Last month the Denver Post reported that our residential property tax rate will go down next year. This sounds like good news for homeowners, but it will come at a cost to our schools and state budget.
Colorado’s Department of Local Affairs is projecting a decrease in the residential property assessment rate. Currently the rate is 7.96% of a home’s market value, which has remained unchanged since 2003. For next year, the assessment rate is projected to fall to 6.56%.
The reason for the cut is the Gallagher Amendment. Back in 1982, Coloradans were concerned about rising property taxes due to the increasing value of homes. The Gallagher Amendment was passed to lock in the ratio at that time of residential to commercial property tax collections: 45% of total statewide assessed values come from residential properties, with the remaining 55% coming from commercial properties. The commercial property assessment rate has remained unchanged at 29%. In 1983, the residential assessment rate was 21%. Over the years residential properties have increased in value much faster than commercial properties, and since the residential percentage of total assessments must stay at 45%…..the assessment rate has been cut nine times.
These rates cannot go back up in changing economic environments without voter approval, as legislated by TABOR, the Taxpayer Bill of Rights. Historically, once a tax rate has been lowered, it stays there.
Our tangled constitutional structure further complicates matters. By law, the state government must backfill the difference between the total funding determined by the school finance formula and what local taxes provide. So as residential property taxes go down, the state must come up with the extra funding to meet the school finance formula requirements.
Next year the decrease in the property tax assessment rate is projected to cut $170 million in local funding to schools. By law, the state must assume this burden and kick in the difference. With growth in the state budget limited by TABOR, our Legislature will have tough decisions on which services to cut to make up for the shortfall. One of these cuts may be to increase the Negative Factor, which would cause school funding to lag even further behind inflation.
To learn more about the tangle between Gallagher and TABOR, check out this video from the Colorado Fiscal Institute.