The news that Colorado is on a collision course with another government-shrinking property tax cut landed with a thud.
One lawmaker called the analysis “very disturbing.” Text messages flying between lobbyists and local government officials took on an increasingly morbid tone. And for many at last week’s Joint Budget Committee meeting, an optimism that accompanied much of the morning’s rosy quarterly economic forecasts turned to dread.
The projections anticipate a 15 percent statewide cut to property tax rates in 2019, triggered by the Gallagher Amendment to the state constitution. It is among the most jarring symbols of the urban-rural divide: The convoluted rules of Colorado state finance mandate additional relief for Front Range homeowners whose property values are soaring but take another bite out of the budgets of rural governments, schools and fire districts that are already struggling to provide basic public services.
“It’s bad. We really are just going to shrink,” Rep. Bob Rankin, R-Carbondale, told The Denver Post. “Everybody’s going to have to move to the city. Is that what we want for Colorado?”
The mood now — while marked by pessimism — is also taking on something never before seen at the state Capitol in regard to the Gallagher conundrum: a sense of urgency.
“This is just one of many issues that, the longer you wait, the worse it gets,” said Rep. Dave Young, a Greeley Democrat, who, like Rankin, serves on the budget committee. “And maybe we don’t get something through this (legislative) session, but I think it’s not for a lack of trying.”
Pressure building
Behind the scenes, pressure is building from a growing coalition of rural officials, advocacy groups and businesses to ask voters to amend the state constitution, possibly as soon as next year.
The goal is anything but simple: a rewrite — or possibly outright repeal — of the Gallagher formula, which has caused residential assessment rates to plummet from 21 percent to 7.2 percent of a property’s value over the past 35 years.
Adopted in 1982, the measure prevents residential property owners from paying more than 45 percent of the overall state property tax base. In most years, the formula doesn’t come into play. But as home values have exploded along the Front Range in recent years, outpacing commercial and industrial growth, homeowners have been footing a growing percentage of the statewide tax bill and forcing assessment rates down to compensate.
This year, the rate dropped to 7.2 percent from 7.96 percent of a property’s value. In 2019, it’s expected to fall again, to 6.11 percent. That would represent a 23 percent cut to the residential tax base in a three-year period.
Special districts, some of which are funded solely by property taxes, will be the hardest hit. Seven fire districts got voter approval for tax hikes this year, but the 2019 cut will offset those gains.
Ann Terry, executive director of the Special District Association, said her group continues to explore a number of ideas with legislative leaders and policymakers. County officials and school superintendents, too, are raising the alarm with state lawmakers.
It’s the rare issue in Colorado government finance that angers both the left and the right. Liberal think tanks such as the Colorado Fiscal Institute and Bell Policy Center have been complaining about Gallagher for years because of the pressure it puts on the state budget. Each time there’s a property tax cut impacting school districts, the state has to spend more to stabilize the budgets of schools, leaving less money for everything else.
Business groups, too, have long wanted the formula to change. The ongoing residential cuts have left businesses paying 29 percent, four times the property tax rate of homeowners. And when communities raise taxes to make up for the falling residential rate, each new hike falls that much harder on businesses.
That should worry residents, too, says Jon Caldara, leader of the Independence Institute, a conservative think tank.
“You talk to your friends in New York state, and they’re paying all this money in property taxes and they hear what they think is a low property tax in Colorado and they think, ‘Oh, you guys have it good in Colorado,’ ” Caldara said. “No. Commercial properties bear the brunt of it, and those commercial entities don’t pay taxes — they pass it on to consumers.”
The TABOR tangle
To some, the overriding problem isn’t Gallagher itself, but how it has become entangled with the Taxpayer’s Bill of Rights, which requires voter approval to raise taxes.
“When Gallagher first came into effect, we didn’t have TABOR,” said Rich Jones, director of policy and research for the Bell Policy Center. “So local governments and school districts could adjust their mill levies relatively easily to make up for the assessment rate.
“TABOR makes it much more difficult to adjust those mill levies.”
Since Gallagher was enacted, the residential assessment rate has only dropped — even when home values fall short of the 45 percent threshold — because it would take an unpopular statewide property tax hike to return it to prior levels. Some local communities have successfully asked voters to bump up their mill levies in response, but in predominantly conservative rural areas, asking for higher taxes — even to reverse an unexpected cut — is politically fraught.
Jones and Young, the Democratic lawmaker from Greeley, believe that freeing Gallagher from TABOR’s voter-approval requirements should be a focus of the discussion.
But to Republicans, overriding TABOR is a nonstarter.
“We have to stay away from either raising taxes overall or changing TABOR — we have to stay away from that,” Rankin said. “In my caucus, my side of the aisle, TABOR’s sacred to us.”
Untangling it from TABOR also wouldn’t address the urban-rural disparity on display today. Even if the residential assessment rate could go both up and down automatically as market conditions dictate, the situation in 2019 would be the same: Rising urban home values would still dictate cuts in small-town Colorado.
“A tricky, tricky spot”
So far, the policy and political complexities involved with a fix that could appeal to voters all over the state have kept lawmakers and policy advocates from coalescing around one single proposal.
Outright repeal has been tried once, in 2003, when the rate was still 7.96 percent, and it failed.
“I don’t know how the calculation works to get a solution that can appeal to voters,” said Gini Pingenot, the legislative director for Colorado Counties. “If you’re a property owner, this is a relief, right? ‘I’m getting some relief from these high values.’ And I think that will continue to be voters’ view on this until we see property values go down.”
One idea appears to be gaining traction among state budget writers, including Rankin and Democrat Millie Hamner, who chairs the Joint Budget Committee: applying the Gallagher formula on a regional basis. That would sever the financial fate of rural Colorado from the home values of the Front Range, while still preserving relief in areas where tax bills are skyrocketing.
But it remains unclear whether the urgency felt by local officials will be met with commensurate legislative action in an election year that promises to be replete with political distractions.
Rankin says he hopes there will be a bill in the 2018 session to ask voters to amend the constitution. Hamner says it may take more time to educate voters on a complicated issue.
Pingenot, meanwhile, is worried that it could take a crisis to spur the state’s leaders to act, and by then it may be too late.
The nightmare scenario for public officials is for the 2019 cut to take effect, followed by a crash in housing prices. Then, the financial struggles faced by rural Colorado would be felt along the Front Range, as well.
“I think that’s where this all comes to a head, which is a very discouraging situation for local governments,” Pingenot said. “Which voters are going to want to vote on a tax increase (during a recession)? They’ll be in the midst of doom with the rest of everybody.
“It’s really a tricky, tricky spot.”
