Colorado Initiative 119 Could Exempt Income Tax on Tipped Wages and Overtime Pay

Colorado Initiative 119 Could Exempt Income Tax on Tipped Wages and Overtime Pay

 Kathryn Bennett, Law Clerk

  Colorado ballot Initiative 119 ( “Initiative 119”)[1] would repeal a recent Colorado law, House Bill 25-1296 (“HB25-1296”), which separated Colorado’s overtime tax policy from federal overtime tax policy and requires Coloradans to add the amount of overtime pay excluded from their federal income tax revenue, via the One Big Beautiful Bill Act (“OBBA”),[2] to their Colorado taxable income. However, this tax structure could all change if the proponents of Initiative 119 proponents obtain sufficient signatures to put Initiative 119 on the Colorado ballot in the November 3, 2026, general election and Colorado voters pass Initiative 119. 

 Brief Background

             Both the Fair Labor Standards Act (“FLSA”)[3] and Colorado wage laws require non-exempt employees to be paid overtime at 1.5 times their regular rate of pay for any hours worked over forty (40) in a workweek and, in Colorado, that overtime pay is required if an employee works over 12 hours a day. 29 U.S.C. §§ 201 et seq.; 7 C.C.R. § 1103-1:1 et. seq.  On July 4, 2025, President Trump signed OBBA into law, which temporarily allows employees to deduct the extra half portion of their regular rate of pay for overtime pay from their federally taxable income and for certain employees to deduct up to $25,000.00 in “qualified tips” from their federally taxable income. 

             Some states, however, like Colorado, have begun to claw back this tax relief through passing legislation of their own to avoid losing an estimated $500 million in annual revenue from state taxes.  Specifically, Colorado Governor Jared Polis signed HB25-1296 into law on May 16, 2025, which requires Coloradans to add the amount of overtime pay excluded from their federal income tax revenue to their Colorado taxable income.[4] 

             In an effort to reverse HB25-1296 and conform Colorado’s tax code to the federal tax code under OBBA, a conservative advocacy organization filed Initiative 119, which, specifically, would prevent Colorado from collecting taxes on earned tips and overtime compensation. The next steps for Initiative 119 to get closer to reaching the 2026 ballot require proponents to collect the signatures of 124,238 registered voters.

             If Initiative 119 passes, it will “reduce funding for [Colorado] state expenditures that include but are not limited to health care policy and financing, education, and higher education by an estimated $155 million in tax revenue,” for FY 2027-28[5]

 Employer Considerations

             If Initiative 119 gets put on the 2026 ballot and prevails, Colorado may be seen as more inviting to employers who have substantial overtime or tip-reliant positions, such as hospitality, food service, and health care, looking for a tax-favorable state to start or move their business, which could mean more competition for employees in those sectors. Employees receiving overtime may also be more willing to work more hours with the idea of benefiting from the more favorable tax treatment. 

 Campbell Litigation will continue to monitor Initiative 119 and other potential changes to Colorado labor and employment law.

[1] See https://leg.colorado.gov/sites/default/files/initiatives/2025-2026%2520%2523119.pdf for the full text of 2025-2026 #119.

[2] H.R. 1, 119th Cong. (2025).

[3] 29 U.S.C. § 201 et seq.

[4] Colo. Rev. Stat. § 39-22-104(3). 

[5] See https://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard/results/2025-2026/119Results.html for the results of the August 20, 2025, hearing on Initiative 119.