.S. 39-22-104(4)(f)
gov.states.co.tax.income.subtractions.pension.cap.older	2027-01-01+	$1,000,000,000 (unlimited)	C.R.S. 39-22-104(4)(f)

Data quality notes

• Uses PolicyEngine's Enhanced CPS microdata for Colorado, projected to tax year 2027
• PE captures ~75% of the deduction base identified in the fiscal note ($9.0B vs $12.05B), reflecting CPS undercount of retirees with pension/annuity income
• 4.8% of households benefit; benefits are concentrated in upper deciles (avg $2,037 in decile 10, $293 in decile 9) — consistent with higher-income retirees having larger pension/annuity income exceeding the current caps
• 0% losers: pure deduction expansion with no phase-outs or interactions
• No poverty impact: the deduction primarily benefits middle- and upper-income retirees whose income is well above the poverty line
• The fiscal note's triggered tax credit interaction (family affordability credit + expanded EITC becoming unavailable, offsetting ~$308-481M in FY2027-28) is not modeled — our estimate reflects only the gross deduction impact
• Bill was postponed indefinitely (killed in committee) on 02/09/2026

Reform parameters JSON

{
  "gov.states.co.tax.income.subtractions.pension.cap.younger": {
    "2027-01-01.2100-12-31": 1000000000
  },
  "gov.states.co.tax.income.subtractions.pension.cap.older": {
    "2027-01-01.2100-12-31": 1000000000
  }
}

Versions

• PolicyEngine US: 1.567.1
• Dataset: policyengine-us-data v1.67.0
• Computed: 2026-02-17