Colorado’s Constitutional conundrum: Gallagher vs. TABOR amendments, and what it means for us
March 6, 2017
Uncomplicating Colorado’s Constitution
Gallagher/TABOR made simple
Q: When was the Gallagher Amendment adopted?
A: The Gallagher Amendment was adopted in 1982 when Colorado voters approved the measure. The amendment is named for state senator Dennis Gallagher, who was one of the primary sponsors of the measure.
Q. Why was the Gallagher Amendment passed?
A: The passage of the Gallagher Amendment by the voters of Colorado in 1982 was the culmination of a property tax revolt that originated in the late 1970s. Homeowners, concerned about skyrocketing residential property taxes, pressured the state legislature to address the problem.
As a result, in 1982 Speaker of the House, Bev Bledsoe appointed nine members from the General Assembly to study the problem and recommend solutions. The Gallagher Amendment was the culmination of the panel’s effort to find a workable solution to skyrocketing residential property taxes.
Q: What does the Gallagher Amendment do?
A: The Gallagher Amendment divides the states total property tax burden between residential and nonresidential (commercial) property. According to the Amendment, 45% of the total amount of state property tax collected must come from residential property, and 55% of the property tax collected must come from commercial property. Further, the Amendment mandates that the assessment rate for commercial property, which is responsible for 55% of the total state property tax burden, be fixed at 29%. The residential rate, on the other hand, is annually adjusted to hold the 45/55 split constant.
Q: How was the 45%-55% split set by the Gallagher Amendment determined?
A: In 1982, residential property was responsible for 45% of the states total property value, and commercial property was responsible for 55% of the states total property value. The authors of the Gallagher Amendment believed that the overall property tax burden should continue to reflect this split. As a result, with the passage of the Gallagher Amendment, the 45/55 split was set in stone.
Q: How is property tax calculated?
A: Property tax = (market value of property) X (assessment rate) X (mill levy)
For example, in order to calculate the residential property tax on a $100,000 home, the market value of the property is multiplied by the assessment rate and the mill levy. By multiplying the
value of the home ($100,000) by the 2003 residential assessment rate (7.96%), we get the assessment value ($7,960), or the amount of value subject to taxation. This amount multiplied by the mill levy equals total tax liability. Using a mill levy rate of 100 mills for this example, the total tax burden for a $100,000 home in 2003 would be $796.
A commercial property valued at $100,000 would be subject to the same formula, but would be taxed on 29% of its worth, or $29,000. Multiplied by the 100 mills, the total tax liability for the commercial property in 2003 would be $2,900.
Q. How is the market value of a property determined for purposes of property taxes?
A. Under the Gallagher Amendment, properties must be reassessed every two years by the county assessor of the county in which they are located. Market values are determined based on recent sales of similar property in the area.
Q: What is the assessment rate?
A: The assessment rate (sometimes called the assessment ratio) is the percentage of the property’s assessed value that is taxed. For example, under Gallagher, the assessment rate for nonresidential property is fixed at 29%. That means that of the total market value of the property, 29% is subject to taxation. The residential property assessment rate floats each year in order to meet the 45/55 split mandated by Gallagher. Because of rapidly increasing residential property values, the residential assessment rate has sunk from approximately 21% in 1982 to around 7.9% today.
Q: What is a mill levy?
A: A mill levy is a property tax rate based on dollars per thousand of assessed valuation. For example, a mill levy of 50 means $50 of tax per $1,000 in assessed value. Mill levies are levied by a taxing district such as a school district or fire district on property owners in the district. By law, each taxing district must set a single mill levy that applies uniformly to all property within the district.
Q: Why has the residential assessment rate gone down since 1982?
A: In 1982, the first year of Gallagher, the residential property assessment rate was 21% (and the nonresidential property assessment rate was 29%, as fixed by Gallagher in perpetuity). However, the rapid escalation in residential property values, combined with the growth boom of the 1990s, led to the 45% share of property tax collected from residential properties being dispersed across more and more residences that were worth more and more money. Something had to give in order to maintain the 45/55 split. In Colorado, in order to maintain the 45/55 split, the residential property assessment rate has dropped from 21% in 1982 to the current level of 7.96%.
Q: Does residential property still account for 45% and commercial property 55% of the state’s total property value?
A: No. In the thirty years since Gallagher passed, increases in residential property values have significantly outpaced the increases in the value of commercial property. In fact, residential property, which made up only 45% of the state’s total property value in 1982, today accounts for 75% of the state’s total property value. However, due to the Gallagher Amendment, residential property is only responsible for 45% of the state’s total property tax burden. Conversely, commercial property, which now accounts for only 25% of total property value in the state, is still responsible for 55% of the state’s total tax burden.
Q: What services and entities do property taxes fund?
A: Property taxes are county government’s primary source of funding. County governments are responsible for providing a host of different services, ranging from police and fire protection to street repair. Public schools are very dependent upon property tax revenues. Sixty cents of every dollar collected in property tax revenue is dedicated to K-12 funding.
Q: What impact has the TABOR Amendment had on Gallagher?
A: Traditionally mill levies were allowed to float to counteract cyclical economic cycles and help protect local government’s primary revenue source. However, TABOR has been interpreted by many as preventing mill levies from increasing without a vote of the people.
As a result, if the assessed value of a property declines, as happened in many areas of Colorado in 2002 and again in 2008, the mill levy can no longer counteract the effect that reduced values have on the amount of property tax collected. In addition, if overall property values located in a jurisdiction go up so fast that the tax revenue would outpace TABOR’s allowable revenue limit, the jurisdiction may need to lower the mill levy. In this case, TABOR prevents the jurisdiction from raising the mill levy to its previous levels without a vote. As a result, the collision between TABOR and Gallagher has led to a structural ratcheting down effect on funding for local governments.
EAGLE COUNTY — Call it the Colorado Conundrum.
Colorado homeowners in the next couple of years will see a property tax break, while our state government is forced to make budget cuts. That's because we stand at the crossroads of a couple of constitutional amendments — Gallagher and the Taxpayers Bill of Rights, or TABOR.
Tim Hoover is the communications director for the Colorado Fiscal Institute, a nonprofit and nonpartisan fiscal policy and analysis organization. They don't have a dog in this fight, but if they did they'd root against TABOR.
"This is a profoundly serious problem. TABOR is not a watchdog. It's a rabid dog," Hoover said. "TABOR is literally threatening public safety."
When the Gallagher Amendment intersects with TABOR, that causes problems, Hoover explained.
It's not complicated
That conflict is not as complicated as you might think, and it goes like this:
Colorado voters approved the Gallagher Amendment in 1982.
The Gallagher Amendment changed the way homes were appraised for property tax purposes. It also mandated that the amount of property taxes collected on homes had to always be lower than the amount of property taxes collected on non-residential property.
Gallagher stipulates that residential property taxes would be capped at 45 percent of the state's total property tax revenue. Nonresidential property taxes comprise the other 55 percent.
Non-residential property is taxed at 29 percent of its value. Residential property is currently taxed at 7.96 percent, but the residential rate can fluctuate to maintain that 45/55 split.
You are not taxed on your property's total market value. You're taxed on the assessed value.
For residential property taxed at 7.96 percent, it works like this:
Let's say your home is worth $350,000. Multiply $350,000 by 7.96 percent, and your assessed value is $27,860. That's the amount on which your residential property is taxed.
Multiply that by a taxing entity's mill levy — a bureaucratic term for property tax rate — and that's what you'll pay that taxing entity. Add up all of the mill levies for all of the taxing entities in your neighborhood, and that's your property tax bill.
The math matters
You can either do your own math, or Eagle County Assessor Mark Chapin — Colorado's Assessor of the Year — and his crew will do it for you.
Gallagher defines non-residential property as commercial, farms, oil and gas property, vacant land and a handful of other categories.
Property taxes are collected locally, at the county level. Eagle County Treasurer Teak Simonton distributes that tax money to the local, county and state entities that are supposed to receive it.
Colorado's schools are funded through those local property tax dollars, as well as other kinds of taxes collected at the state level. If local taxes come up short, then the state is on the hook to make up the difference.
Other entities don't have that safety net. Last May, voters living in the Gypsum Department and Eagle River Fire Protection District, as well as the Eagle County ambulance district approved tax increases.
Anyway, back to school funding, to which county voters also gave a boost in 2016.
In the early 1980s, local property taxes paid 54 percent of the state education budget; the state paid 46 percent.
By 2015, the state was providing 66 percent of the state's education budget, while local property taxes paid 34 percent.
This happened because the Gallagher Amendment mandated that the residential property tax rate shrank from 21 percent in 1982, to 7.96 percent in 2003, where it remains.
The tax rate declined because home values continue to increase, while the Gallagher Amendment mandates that 45/55 split with non-residential property.
Here's where the Gallagher Amendment collides with the TABOR Amendment — which Colorado voters approved in 1992.
TABOR demands that all tax increases be approved by a vote of the people. Local governments sometimes skirt that requirement by calling an increase a fee, instead of a tax.
Property tax rates can be reduced without voters' permission to maintain the 45/55 Gallagher split, but TABOR prohibits tax rates from being increased without a vote.
In 2017, residential property values are increasing again.
To maintain the required 45/55 taxation split, property tax rates will likely have to be ratcheted down again, probably to somewhere around 6.56 percent, according to projections by the Colorado Fiscal Institute.
Businesses, meanwhile, are still being assessed at 29 percent — four times the rate that homes are.
The pinch feels different in different parts of the state. If you're in places such as Pitkin or Eagle counties, or the Front Range where home values continue to increase, then the fiscal impact on schools might not be as dramatic as in Conejos County, one of the nation's poorest areas. But that split is affecting local revenues throughout the state.
Staff Writer Randy Wyrick can be reached at 970-748-2935 and firstname.lastname@example.org.
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