Many Colorado local governments that are primarily dependent upon property tax revenues continue to be impacted by provisions of a 1982 amendment to the Colorado Constitution commonly known as the Gallagher amendment. Fire districts in particular have been hit hard. “Property tax law putting lives in danger,” reads one October headline in the Denver Post.
Until 1982, when the Gallagher amendment was adopted by the voters, the assessment rate for both residential and non-residential property was 30 percent of actual value. Starting in the early 1970s residential property values started to rise much more quickly than non-residential values, and the Gallagher amendment was intended to stabilize residential property taxes. The amendment mandates that the statewide assessed value for residential property may not exceed 45 percent of the total statewide assessed value for all property.
When the Gallagher amendment passed, residential property was assessed at 21 percent of its actual value and all other property was assessed at 29 percent. Residential property values statewide have risen faster than the value of other property, and to maintain the 45 percent limitation, the residential assessment rate is adjusted by the General Assembly every two years, coinciding with reappraisal years.
As a result, the residential assessment rate has dropped from 21 percent in 1982 to 7.2 percent in 2017, and the Colorado Legislative Council recently projected that the residential assessment rate will decline further, to 6.78 percent in 2019 and 6.41 percent in 2021.
The following chart shows the history of the reduction in the residential assessment rate in Colorado from 1983 to 2018 (data courtesy of the Colorado Division of Local Affairs).
What does this mean in practical terms? In 1982, a fire district levying 5 mills on a $100,000 residence assessed at 21 percent of actual value ($21,000) collected $105 in property tax revenue. Now, in 2019, the assessed value of that a $100,000 house is $7,200 because the assessment rate has dropped to 7.2 percent of actual value, and the fire district only receives $36 in tax revenue from the same house. The impact of the Gallagher amendment has been more significant on governments in rural areas than those on the Front Range because the growth in market value of residential property on the Front Range has been faster than the decline in the residential ratio.
One might wonder why the General Assembly doesn’t just increase local mill levies to offset the revenue loss associated with the decline in the residential assessment rate. The answer is that Colorado lawmakers can’t unilaterally increase taxes; such an action requires voter approval under the TABOR amendment to the Colorado Constitution (the Taxpayers’ Bill of Rights), which was adopted by the voters in 1992 and prohibits an increase in taxes without a vote of the electorate. While the question of whether a government entity can raise the mill levy solely for the purpose of recouping the tax revenue lost to the decline in the residential assessment rate without implicating the TABOR amendment remains an unresolved one, many entities opted to treat such a situation as a tax increase under TABOR and went to the voters in the November 2018 election. One press report indicated that over 120 governments asked for relief from Gallagher amendment impacts and that approximately 100 received voter approval. TABOR also impacts the ability of the General Assembly to raise the residential ratio in the years that non-residential property values increase faster than residential property values, because TABOR prohibits an increase in the assessment rate without a statewide vote.
Trying to prevent the erosion of the property tax base from the effects of Gallagher is not a recent effort, though. In 2003, an initiated constitutional amendment was submitted to Colorado voters to permanently fix the residential assessment rate at 8 percent of actual value, and eliminate the requirement to maintain the 45/55 percent split between residential and non-residential tax revenues. That effort failed with less than 23 percent of the electorate voting in favor of the measure.
During the summer of 2018, an interim legislative committee met to determine how the ongoing erosion of the tax base of local governments could be fixed. Several ideas were identified, and of the list below, most would require a two-thirds vote of each legislative chamber, plus a statewide vote.
• Freezing the residential assessment rate
• Reducing residential and nonresidential assessment rates and creating a new property class for second homes
• Reclassifying short-term rentals as nonresidential properties
• Allowing local governments to raise mill levies
• Implementing a four-year reassessment period instead of a two-year reassessment period
• Repealing Gallagher
• Replacing the assessment rates in the constitution with rates in the statutes
• Using regional residential rate assessments instead of statewide assessments
At the end of the committee’s term, a package of three bills was recommended to move forward:
• Repeal of Gallagher, which would first require legislative approval (by two-thirds of each house) and then statewide voter approval
• If the voters approve a repeal of the Gallagher amendment in November 2019, the creation of regional assessment rates for residential property
• Backfilling of property tax revenue losses by the state for fire protection and library districts, which experience at least a 5 percent reduction in residential property taxes in 2019
In a separate but parallel action, outgoing Gov. John Hickenlooper in November submitted a set of interrogatories to the Colorado Supreme Court asking it to resolve the “irreconcilable conflict in the Colorado Constitution” and determine whether TABOR should take precedence over Gallagher and whether Gallagher should be struck from the constitution.
Less than two weeks later, the Supreme Court issued an order declining to get involved, leaving the issue to lawmakers and voters to sort out.
Therefore, assuming the package of three bills recommended by the interim legislative committee moves successfully through the legislature, Colorado voters should expect to see a statewide measure on the ballot in November.
— Monica Rosenbluth and Dee Wisor are attorneys in the Denver office of Butler Snow.