If you’ve been watching the news, or your property tax bill, you may be aware that Colorado is in the middle of a property tax crisis. For the last two years, there have been multiple ballot initiatives proposed to address the crisis, and Governor Polis has called two special sessions of Congress to work out relief legislation to offer homeowners. But why is this happening at all?
The Gallagher Amendment
In 1982, Colorado voters, by a 65.49% to 34.51% decision, voted to enact the Gallagher Amendment to the Colorado Constitution. The Amendment reduced non-residential (commercial) property tax assessment rates to 29%, and reduced residential property tax assessment rates from 30% to 21%. Additionally, the Amendment enshrined a 45-55% split share of property tax revenue between residential and commercial tax revenue statewide. Every two years, the state legislature was required to adjust the residential property tax rate to keep the 45-55% split.
At the time the Amendment was passed, commercial real estate made up about 55% of the state-wide property value, and residential real estate about 45%. Additionally, Colorado homeowners had been on the verge of revolt due to rising property taxes for years, and had been pressuring the Legislature to offer relief since the late 1970s. The Amendment was offered as a way to provide that relief to homeowners, and to fairly share the property tax burden between residential and non-residential properties.
As residential property values have increased, and the overall number of residential properties has also increased, this had the effect of reducing the residential property tax assessment rate over time, as the 45-55 split was constitutionally required to be maintained. As of 2020, the residential property tax rate had fallen from 21% in 1982 down to 7.15%. The state-wide residential property value, however, has increased from 45% to approximately 75%. The commercial property tax rate has stayed the same at 29%, while the total value has dropped to approximately 25%, adding an increasing burden of property tax to value on a commercial property.
The estimated total savings for homeowners due to the Gallagher amendment since 1982 is $35 billion. In 2019 alone, the savings is estimated to be $2.8 billion. However, the state has been facing budget shortfalls, especially during the COVID-19 Pandemic, when overall economic activity was depressed due to lockdowns and goods shortages.
Repeal of the Gallagher Amendment
In 2020, a ballot initiative was added to the Colorado ballot, known as Amendment B, that sought to repeal the Gallagher amendment. Amendment B also froze property tax assessment rates at 7.15% for residential property and 29% for commercial property, put future tax assessment rate decreases back to the state legislature, and continued to require voter approval for future property tax rate increases due to the Taxpayer Bill of Rights (TABOR). This ballot initiative passed on a 57.52% to 42.48% vote.
Earlier that same year, the state legislature passed Senate Bill 20-233, Assessment Rate Moratorium & Conforming Changes, which would only go into effect if Amendment B passed. This bill placed a moratorium on changing the ratio of property valuations for any class of property, until the next property tax year when the general assembly would adjust the ratio for valuation for residential real property.
These two pieces of legislation essentially repealed the property tax structure that had been in effect since 1982, but did not contain a plan for what would replace the Gallagher amendment. Under normal circumstances, this may have led to some uncertainty with future property tax burdens on residential homeowners, however, with the skyrocketing property values that occurred between 2020-2023, the current property tax crisis was born.
Without the Gallagher amendment to keep residential and commercial property tax revenue in lockstep, a 40% increase in a home’s property value had the potential to dramatically increase a homeowner’s tax bill for that year. The average Colorado home increased 37% in value over two years. For an easy example, let’s take a property valued at $100,000.00. To calculate the property tax, we have to take the property value x the assessment rate x the mill levy (each local entity with taxing power adds a certain number of mills to be collected for their services, which are totalled up to create the mill levy). A mill is one dollar per $1,000.00 of assessed value. So, a mill levy of 100 means that for every $1,000.00 of assessed value, the property owner will pay $100.00 in property taxes.
So, in our example, using the frozen 7.15% assessment rate, and a mill levy of 100 mills.
($100,000.00 x 7.15%) assessment value x 100 mills
$7,150.00 assessment value x 100 mills = $715.00 tax burden for this property
If this property increased by 40%, here is what the new tax calculation looks like:
($140,000.00 x 7.15%) assessment value x 100 mills
$10,010.00 assessment value x 100 mills = $1,001.00 tax burden for this property.
Small increases in property value over time, just like small increases in insurance, or the cost of food, are much easier to fold into your overall budget, and do not constitute a “crisis” in any sense of the word. However, when property values increase by 30%, 40%, or, as some homeowners in western Colorado saw, an increase of 80% between 2022-2023, can be devastating.
Proposed Solutions
Let’s break down some of the proposed solutions to this issue next.
Prop HH
Proposition HH, a legislatively referred state statute in 2023 (SB23-303), was a proposed 10-year property tax relief measure, would have limited the expected future increase in property taxes, starting in the 2023 tax year, and continued that relief through the 2032 tax year. The residential assessment rate would have been lowered from 6.765% down to 6.7% and remained at that level through 2032, and exempt the first $50,000.00 in home value from taxation for the 2023 tax year, although that would have lowered to $40,000.00 for 2024. If homeowners wanted to maintain this exemption on their primary residence after 2026, they would have to attest to their county assessors that it was their primary residence, as second or more single-family homes were not eligible for the exemption.
In addition, to account for the expected revenue cuts, Prop HH would increase the TABOR cap on government growth and spending by an extra 1% each year. This would directly reduce the amount due back to taxpayers as TABOR refunds, as only revenue collected in excess of the TABOR cap is refundable to taxpayers. This proposition, if passed, would also trigger a separate state bill passed in 2023 changing how TABOR refunds were distributed to taxpayers: the default TABOR refund system is based on 6 income tiers, with higher earners receiving larger refunds, and lower earners receiving smaller refunds. Prop HH passing would change that system for one year, changing refunds to a flat $832.00 regardless of income, doubled for joint filers.
Prop HH was defeated by a 59.31% to 40.69% vote.
2023 Colorado Special Legislative Session
After the defeat of Prop HH, Governor Polis called a special session of Congress in late 2023 to address property tax relief. The legislation passed reduced the residential assessment rate from 6.765% to 6.7%, and increased the home value exemption from $15,000.00 to $55,000.00. This legislation, SB23B-001, also required the state to backfill local governments due to expected revenue losses.
Initiatives 50 and 108
These were two proposed 2024 ballot initiatives to address ongoing concerns with the tax rates after the legislation passed in the 2023 special session was deemed as not providing enough relief to property taxes.
Initiative 50, or the Colorado Property Tax Revenue Cap Initiative, would have limited property tax revenue to 4% growth above the total statewide property tax revenue collected in the previous year, and would have required statewide voter approval if said revenue was projected to increase by more than 4%.
Initiative 108, or the Colorado Property Tax Valuation Reduction Initiative, would have reduced the valuation rate for residential property to 5.7% and the commercial rate to 24%, required the state to reimburse local governments for revenue losses, and required the state to maintain current education funding levels.
Both initiatives were withdrawn from the 2024 ballot after a 2024 Special Session was called, and passed a so-called compromise bill to provide more property tax relief.
2024 Colorado Special Legislative Session
The law passed during the 2024 Special Session, HB24B-1001, limits annual growth of property tax revenue for certain local governments, excluding school districts, sets assessment rates for residential and commercial properties for 2024, 2025, and 2026 with differing rates if the statewide increase in actual value is greater than 5% or is less than or equal to 5%, requires the state government to provide backfill funding for local governments, among other things. This bill went into effect on 10/1/2024, as both initiatives 50 and 108 were withdrawn from the 2024 ballot.
