Even as the state of Colorado mulls transportation needs, education shortfalls and a backlog of infrastructure repairs, some property owners in Colorado Springs will see a decrease in property taxes next year. But while residential property owners could see as much as an 18 percent decrease in their tax bill, the same doesn’t hold true for businesses.
It’s all due to the Gallagher Amendment, which along with the Taxpayer’s Bill of Rights creates a headache for state legislators trying to balance the budget and meet state needs that aid economic development.
The way it works: The Gallagher Amendment says that residential homeowners are responsible for 45 percent of all property taxes collected by the state, and nonresidential and commercial property owners are responsible for the remaining 55 percent. Gallagher also mandates that non-residential property is taxed at a fixed 29 percent of the assessed value.
Throw in TABOR requirements, and residential rates can’t increase without a vote of the citizens of Colorado. As a result, residential property taxes dropped steadily during the past 30 years and are currently fixed at 7.9 percent of a property’s assessed value. But they are scheduled to drop again to 6.56 percent in 2018.
They have never gone back up because that requires voter approval. When Gallagher passed, business property taxes were 29 percent of assessed valuations — and they still are. Residential property taxes were at 21 percent, and have dropped precipitously in the years since it passed to maintain 45 percent of overall tax revenue as home prices rise. There’s no corresponding increase when home prices drop, because that requires voter approval.
It’s not just a problem for the state. Taxing districts that rely on property taxes also feel the pinch: school districts, fire districts, library districts and counties, all of which must abide by the state’s constitution.
Colorado will have to cut $170 million from state schools, thanks to Gallagher, but another amendment to the constitution says the state will have to make up the loss — leaving other needs unfunded and unfilled. And the state will have to cut payments in places that don’t rely on property taxes to make up the education shortfall.
The solution? Not one that will be palatable to homeowners or to the state legislature. They’ll inevitably have to repeal Gallagher, essentially voting to increase their own property taxes. It’s unlikely, but it’s necessary, officials say, to restore balance to the system.
That imbalance is highlighted by a simple fact: The 45-55 ratio is set statewide and doesn’t take local market situations into account. Because most people in the state live on the Front Range, property values there are setting the formula — but taxing districts in rural areas are also paying the price because they rely more on property taxes than on sales tax.
And as good as Gallagher might be for homeowners — it’s a short-term gain. It equals long-term trouble as Colorado puts off road improvements, school districts operate under ever-tighter budget constraints and other public services remain underfunded. Those factors will make it increasingly difficult for the state to attract and retain businesses, when property assessments are so unbalanced.
The Gallagher Amendment is bad for business, bad for future planning and bad for Colorado’s economic development.