Monday’s terse announcement from the Colorado Supreme Court dashed whatever lingering hopes local governments had for a constitutional Christmas miracle.
Without so much as a word of explanation, the court declined to hear outgoing Gov. John Hickenlooper’s last ditch request for relief from the property tax-slashing Gallagher Amendment.
It was a long shot at best.
Now state lawmakers and the new Democratic governor, Jared Polis, will enter 2019 barreling toward yet another constitutional fiscal crisis, this one felt primarily at the local level, but with sweeping implications for the state budget.
The problem, as Hickenlooper put it in his unusual lame-duck interrogatory, is a familiar one to those steeped in Colorado finance and its intricate web of constitutional requirements.
“Superimposing TABOR (the Taxpayer’s Bill of Rights) on the system the Gallagher Amendment created has caused the system to collapse,” Hickenlooper wrote.
So what now? The Colorado Sun, through a review of legislative documents and interviews with top lawmakers and policy experts, found that state policymakers face no shortage of options. But virtually all of them involve political complications, trade-offs and steep hurdles to passage.
Here are five options to watch in the coming months as the clock ticks toward a projected 15-percent cut in property taxes:
Option 1: The status quo.
Here’s what will happen if no one does anything. Based on a year-old forecast, rising property values along the Front Range will once again trigger a statewide property tax cut for homeowners, slashing the residential assessment rate to 6.11 percent from 7.2 percent.
That number’s sure to change. Colorado Legislative Council is expected to update that forecast later this month, and then the Department of Local Affairs will conduct studies due in January and April to come up with a final recommendation to the legislature. Then lawmakers will be asked to pass that number into law, much as they did two years ago when the rate was cut from 7.96 percent.
Homeowners will get a 15 percent tax break. In areas where home values are rising the fastest, that’ll mean relief from their soaring tax bills. In places with stagnant property values, it’ll mean an outright cut from what they paid in prior years.
But that’s not all. The state will owe millions more to K-12 schools each year, adding to funding obligations that Colorado is already failing to meet. The next time the housing market dips, even local governments currently awash in cash will feel the Gallagher pinch, because the assessment rate can’t go back to where it was without a statewide referendum. And if local governments seek voter approval to raise mill levies to compensate, the next tax hike will fall that much harder on businesses, who already pay four times the property tax rate that homeowners do.
Option 2: Someone could sue.
The court’s refusal to take up Hickenlooper’s questions doesn’t mean it wouldn’t weigh in on an actual case that raised the same issues. Local government agencies or even businesses may have grounds for a suit against the state for ignoring the intent of Gallagher, which was to limit residential property taxes to 45 percent of the statewide property tax base, with commercial property owners paying the other 55 percent. In 14 out of 26 years since TABOR passed, businesses have paid more than their 55 percent share, Hickenlooper noted.
But the fix Hickenlooper’s hinting at wouldn’t immediately help rural Colorado. He’s arguing that the residential assessment rate has to be able to rise and fall to maintain the 45-55 split as economic conditions change. (TABOR’s voter approval requirements and politics have prevented that.) If the court agrees, that would allow residential taxes to rise the next time home values fall. But it wouldn’t fix the immediate pinch on rural services. These cuts are happening precisely because the state is hewing to the 45-55 ratio, which Hickenlooper’s questions don’t seek to eliminate.
Option 3: Repeal and replace.
A bipartisan panel of lawmakers tasked with solving this has coalesced around a two-step fix. 1. Send voters a measure to repeal key parts of Gallagher. This would require a two-thirds majority of both chambers, but just a simple majority at the ballot box. 2. Replace it with a statutory version of Gallagher that would apply the ratio region-by-region rather than statewide.
What would this solve? Well, for starters, tax rates on the Western Slope and Eastern Plains would no longer be determined by the whims of the Front Range housing market. Instead, each regional economy would dictate local tax policy. Based on a preliminary analysis by the nonpartisan Colorado Legislative Council, the cuts to most of rural Colorado would stop. Denver homeowners would likely get even more tax relief.
But there are some downsides. It all depends on how you draw the lines, but let’s assume Arapahoe County is in Denver’s region. Struggling rural fire districts there would face even larger cuts. It could create even bigger problems elsewhere. Apply the proposed Gallagher formula to the seven-county northern mountain region, which stretches north from Park County to the Wyoming border, and their property tax rates could eventually be cut in half.
Option 4: Replace.
The politics of this one are really hard, because it would require 55 percent approval at the ballot box. But a proposal from the lesser-known co-creator of Gallagher, former state Sen. Ron Stewart, would rewrite the state constitution to preserve the tax relief provisions. But it would apply only in places where home values are rising fast enough to warrant it, after accounting for inflation and growth.
In counties where Gallagher would cause a net cut in government revenue, the rate would stay the same. If government revenue would still increase, homeowners get the tax cut.
It has some practical complications. Some taxing districts cross county lines, so they’d be charging different rates to different neighborhoods for the exact same services.
But, there are a lot of benefits, as well. By going down to the county level, it mitigates the regional problem, where million-dollar homes in mountain towns are dictating tax rates two counties away. It also retains tax relief in places like Denver without accelerating it, like the regional plan does, because cuts still would be based on a statewide calculation.
MORE: Read more politics and government coverage from The Colorado Sun.
Option 5: Repeal and freeze.
This is the simplest solution. It’s also the least likely to pass the legislature.
Repeal and freeze would ask voters to get rid of the Gallagher Amendment entirely and freeze the residential assessment rate. That would prevent continued cuts to rural services. It would prevent shifting additional K-12 costs onto the state.
And it’s likely dead in the water, because it would end property tax relief all over the state, uniting anti-tax Republicans with urban Democrats who are concerned with the rising cost of living along the Front Range.
Some additional food for thought.
The timing is awkward. If lawmakers wanted to prevent a cut in 2019, they should have done something last year. You can’t even attempt to unravel the Gallagher-TABOR knot until the November 2019 election, at the earliest, because you have to ask voters for approval to change the constitution. And, depending on the measure, it might even have to wait until 2020 because of Colorado’s ballot rules. The legislature is required to set a new assessment rate this spring.
No matter what, expect counties and special districts to push the state to backfill their losses. Lawmakers won’t like it — the state already has enough spending needs it can’t afford. But cash-strapped local governments may not want to support any solution that doesn’t offer them the same deal schools have had for years: Protection from future state-mandated cuts.
Statewide, regional, or by county — no matter how you apply Gallagher, it will create winners and losers. Just to illustrate how difficult it is to come up with a statewide formula that works for everyone — if you ignored TABOR and forced the state’s eight economic regions to meet the 45-55 split on their own? Residential assessment rates would range from 3.5 percent to a whopping 33.7 percent.
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