Colorado’s low residential property taxes – c’est la vie

Voters can change local tax structures in November by altering the Gallagher Amendment of 1982
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Voters can change local tax structures in November by altering the Gallagher Amendment of 1982. Both the Colorado Senate and House voted overwhelmingly in favor of placing Gallagher in front of voters. Democrats are concerned about likely declines in school funding, and Republicans are concerned about decreased funding for local governments, especially fire and hospital districts in rural areas. Will voters respond like their elected representatives given changing Gallagher will likely lead to residential property taxes trending upwards with future home price appreciation? 

The Gallagher Amendment emerged from early fears related to state and local government growth. The amendment requires 55% of all property taxes come from non-residential (i.e., business) properties in the state and 45% come from residences. This split was set in 1982 as that was the ratio at the time. Non-residential property was assessed at a fixed 29% of market value while the assessment rate of residential properties was allowed to float in order to maintain the 55% – 45% split by property type.  Had non-residential properties appreciated faster than residential properties, homeowner property taxes would have increased, but that did not happen. Since 1983, the Gallagher Amendment has dropped residential assessed values (for tax calculations) from 21% of the market value to 7.1% while non-residential properties remained fixed at the 29%.  This resulted in Colorado’s residential property taxes being among the lowest in the nation.  

By the early 1990s, concerns over rapid state and local government growth expanded into other initiatives including the Taxpayer Bill of Rights Amendment (TABOR). TABOR limited all state and local revenue growth to the prior year plus the inflation and population growth rate combined while requiring voter approval on all tax rate increases.  TABOR remains today except in communities that have voted to “de-TABOR,” thereby removing the revenue growth caps.  

The central question this election year is whether the Gallagher Amendment is still needed. The proposal before voters is to eliminate the 55% to 45% relationship to one where the residential assessment rate is fixed to the current level of 7.1% so that residential property taxes will keep pace with market values in the future. This should increase property tax receipts going forward as long as real estate appreciates in value.

Looking at the impact of Gallagher and Tabor on county governments, we see total revenues for all Colorado county governments combined grew four times from 1990 to 2016.  This equates to roughly 5% per year — slightly faster than the average TABOR benchmark of approximately 4.4%.  During this timeframe total property taxes collected by county governments as a percent of total revenues has not changed proportionately (37.5% in 1990 to 37.8% in 2016) while sales and use taxes have proportionately increased from 7.8% to 14.9%.  All other sources of county revenues have remained relatively the same except for federal and state grants for social services, which declined from 18% to 12.7% of total county revenues.  

Looking at budgetary winners and losers at the county level, we see general government costs grew slower than overall county expenditures. Social services and roads and bridges were hit the hardest — growing at slower rates than other expenditure categories. The biggest winners in terms of relative budgets gains were solid waste, law enforcement and jails, fire services, and culture and recreation. This seems consistent with broader political priorities: more public safety and health, more recreation, less capital maintenance and replacements, and less social services.  

Residential property owners are the primary beneficiary of more stable property taxes compared to other county revenue sources. As a result of Gallagher, residential owners witnessed property tax per residence growing less than the appreciation rate of their property.  The Colorado Division of Property Taxation estimates the amendment has saved residential property owners $35 billion since 1983 as the residential assessment rate decreased from 21% to 7.1% of market valuation. While total county government, special districts and schools funding have struggled as a result, some consider the tradeoff acceptable in order to limit government growth.

I oppose the current Gallagher Amendment because I consider it an inferior tax structure. The proposed change is better, but still insufficient.  My reasoning is that in most cases taxes should be transparent to those who pay the tax and vote. The problem with non-residential property taxes is the tax gets embedded in the total price charged to customers and is therefore less transparent as a tax on households. A more transparent scheme would be if the entire property tax burden be placed on homeowners who would then be able to make more informed decisions during elections. Political consultants are not optimistic voters will side with my thinking nor the underfunded government and schools argument.  C’est la vie.

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