Earlier this year we shared the news that Colorado’s residential property tax assessment rate was going to drop. This sounds like good news for homeowners, but it may come at a cost to our schools and state budget.
Since 2003 the assessment rate on residential property has remained at 7.96% of a home’s market value. In 2017, the assessment rate falls to 7.2%. So if your home is worth $100,000, then you will be taxed on $7200 (the assessed value), which is then multiplied by the mills in your area to determine the taxes due.
The reason for the cut is the Gallagher Amendment. Back in 1982, Coloradoans 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 non residential property tax collections: 45% of total statewide assessed values must come from residential properties, with the remaining 55% coming from commercial, industrial, and oil and gas properties. The non residential 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 now been cut ten 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.
The driver behind the decrease is the urban corridor, where property values have increased at a much faster rate than the rest of the state. In these districts the lower assessment rate will be offset by rising home values, but in rural districts without as much appreciation in home values, the lowered rate will result in lower tax collections and will squeeze school budgets. Unfortunately this outcome widens the funding divide between school districts based on their location in the state.
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 if residential property tax collections go down, the state must come up with the extra funding to meet the school finance formula requirements.
To learn more about the tangle between Gallagher and TABOR, check out this video from the Colorado Fiscal Institute.