A fiscal crisis nearly 40 years in the making — exacerbated by a historic pandemic — prompted lawmakers to put Amendment B on November’s ballot.
The measure would repeal the 1982 Gallagher Amendment, which set ratios for how much property tax is paid by residential and commercial property owners. Over time, this ratio, which is based on statewide averages, has driven down property tax collections for rural school districts, fire districts, and other taxing entities.
If Amendment B passes, it wouldn’t solve many of the problems in Colorado’s school finance system, but it would spare districts from steep budget cuts next year. If it fails, lawmakers won’t have the money to meet even current school funding levels.
At stake is roughly $490 million in property tax collections for school districts.
If Amendment B passes, residential assessment rates would be frozen, and school districts would get more property tax revenue. Residential homeowners would lose some protection against the impact of rising property values on their tax bill, while business property owners would get relief from taxes that had increasingly shifted to their shoulders.
If the measure fails, residential assessment rates will continue to fall while commercial assessment rates hold steady. Schools are likely to see additional funding cuts during a time of increased need.
“When you lose additional local revenue, you decrease the tax base that supports the system,” said Tracie Rainey of the Colorado School Finance Project, who supports Amendment B. “The idea behind school finance is you want to have a combination of income tax, sales tax, and property tax. And property tax is your most stable revenue source.
“By reducing the amount of property tax in the system, you are weakening that stability, in addition to putting pressure on the state to backfill.”
The measure is not technically a tax increase, but opponents say it will function like one because if it passes, residential property owners will pay more than they otherwise would have.
“The key thing is that property taxes go up every year no matter what,” said opponent Michael Fields, executive director of Colorado Rising State Action, a conservative issues committee. “Even when the assessment rate goes down, values are going up and people pay more. … You don’t want people taxed out of their homes.”
How we got here
The Gallagher Amendment requires that residential property owners contribute no more than 45% of total property tax collections and that non-residential property — offices, shopping centers, farms, oil and gas fields, and so on — contribute the other 55%.
To achieve this balance, Colorado tinkers with the assessment rate, which determines the amount of property value that is actually taxable. As residential property values soared along the booming Front Range, the residential assessment rate fell from 21% in the early 1980s to just 7.15% this year to keep tax collections at 45% of the total.
The non-residential assessment rate remains fixed at 29% of a property’s assessed value. How much a property owner pays on that taxable value is determined by tax rates levied by local school districts, counties, and other taxing districts.
The falling residential assessment rate has had a number of challenging effects. It’s dramatically shifted the state’s tax burden to businesses, a major reason that some Republicans support repeal, especially when so many business owners are struggling to stay afloat.
It’s also left many small, rural taxing districts that support hospitals, libraries, and fire departments struggling to provide basic services.
Gallagher sets assessment rates based on statewide averages. In urban and suburban communities, property values have risen so much that local governments still take in more revenue each year, even with less of that property value being taxable. These areas also have lots of businesses paying taxes as well.
But that’s not the case in rural communities with a limited tax base.
Schools have been shielded, to a degree
Once a school district’s per-pupil budget is established by a formula, Colorado’s school finance system requires the state to make up whatever money is not covered by local taxes. Over time, the Gallagher Amendment, in particular how it interacts with another voter-approved amendment, the Taxpayer’s Bill of Rights, has shifted the burden of school finance from local districts to the state.
That means school districts haven’t felt the hit from reduced property tax collections the way that fire districts have.
But the state budget has. Every year, growing education costs crowd out other needs in the state budget, from transportation to human services to higher education. And even then, lawmakers haven’t met their constitutional obligations for school funding. Every year, they hold back money in a maneuver known as the budget stabilization or negative factor.
This year, with the state budget battered by a COVID-induced downturn, that withholding reached nearly $1.2 billion out of roughly $8 billion in education spending.
Next year, the impact is expected to be much greater.
COVID makes everything worse
A coalition of rural fire chiefs, business groups, and politicians of both parties have wanted to do something about Gallagher for a while now. The pandemic and the economic downturn created a favorable political environment to place an amendment on the ballot with bipartisan support.
Widespread business closures and loss of income are expected to result in a drop in commercial property values. According to Gallagher’s ratio, if business property values go down, the assessment rate on residential property has to drop too, so that those taxpayers will only pay 45% of total tax collections. State property tax administrators estimate the assessment rate will hit 5.88% and that the loss of income to school districts will be around $490 million.
In the East Grand district in northwest Colorado, Superintendent Frank Reeves estimates the decrease in assessed value could cost his district about $900,000 out of a $10 million annual budget. The 9% hit would comes as the district is spending more on everything from smaller class sizes and plexiglass dividers to online courses.
The district already covers about 78% of its own costs, and the state withholding more money would cut deep. Separate from Amendment B, the East Grand district is asking voters to approve a local tax increase that would bring in about $1 million a year.
“We’re going to have to do pretty much all of our funding locally,” Reeves said. “We can’t count on the state to give us what we need to operate.”
But many rural districts with small tax bases struggle to get voters to agree to increases. For those with limited property values, it would take a large increase to generate much money.
When Reeves talks budgets with other rural superintendents, it’s “doomsday,” he said.
What Amendment B does and doesn’t do
Amendment B would keep assessment rates where they are today. That means the portion of a home’s value that is taxable would stay at 7.15% instead of decreasing. Property assessments — a home’s value for tax purposes — could still go up or down based on determinations made by county assessors.
At today’s assessment rate, the owner of a $200,000 home in a district with a tax rate of 26 mills would pay roughly $371 in school taxes. If Amendment B passes and the home’s value stays the same, that homeowner would pay a similar amount next year. If Amendment B fails, the Gallagher requirements would still be in effect, and the portion of the home that is taxable would go down. That means that if the home’s value stays the same, the owner would pay closer to $305 in school taxes next year.
Of course, home values rarely stay the same over time.
Opponents of Amendment B point out that increases in property values have generally outpaced the decreases in the residential assessment rate, such that homeowners continue to pay more every year.
Supporters of Amendment B say the legislature could still reduce the residential assessment rate in the future, though they admit that’s unlikely to happen in the next fiscal year, given the dire budget outlook.
State lawmakers and local school districts will face tough budget decisions next year either way, but the challenges will be much more significant if Amendment B fails.
“The state has made it clear they don’t have the ability to backfill in this current environment,” Rainey said.