DID YOU KNOW…
Coloradans only pay 1/4th as much as they used to pay in property taxes on their homes due to the Gallagher Amendment to our state constitution which we adopted in 1982?
The Gallagher Amendment’s forced continual decline in Colorado’s Residential property tax base has reduced local funding for services like K-12 schools and fire districts.
How does Gallagher affect YOU?
Check out this short video testimonial to see how the Gallagher Amendment affects public services in communities like yours…
CASE STUDY: Montrose Fire Protection District; Montrose, Colorado
Though it serves the City of Montrose, the Montrose Fire Protection District (MFPD) is NOT a part of the City’s government and therefore receives no City sales tax to support its work. Like about half of the fire departments in the state, the MFPD is a Special District which is funded almost entirely by property tax revenues.
Tad Rowan, Montrose Fire Protection District
Current impact of 2018 Decline in Residential Assessment Rate from 7.96% to 7.2%
Revenue Decrease of $172,578 (3.6% decrease in operating revenues) while annual operating expenses have increased 4.5%.
- Forced District to use Reserve Funds to pay for annual operations in 2018 and 2019.
- Already delayed capital replacement and hiring plans are further delayed.
Anticipated Impact of 2020 Decline in Residential Assessment Rate from 7.2% to 6.11%
Revenue Decrease of $272,240 (5.5% decrease in operating revenues) while operating expenses are expected to increase 4.5%.
- One less ambulance and one less fire engine staffed.
- Response times will significantly increase due to the closing of Station #2 and the lack of available resources.
The Gallagher Amendment in 5 minutes:
Watch this short video from the Colorado Fiscal Institute for a quick explanation of how the Gallagher Amendment works!
What is the Gallagher Amendment?
The Gallagher Amendment was part of a package of property tax changes in our state constitution which the Colorado legislature referred to voters as Amendment #1 on the 1982 ballot.
The amendment is named after former State Senator Dennis Gallagher, who was one of the prime sponsors of this amendment which limited the potential contribution of residential property to the state’s total property tax pool.
Why did Coloradans adopt the Gallagher Amendment in 1982?
The Gallagher Amendment was the culmination of a property tax revolt that began in Colorado in the late 1970’s as a result of growing frustration among Colorado voters about the increasing property tax which they were paying as extremely high inflation and high growth, especially along the Front Range, caused their property values to grow.
Additionally, prior to the passage of Amendment #1 in 1982 (the comprehensive property tax proposal which included the Gallagher Amendment), there was no statewide oversight to ensure that each county assessed property values in a consistent manner. Some counties chose not to reassess the value of some classes of property (i.e. Residential) in order not to increase the tax burden for those property owners, and some counties chose not to reassess ANY of their property during some scheduled reassessment cycles. Consequently, there was a lot of inequity in property values across the state.
How did Amendment #1 (which included the Gallagher Amendment) affect Colorado property taxes?
Amendment #1, which voters adopted in 1982, changed Colorado’s property tax law in several ways:
2. The Gallagher Amendment froze the ratio of the value of Residential and Non-Residential property.
When the Gallagher Amendment was proposed in 1982, Non-residential property made up 55% of the state’s total aggregate property valuation, and Residential property made up the other 45% of that total valuation. The Gallagher Amendment froze these relative ratios at the 1982 levels so that Residential property in Colorado would always constitute approximately 45% of the total property valuation. (This has unintentionally resulted in forcing a continued reduction in the residential property tax rate and the resulting revenues which pay for local services like K-12 and fire services.)
Prior to this amendment, different county assessors would use different appraisal methods involving some seven factors. Amendment #1 established a uniform appraisal methodology for all counties, involving just three factors of cost, market, and income.
4. Amendment #1 ensured that every county would assess the value of property in a consistent and equitable manner.
Prior to this amendment, different counties taxed different property in different ways which created inequities. Some counties chose not to reassess the value of some classes of property (i.e. Residential) in order not to increase the tax burden for those property owners, and some counties chose not to reassess ANY of their property during some scheduled reassessment cycles. Consequently, there was a lot of inequity in property values across the state.
5. Amendment #1 established that the actual value of agricultural land would be determined by its earning or productive capacity rather than its market value.
Valuing agriculture land based on its ability to PRODUCE (grow grass to support animals or grow crops for harvest) rather than its MARKET value helps to keep farms on the land. Otherwise, in high-growth areas, the land’s market value (and associated property tax bill) quickly exceeds its ability to support a farm or ranch and is forced to either be developed or left vacant.
Property such as household furnishings and farm equipment were exempted from taxation because the cost to collect these taxes was more than the revenue collected.
What have been the impacts of the Gallagher Amendment?
While the Gallagher Amendment was intended to address specific challenges at a specific time when it was proposed and passed in 1982, changes in real estate market conditions over time and the voters’ adoption of subsequent constitutional amendments which retroactively affect the Gallagher Amendment have created unforeseen and unintended consequences that are causing significant challenges for Colorado today.
1. The frozen Residential/ Non-Residential ratio is forcing down the Assessed Value of houses (from 30% in 1982 to 7.2% today) and jeopardizing community services which rely on that Residential property tax base.
Today, Residential property makes up about 80% of the actual market value of all property in the state. However, the Gallagher Amendment has frozen the ratio of Non-residential and Residential property values at their 1982 levels and limits the taxable value of all Residential property to never constitute more than approximately 45% of the state’s total property valuation.
Because the growth in value of Residential property in the state has outpaced the growth in the value of Non-Residential property, the Gallagher Amendment has forced down the Residential Assessment Rate in order to abide by the Gallagher Amendment’s requirement that Residential property make up no more than 45% of the total value of all property in the state. When we adopted the Gallagher Amendment in 1982, this Assessment Rate for Residential property was 30%; today, it’s been forced down to only 7.2% and is expected to continue its decline to 6.11% in 2019.
The last reduction from 7.96% in 2017 represented a 10% reduction in property tax revenue for Special Districts, and the next drop to 6.11% in 2019 will amount to another 15% reduction — a total of 25% reduction in revenue over a 2-year period.
The declining Residential Assessment Rate is resulting in lower property tax collections for every house in Colorado.
This lower Residential Assessment Rate is great news if you’re a homeowner because you’re only paying a fraction of the property tax that you would otherwise pay without the Gallagher Amendment. However, Colorado’s decreasing Residential tax base is extremely challenging for local communities which rely on property taxes to provide local services like K-12 education and fire districts.
2. The poorest communities are disproportionately adversely impacted by the forced decline in the Residential Assessment Rate.
Because the Gallagher Amendment requires that the Residential Assessment Rate be the SAME for all counties, and since the actual market value of Residential property grows at DIFFERENT rates in different counties, the impact of the declining Residential Assessment Rate affects each county tax base differently. Specifically, for those counties whose Residential values are growing more slowly, the declining Residential Rate causes a larger decline in the Residential property tax base.
Typically, the state’s poorest communities are located in rural areas which have the slowest growth in Residential market values, and therefore the Gallagher Amendment forces a reduction in their residential property tax base when the market value in other more prosperous communities may actually be growing.
Additionally, the less affluent rural communities which have relatively slow growth in their Residential property value typically also have a relatively small Commercial property tax base on which to shift the tax burden, therefore they have very limited ability to raise additional property tax revenues to counter Gallagher’s erosion of their Residential property tax base.
3. The property tax burden is being shifted to Commercial/Business property owners which creates an unfriendly tax environment for growing and attracting businesses.
As the Gallagher Amendment forces down the Residential Assessment Rate, the corresponding Assessment Rate for Commercial property is frozen at 29%. Therefore, when taxpayers vote to increase their mill levy to offset the effect of the declining Residential property tax base, the property tax burden is shifted to business property owners who are forced to pay for a higher mill levy at the higher fixed Commercial Assessment Rate. Currently, owners of Commercial and Industrial properties bear over 4X the property tax burden of Residential property owners on property with the same market value.
In addition to this increasing shift in the property tax burden from Residential to Commercial property owners, those same commercial businesses also have to pay property tax on their Business Personal Property which Amendment #1 never exempted from taxation as it did with residential personal property.
4. The Taxpayers Bill of Rights (TABOR) further complicates the property tax challenge created by the Gallagher Amendment.
The “Taxpayers’ Bill of Rights” (TABOR) amendment to Colorado’s constitution, which passed ten years after the Gallagher Amendment in 1992, complicates the Gallagher Amendment’s impact on property taxes in two ways:
TABOR Challenge #1: Ratcheting down of the Residential Assessment Rate
the Residential Assessment Rate has to AUTOMATICALLY DECLINE when the value of residential property rises faster than non-residential property.
the Residential Assessment Rate CAN’T INCREASE without a vote of the people.
TABOR Challenge #2: Ratcheting down of the Mill Levy
Prior to TABOR, Mill Levies used to be able to float up and down to maintain consistent funding for the services which voters have approved.
When Property Values ROSE…
…Taxing jurisdictions could choose to LOWER their Mill Levy.
When Property Values DECLINED…
…Taxing jurisdictions could RAISE their Mill Levy.
After 1992, with the passage of TABOR…
Mill Levies are REQUIRED to DECREASE when property values rise.
Mill Levies are PROHIBITED from INCREASING without a vote of the people when property values decline.
5. The burden for funding K-12 Education has shifted from local communities to the State as Gallagher continually erodes local Residential property tax bases.
Local property taxes used to be the primary funding source for K-12 education in Colorado. In 1982, local property taxes funded 60% of K-12 education, and the state General Fund provided the other 40% of funding. A combination of interacting policies has shifted this burden to the state over time.
Since 1992, the combination of Gallagher’s forced decline of the Residential Assessment Rate and TABOR’s forced decline of the mill levy has dramatically reduced the amount of local property tax revenue which School Districts receive. The state’s School Finance Act, which is designed to ensure that every student in Colorado has the same opportunity for a quality education, requires that the State automatically backfill these reduced K-12 revenues.
As the amount of funding which School Districts receive from local property tax revenues has declined, and as the State has subsequently had to backfill this declining local funding source, the burden of funding K-12 has gradually and consistently shifted from local governments to the State. The state now provides almost 70% of funding for K-12 schools, with local property taxes providing only 30% of funding.
The shift in the burden for funding local K-12 School Districts now consumes 40% of the state’s General Fund, which leaves a shrinking amount of state funding to pay for other priorities like prisons and higher education.
Coloradans Have Tried to Fix this Problem Before…
In 2003, when the Residential Assessment Rate was then set at 8.04%, a group of concerned citizens placed “Initiative 32” on the ballot proposing to freeze the Residential Assessment Rate at 8.0% and eliminate Gallagher’s requirement to maintain the 45:55 split between the total value of Residential and Non-Residential property. The proposed 8.0% rate represented a slight DECREASE in the Residential Assessment Rate at the time which proponents hoped would garner support for their proposal.
Ironically, very shortly after the Initiative proponents filed their ballot measure, the Residential Assessment Rate had to be revised downward slightly to 7.96% as a result of additional property valuation data which had been submitted late by Jefferson County; consequently, opponents of Initiative 32 could then argue that the proposed 8.0% frozen Assessment Rate was actually an INCREASE from the current rate of 7.96%, and this eroded support for the proposal. Initiative 32 ultimately failed at the ballot box.
THE BOTTOM LINE (Why YOU should care.)
Unless and until the total value of residential property in Colorado ceases to grow faster than the total value of commercial property (which no one foresees as long as Colorado is a desirable place to live), the Gallagher Amendment will continue to force downward the Residential Property Tax Assessment Rate, which will continue to erode local property tax bases and reduce local funding for local government services like schools, fire protection, county road maintenance, and recreational districts.
Because the Gallagher Amendment is an amendment to our state’s constitution, and since ONLY the voters can amend our constitution, it will be up to Colorado voters – NOT their elected legislature – to change the Gallagher Amendment IF they desire a different outcome.