In a desperate attempt to stave off further budget calamity, state lawmakers are fast-tracking a landmark ballot measure that would ask voters to repeal the Gallagher Amendment — the property tax-limiting constitutional provision that has provided an estimated $35 billion in tax relief to Colorado homeowners since 1983.
The bipartisan proposal — which requires a legislative supermajority to pass — represents the nuclear option for tackling Gallagher, a sign that the growing economic crisis is upending long-held assumptions about what is politically feasible in tax-averse Colorado. It is also an indication of just how desperate state lawmakers have become as they face an economic abyss unlike any other in their lifetimes.
Last week, state budget writers put the finishing touches on a proposed spending plan that cuts $3 billion this year and next. And earlier in May, lawmakers learned that Gallagher could trigger an 18% residential property tax cut, which would mean an additional $491 million in cuts to schools and $204 million in cuts to county governments starting in July 2021.
After years of political hand-wringing over Gallagher’s effects on public services across the state, lawmakers said the possibility of a massive tax cut in the middle of a pandemic finally represented a bridge too far.
“We’re in an unprecedented moment,” said Sen. Chris Hansen, a Democrat from Denver. “And when that happens, some of the business-as-usual hurdles often fall away.”
In this case, each side has been energized by different threats. For Democrats, it’s the prospect of deep cuts to local funding for public education, with no assurance there will be any state funding to fall back on. For Republicans, the lower property taxes from Gallagher means another round of cuts to fire and hospital services in the rural communities many of them represent. It also means a potential round of local tax hikes on businesses across the state that are already reeling from the coronavirus shutdown this spring.
A day after the measure’s introduction, lawmakers on Tuesday passed the resolution unanimously out of the Senate Finance Committee, sending it straight to the Senate floor. And after years of inaction, the rapid pace has caught a number of key stakeholders off guard.
A number of local chambers of commerce across the state are in support, but Colorado Counties Inc., a long-time proponent of Gallagher reform that advocates on behalf of county governments, hasn’t taken a position.
Scott Wasserman, who runs the left-leaning Bell Policy Center and supports repealing Gallagher, said he has “concerns” about the measure’s timing. On the political right, the Independence Institute hasn’t taken a stance, while another conservative group, Colorado Rising State Action, opposes it on the grounds that repealing Gallagher won’t address broader inequities in the school finance system.
Moreover, like the failed Proposition CC campaign from a year ago, the subject matter is complicated for voters — with huge implications for public services as well as taxpayers’ wallets. Gallagher affects different communities in different ways, pitting the financial interests of Front Range homeowners against rural fire services, business owners and school funding needs that will trickle up to the state budget.
Nonetheless, policymakers say now is the time to try — if only because they can’t afford to wait any longer. “We’re at the end of the line now,” said Sen. Jack Tate, a Centennial Republican who is co-sponsoring the repeal effort. “We can’t be punishing businesses. We can’t … have them continue to pay a higher and higher tax burden” during an economic downturn.
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How the Gallagher Amendment works when it comes to property taxes
Adopted by voters in 1982, the Gallagher Amendment is designed to provide ongoing tax relief to homeowners by limiting residential property to no more than 45% of the total property tax base statewide. It required businesses to pick up the remaining 55% share of the tax burden.
Over time, it has accomplished just what it set out to do — and then some. The residential assessment rate, which is used to calculate property taxes, has fallen from 21% when Gallagher was adopted to 7.15% today. Business property is assessed at 29% — meaning businesses pay four times the property tax rate that homeowners do. If the residential rate is cut to 5.88% in 2021 as projected, businesses would be on the hook for five times the residential tax rate.
It helps to imagine Gallagher as a balancing scale, with residential property values on one side, and non-residential property, such as commercial buildings and oil and gas, on the other. Usually, rapidly rising home values are what disrupts the 45% to 55% split, triggering a residential tax cut. This time, home values are indeed on the rise — but it’s a precipitous drop in business values and oil and gas from the current economic downturn that’s expected to tip the scale out of balance.
Even though Gallagher gets less attention than another tax-limiting constitutional provision — the Taxpayer’s Bill of Rights — it has arguably had just as significant an impact on governance in Colorado.
When Gallagher was first adopted in the early 1980s, residential properties were valued at $35 billion, a figure that represented 53% of all the value in the state, according to state property tax records. Nonetheless, businesses still paid 55% of the state’s property taxes, because residential properties were assessed at a slightly lower rate.
Now, amid explosive population growth and rising home prices, Colorado’s residential properties in 2019 had a total market value of $874 billion, or nearly 80% of the statewide total. But thanks to Gallagher, homeowners still pay just 45% of the state’s property taxes.
The tax shift away from homeowners has been staggering. The state Division of Property Taxation estimates that Gallagher has saved homeowners $35.3 billion in property taxes since 1983. In 2019 alone, homeowners paid $2.8 billion less than they would have if the Gallagher Amendment had never reduced the assessment rate from 21%. For context, the state’s school funding shortfall — the so-called negative factor — has never exceeded $1.1 billion in a single year.
But while Gallagher has been a boon to homeowners, who now pay among the lowest effective property tax rates in the country, it has steadily increased the tax burden on businesses, whose 29% assessment rate is set in the constitution.
Many communities have responded to Gallagher-initiated cuts by raising mill levies — the part of the property tax equation that people are more familiar with. In some places, this happens automatically through what’s known as a “floating” mill levy. Each new tax hike now hits businesses four times as hard as residential taxpayers.
Gallagher’s impact varies greatly across the state
Part of what has made Gallagher so resistant to political change is that it affects different communities in wildly different ways, distributing its benefits and its downsides unequally across the state.
That’s because the Gallagher formula triggers tax cuts based on a statewide calculation, without consideration to what’s actually happening to individual taxpayers or specific government agencies.
In metro Denver, for instance, home prices have more than doubled since 2010, rising to $424,051 from $202,896. But Gallagher has triggered only two tax cuts in that period, worth about a 10% tax reduction in total.
For the metro area homeowners, Gallagher hasn’t provided much relief because the rate cut hasn’t come close to offsetting a 109% increase in property values.
From the local governments’ perspective, rising property values in many Front Range communities have largely compensated for any cuts to revenue Gallagher could have caused. In 2019 alone, residential values in Denver increased by 20% — more than offsetting Gallagher’s 10% assessment rate cuts over the past decade. On top of that, commercial property values have risen steadily, resulting in even more funding for public coffers.
But in some rural areas, the opposite has occurred. Homeowners have been the beneficiaries of Gallagher’s tax cuts even when their property values may be stagnant or rising slowly. Meanwhile, small public agencies that rely on property taxes, like rural fire departments, hospital districts and county governments, have been hard hit as it squeezes public coffers in places that were already struggling financially.
Complicating matters further, some taxing districts don’t have much commercial property at all, making a residential tax cut that much harder to cope with financially.
Lawmakers are looking at a four-year freeze for property taxes
While the repeal effort has wide bipartisan support at the legislature — and supporters believe it will win the two-thirds supermajority needed for passage — a companion effort to enact a four-year statutory freeze on assessment rates faces a less certain path.
That bill, which has not yet been introduced, would freeze the residential assessment rate at 7.15% and the business rate at 29% for four years. The rates can’t go up without voter approval under the Taxpayers’ Bill of Rights, so this would effectively limit property tax cuts — at least on paper.
This is largely a symbolic gesture because the legislature could repeal the statutory freeze in the future and approve a new rate. Nonetheless, some county commissioners are pushing for it as a condition of their support, saying it would provide some comfort that their revenue streams won’t be cut out from under them after the immediate crisis has passed.
The reason: In the long-term, repealing Gallagher could have a downside for local governments. The business tax rate, long enshrined in the constitution, would suddenly be a matter of statute, subject to the whims of the state legislature.
“I think there will be enormous pressure on the legislature — and in some respects rightfully so — to reduce the commercial tax rate down from 29%,” said John Messner, a Gunnison County commissioner, in an interview. “It could put local governments in a worse situation than if we did nothing.”