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A group of state lawmakers Wednesday spiked an effort to change the property taxation formula for short-term rentals in Colorado, underscoring the political touchiness of the topic sparking regulatory debate across the state. 

In a 5-1 vote, the Legislative Oversight Committee Concerning Tax Policy rejected an effort to advance a draft bill that would have more than tripled the property taxes on residential properties rented as short-term rental properties for more than 30 days each year. 

Sen. Chris Hansen, a Denver Democrat and a leading proponent of the legislation, was the lone “yes” vote. He argued that the proposal would increase revenue for underfunded schools, as well as fire departments, libraries and special taxation districts that rely on property tax revenue.

The debate comes as Colorado mountain communities have blamed their lack of affordable housing on the proliferation of short-term rentals. Communities across the state will decide in the November election whether to enact new regulations on the properties to combat a hand-in-hand housing and labor crisis.

“Regulating the number of short-term rentals, that is going to be left up to city and county government,” Hansen said. “We’re already seeing lots of municipalities take action on this. I just think we have to really be careful not to conflate local tax issues and local property-use issues with what I see is the statewide concern, which is how do we fund schools and how do we have a stable property tax base.”

Colorado State Sen. Chris Hansen, D-Denver, leads the Senate Appropriations Committee on the first day of Colorado’s 73rd legislative session at the Colorado Capitol in Denver on Wednesday, Jan. 13, 2021. (Andy Colwell, Special to The Colorado Sun)

The draft bill would have drastically changed the way properties used as short-term rentals for more than 30 days in a year are taxed. 

They currently are taxed as residential properties, which are subject to a lower tax assessment rate. But the bill would have taxed them at the lodging property tax rate, which comes with an assessment rate that’s more than three times higher, for each day they are rented if the property is rented more than 30 days in a year.

In other words, if a property is rented out as a short-term rental for 45 days, the owner would have had to pay a lodging property tax rate on those 45 days in a year and the single-family property tax rate on the remaining 320 days.

A version of the legislation still could be introduced in the upcoming lawmaking term, which begins in January, but the overwhelming rejection of the policy Wednesday signals the strong political headwinds it would face.

If the draft bill had been advanced by the Legislative Oversight Committee Concerning Tax Policy Policy, a bipartisan interim committee, it would have carried extra clout in the General Assembly. Measures that win the approval of an interim committee typically fare well before the full legislature. 

“This certainly doesn’t end the conversation,” Hansens said. “It just means that it won’t be an interim committee bill.”

Hansen said he plans to recalibrate and seek more input before deciding how to proceed. 

“We need to tackle the challenge of short-term rentals,” Rep. Shannon Bird, a Westminster Democrat, said before the vote Wednesday. “I see the impact on local communities.”

But she thinks there is a better policy path forward. “I think the conversation needs to continue.”

The lodging property tax rate is currently 29%. Proposition 120, on the November ballot, would reduce the rate to 26.4% if it’s approved by voters.

The single-family property tax assessment rate is 6.9% for the next two tax years under Senate Bill 293, which passed this year. Lawmakers will have to decide whether to continue the reduction or reinstate the 7.15% assessment rate. 

The assessment rate works like this: If property’s fair-market value is $1 million, its assessed value for purposes of taxation would be $290,000 if it’s considered a lodging property under the 29% assessment rate. If it is considered a residential property, its assessed value would be $69,000 under the 6.9% assessment rate.

The higher the assessed value, the more taxes the property owner pays.

The vote Wednesday came after public testimony against the draft bill. 

Liz Peetz, the vice president of government affairs at the Colorado Association of Realtors, warned that the policy could make it difficult for people to secure housing loans and that it may hurt the housing market by prompting a sell-off that could deplete the rental market.

“We also think this could instill lots of litigation over limiting property rights,” Peetz said.

Finally, Peetz argued that short-term rental income is used by property owners to pay their mortgages, medical bills and other expenses. A higher tax assessment rate may cut into that cash flow, she said.

Denver County Assessor Keith Erffmeyer said members of the Colorado Assessors’ Association “are unequivocally opposed to this.” The policy would be too difficult for assessors to implement since they would have to track short-term rentals in their counties and try to determine how many days they were rented out each year. The regulatory burden would overwhelm assessors’ small workforces, Erffmeyer said. 

“We think this shouldn’t be a dimmer. It should be a light switch,” Erffmeyer said of changing the property tax assessment rate for short-term rentals. “Either it is or it’s not.”

Hansen noted that the policy change would cost less than $20 more a day for property owners and that he envisioned the added burden being passed onto guests of the homes. 

Hansen’s concern is that without a policy change, lodging properties across Colorado could simply convert to short-term rental properties to avoid paying higher taxes. That happened in Steamboat Springs, causing a decline in revenues for the local school district.

“This is a nettle that needs to be grasped,” he told his fellow lawmakers Wednesday. 

A Legislative Oversight Committee Concerning Tax Policy Policy task force is slated to hear public testimony Thursday morning on short-term rentals. VRBO, the short-term rental listing service, has urged its Colorado users to show up and voice their opinions. 

Jesse Paul is a Denver-based political reporter and editor at The Colorado Sun, covering the state legislature, Congress and local politics. He is the author of The Unaffiliated newsletter and also occasionally fills in on breaking news coverage....