At a moment when government agencies across the country are already drowning in red ink, Colorado’s state constitution is now projected to trigger the second-largest residential property tax cut in the state’s modern history.
Under forecasts that will be presented Tuesday to the Joint Budget Committee, 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 — a gap that will trickle up to the state budget, which is constitutionally required to backfill school funding shortfalls, and is already facing 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 might not end there. The report shows residential property values continuing to rise in this assessment period, which ends June 30, 2020. 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.
For years now, the residential assessment rate, which determines how much homeowners pay in property taxes, has been falling 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.
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, all tax cuts are permanent without voter approval to reverse them.
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.
