Coronavirus may trigger the second-largest property tax cut in Colorado history, further crippling local budgets

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The reductions under Colorado’s Gallagher Amendment would slash total school district revenue by an estimated $491 million. Fire districts would also be hard hit.

Originally posted May 12, 2020 by Brian Eason, Special to the Colorado Sun

At a moment when state and local governments are already drowning in red ink, Colorado’s constitution is now projected to trigger the second-largest residential property tax cut in modern history.

Under forecasts presented Tuesday, Colorado lawmakers could be asked to cut residential property taxes by nearly 18% in 2021 to comply with a tax-limiting constitutional provision known as the Gallagher Amendment.

For homeowners, it would mean permanent financial relief at a time of rising unemployment and deep economic uncertainty. But if the cut goes through as projected, it would have cascading effects at nearly every level of government in the state, gashing the budgets of property-tax reliant fire districts, county governments and schools.

The reductions would cut total school district revenue by an estimated $491 million. About half of that gap will impact the state budget, which is constitutionally required to backfill certain school funding shortfalls, even as it faces a fiscal catastrophe of its own as sales and income tax revenue plummet. In one fell swoop, it could wipe out all the recent gains the state had made in erasing its unfunded debt to schools, formerly known as the negative factor. At the county level, statewide revenue could drop by $204 million.

And the fiscal toll may not end there. The report shows residential property values continuing to rise in this assessment period, which ends June 30. If the economic downturn ripples into the housing market and home values drop, local governments could be facing a new tax-starved normal for the foreseeable future, with widespread implications for public services, employee pay and pension contributions.

Cities and counties across Colorado are already furloughing workers because of the pandemic’s economic blow.

How the Gallagher works when it comes to property taxes 

For years now, the residential assessment rate, which determines how much homeowners pay in property taxes, has fallen in order to offset booming home prices along the Front Range. This time around, the coronavirus-induced economic shutdown will add a new variable to the Gallagher equation: the collapse of the oil and gas industry, which until now had been preventing deeper tax cuts.

Think of the Gallagher Amendment like a balancing scale. On one side are residential property values. On the other, non-residential values, such as commercial properties and minerals, like oil and gas. Residential property values can’t exceed roughly 45% of the statewide tax base. So when home values rise, or non-residential values fall, it tips the scales out of balance, and residential taxes are cut. 

In the 2020 assessment cycle, oil and gas values are expected to drop by 36%, and commercial values are projected to drop 20%, according to Tuesday’s report from the Division of Property Taxation. Residential property values — which so far, have held relatively steady amid the broader malaise — are projected to increase 10% over the last assessment from two years earlier.

This would cause the residential assessment rate to fall from 7.15% to 5.88% during the next reassessment cycle. That represents a nearly 18% drop in residential property taxes, the largest cut since it fell by 19% in the 1995-96 assessment cycle, and the second-largest cut in the history of Gallagher, which was adopted by Colorado voters in 1982.

“All indications are that although home sales have slowed, the values have not dropped,” JoAnn Groff, the state property tax administrator told the JBC. “For commercial properties that is not the same.”

In some ways, it could be the nightmare scenario for local governance in Colorado: a massive tax cut driven by rising home values and plummeting business activity, followed by a drop in the very home values that necessitated the cut in the first place, if the downturn later extends to the housing market. And because of Colorado’s Taxpayer’s Bill of Rights, known as TABOR, all tax cuts are permanent without voter approval to reverse them.

Gini Pingenot, the legislative director for Colorado Counties, said she expects mandated government services — like administering food stamps or running elections — would largely be protected from cuts. But employee pay and community-specific local programs, like affordable housing, environmental projects, or economic development efforts, will likely suffer.

“I see those things taking the hit,” she said. “It’s the piece that a community looks at and is like, ‘this is why I’m proud to live here.’ ”

For smaller government entities, an 18% hit to residential tax revenue could mean a direct hit to vital services, like replacing a fire truck or having enough firefighters on staff to supplement a shrinking supply of volunteers.

If lawmakers proceed with the tax cut next year, it would mark the third residential property tax reduction since 2017. The effects have varied greatly from one community to the next. Along the Front Range, where home values are rising the fastest, Gallagher hasn’t exactly cut taxes so much as limited their rapid rise. That’s what state Rep. Kim Ransom says she hears from her constituents: concern not about budget cuts, but about rising tax bills.

“I‘m trying to figure out what the problem is,” said Ransom, a Republican budget writer from Douglas County, at Tuesday’s Joint Budget Committee meeting. “My property tax has gone up significantly in the 30 years I’ve lived in this house.”

But in many rural areas, home values are either stagnant, or rising slower than tax rates are being cut, so each time the Gallagher Amendment is triggered, it can result in steep declines in tax revenue.

Homeowners won’t see immediate relief. The reassessment cycle affects property taxes paid in the fiscal year that starts July 1, 2021. And at this point, the estimated cut is just that: an estimate — one that will be revisited by state tax officials next year, giving budget writers time to prepare.

“At the very least that’s a problem that hits in 2022, which certainly isn’t ideal, but at least it’s not next year when we will expect the full budget reductions,” said Sen. Dominick Moreno, D-Commerce City, the budget committee’s vice chairman.

Renewed interest in repealing the constitutional amendment

The report underscores the unique fiscal challenges Colorado policymakers face due to the one-two punch of coronavirus and the state’s financially restrictive constitution. And it will put new pressure on lawmakers and Democratic Gov. Jared Polis to enact reforms to Gallagher, which has affected rural areas the hardest. Legislative and executive branch efforts to alleviate the local budget pinch in recent years have all fizzled.

Sen. Jack Tate, R-Centennial, is backing an effort to repeal the amendment outright. While Gallagher is best known for reducing residential taxes, in many communities it has a side effect of increasing taxes on businesses. Some local governments have received voter approval to “float” mill levies upward whenever the residential rate is cut, while others have passed referendums to raise mill levies in response to Gallagher.

“An underappreciated secondary effect will be crippling tax increases on businesses,” Tate told The Sun in an interview. “We’re going to be exacerbating the phenomenon of Gallagher” if the residential rate cut goes through.

Moreno agrees: The report “illustrates the need for us to have a serious conversation about repealing Gallagher and taking it out of the constitution. I don’t think there’s ever been more of a case for that than now.”

Still, repealing Gallagher remains a long shot to get through the legislature, and would face an uphill battle at the ballot box. The state’s most populous areas, whose support would be needed to pass a statewide referendum, are the very places where rising property taxes are hitting homeowners the hardest.

Behind the scenes, others like Pingenot are pushing for another solution: delaying the state’s reassessment cycle from once every two years, to once every four. In the interim, this would sidestep the unfortunate timing of conducting a reassessment during a pandemic. It could also buy lawmakers time to come up with a more permanent solution.

The idea has been floated and rejected by lawmakers once already, but as Pingenot notes, “it was a very different time. The economy was booming.”

Staff writer John Frank contributed to this report.