Colorado homeowners will get a tax break, thanks to TABOR’s lesser-known cousin. But local governments will be squeezed.
A little-understood provision of the state constitution will provide property-tax relief for homeowners across the state next year, but it could have cascading financial consequences for virtually all levels of Colorado government.
Gov. John Hickenlooper in his State of the State address on Thursday highlighted the immediate problem for Colorado’s budget: a projected $170 million cut to school districts across the state in 2018, which the state is required by law to replenish from its own coffers.
“The constitutional budget constraints for school finance are the thorniest part of our fiscal thicket,” Hickenlooper said, urging lawmakers in both parties to come together to find a solution.
But local governments, too, are bracing for the fallout — especially those counties, cities and special districts that rely heavily on residential property taxes. Even those that don’t could feel the pinch. In the past, the state has cut tax distributions to local governments in order to meet its growing school funding needs.
“It’s more than a ripple (effect),” said Kevin Bommer, deputy director of the Colorado Municipal League. “It’s like throwing a boulder in a lake.”
Since 2003, the assessment rate for residential properties has been unchanged, at 7.96 percent of market value. Next year, according to a study released Friday by the Department of Local Affairs, that’s projected to drop to 6.56 percent. Local officials apply that rate to their tax levies to calculate how much property owners owe.
Statewide, the total assessed value of property is expected to grow slightly over the next three years under the new formula, but that’s driven by the Denver area. Other parts of the state are expected to see revenues fall, according to a forecast from the Colorado Legislative Council.
Gini Pingenot, legislative director for Colorado Counties Inc., said the impact will vary from place to place, but for some local governments, the cut could be severe.
In places that can’t adjust their tax levies to compensate, that would represent an 18 percent drop in residential tax collections, not accounting for any growth in the local housing market.
So what is Gallagher?
Known as the Gallagher amendment, the constitutional measure was approved by voters and adopted in 1982 in response to homeowner concerns over rising residential property taxes. It requires that residential assessed values comprise no more than 45 percent of the state’s overall assessed value. Non-residential properties make up the remaining 55 percent.
Most years, Gallagher doesn’t come into play. If commercial values and home values rise at a similar pace, there’s no need for an adjustment.
But when there’s a housing market boom — as there has been over the past several years — coupled with a business downturn, like the recent dip in the oil and gas industry, homeowners can wind up contributing more than their 45 percent share. That throws the ratio out of whack, triggering a mandatory tax cut for homeowners under the state constitution.
The Taxpayer’s Bill of Rights adds another layer of complexity. Gallagher can trigger an automatic reduction in the assessed rate, but under TABOR, the rate can’t go back up without voter approval. So when commercial growth outpaces home values, and residential values drop below 45 percent, the rate doesn’t adjust.
“You never really get back any of that that you lose when you adjust this downward,” said Todd Weaver, the budget manager for Arapahoe County.
When the amendment was first adopted, the assessment rate for commercial property was 29 percent, and the residential rate was 21 percent. Today, the commercial rate is still 29 percent — but the residential rate has plummeted to 7.96 percent.
No easy fix
Lawmakers in both parties acknowledge the challenges Gallagher poses, but solutions are elusive.
State Rep. Millie Hamner, the top Democratic budget writer, put it bluntly at a Joint Budget Committee hearing in December: “I’m feeling choked by the Gallagher amendment,” said Hamner, of Dillon.
In a meeting with The Denver Post’s editorial board this month, Senate President Kevin Grantham, R-Cañon City, said it’s a simple fix but not an easy one: “You repeal Gallagher.”
“What you’d be asking people to do is to raise taxes on their own homes by repealing Gallagher,” Grantham said. “So what are the odds of that? Not very good.
“But as far as equity in the system, that’s exactly what should happen if we’re going to bring equity back to the entire system without putting the beast on the back of all the businesses here in Colorado to the tune of four times the taxes and increasing.”
Because the 45/55 ratio is set statewide, Gallagher doesn’t take local market conditions into consideration. That means the formula is driven by what happens in the Front Range, where the bulk of the state’s population lives.
So next year, homeowners in Denver will see some tax relief from their soaring home values. But so, too, will homeowners in other parts of the state, where home values might be growing more slowly or even declining.
On the West Slope in Mesa County, budget cuts in prior years had already left county commissioners mulling a sales-tax hike to pay for law enforcement and criminal justice needs.
Scott Stewart, the county’s chief financial officer, said the district attorney’s office had been cut so severely that last year, when a police officer was shot and killed, the office had to move money from elsewhere just to hire someone to investigate the case.
“They have to sometimes plea bargain cases that maybe should be prosecuted a little stronger,” Stewart said.
With the Gallagher amendment changes, Stewart is looking at a $964,000 drop in residential property-tax collections. That’s despite home values rising by 10 percent.