One of the many policy questions Colorado voters will be tasked with deciding this November is whether to amend the state constitution to repeal the Gallagher Amendment, a provision within the Colorado constitution that, since 1982, has limited residential property to 45 percent of the statewide property tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . Repealing the Gallagher Amendment would cause residential property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es to rise over time but would also enhance the neutrality and overall competitiveness of the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code.
Amendment B, the Gallagher Amendment Repeal and Property Tax Assessment Rates Measure, was referred to the ballot by Senate Concurrent Resolution 20-001, which passed the legislature in June with a supermajority vote in each chamber. The constitutional amendment will be ratified if approved by a simple majority of voters this Election Day.
The Gallagher Amendment has a long history in the state of Colorado but has caused the tax code to become increasingly nonneutral over time. Since the Gallagher Amendment’s adoption 38 years ago, commercial and other nonresidential property has declined as a share of the total assessed value of all real property in the state but has been forced to bear a growing share of the statewide property tax burden.
When the Gallagher Amendment was approved by voters in November 1982, residential property comprised only about 45 percent of the assessed value of all property in the state, while commercial, agricultural, industrial, and other nonresidential property comprised the other 55 percent. The Gallagher Amendment was adopted with the goal of keeping residential property taxes low, and it has certainly done that: Colorado has one of the lowest effective property tax rates on owner-occupied housing in the country.
However, declining property tax burdens on homeowners and renters have come at the cost of increasing burdens on in-state businesses. Under the Gallagher Amendment, commercial and other nonresidential properties are assessed at 29 percent of actual value. And while residential properties were originally assessed at 21 percent of actual value, that rate has been adjusted downward on a biennial basis to maintain the 45-to-55 percent split as Colorado’s population has grown and home values have risen. As a result, residential properties are now assessed at only 7.15 percent of actual value, and absent a constitutional amendment, that assessment rate is expected to continue to drop. Meanwhile, nonresidential properties remain responsible for generating 55 percent of the state’s property tax revenue despite now representing only 20 percent of the total assessed value of all property in the state. What began as a 38 percent higher assessment ratio on commercial property is now 306 percent higher, and still rising.
If Amendment B is approved by voters this November, the 45-to-55 percent ratio requirement would be eliminated, and specific property assessment ratios would no longer be prescribed in the state constitution. To prevent such a change from causing residential property taxes to skyrocket, however, earlier this year, the legislature proactively passed, and the governor signed, Senate Bill 20-223, which will take effect only if Amendment B is approved.
If the Gallagher Amendment is repealed, Senate Bill 20-223 will freeze assessment ratios at their current levels, including the residential real property rate of 7.15 percent and the nonresidential property rate of 29 percent. Because those assessment rate freezes would be written in statute rather than in the constitution, changing or repealing those rates would require a simple majority vote in the House and Senate and the governor’s signature, but it would no longer require a constitutional amendment. It is important to remember, however, that any future proposal to increase property tax assessment rates—or any tax policy change resulting in increased tax revenue—would still require voter approval under Colorado’s Taxpayer’s Bill of Rights (TABOR).
The robust growth of urban areas, particularly Denver, has driven the increase in assessed housing value generating these lower assessment ratios, but smaller, more rural local governments are the clearest losers, as they have less of a commercial base on which to rely as residential property ceases to be an effective revenue raiser.
If Amendment B is adopted, the statutory rate freeze in Senate Bill 20-223 would prevent any significant near-term increase in residential property taxes, but those taxes would eventually rise as property values continue to rise, and there would be no further automatic erosion of the residential assessment ratio. (Absent a change, the residential assessment ratio will fall to 5.88 percent next year.) Over time, this would both free up additional revenue for local governments and reduce the extent to which residential property receives preferential treatment under the tax code.
While this may not immediately sound like a great deal for homeowners, the current trajectory is increasingly untenable. Continued erosion of the residential property tax base, and further shifting of burdens to commercial property, will be a bar to business investment, harming all Coloradans.
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