property tax

Assessor cites downside to falling property tax rates

Rising home values, decreasing taxes may not be a good thing

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Rising home equity and decreasing property tax rates sound like a win-win for Colorado homeowners. But Douglas County Assessor Lisa Frizell warns there is a downside.

“It’s kind of a nice thing because our taxes won’t increase,” she said. “But there are some underlying problems with it.”

Those underlying problems, she said, are adding up.

“What we’re going to see is this perfect storm that’s been 27 years in the making,” Frizell said. “It’s always been expected that the growth would pay for itself, but that’s not the case.”

Gallagher sets the stage

Property tax assessment rates have been falling despite increasing property values. The reason, in short, is an amendment to the state Constitution that limits the amount of revenue that can be collected from homeowners.

Lower assessment rates mean the local districts collect less revenue to fund schools and other government services. As the population and demand for those services increase, mill levies for schools and fees for other services like water and sanitation will have to increase to cover the shortfall, Frizell said.

A report from the Legislative Council, released April 17, sets the assessment rate for 2017-18 at 7.2 percent. While the rate is not as low as economists predicted, localities across the state will still miss out on more than $5.4 billion that could be used for schools and other services.

The Gallagher Amendment, a little-known provision passed in 1982, set a system for establishing tax assessment rates for residential and nonresidential properties, such as farms and commercial space, every two years.

The amendment also provides that the amount of revenue collected from residential property taxes must always be lower than the amount from nonresidential property taxes at an approximate ratio of 45 percent to 55 percent.

A home’s market value is multiplied by the assessment rate to calculate how much of the property’s value is taxed. For example, the owner of a $350,000 home pays taxes on $27,860 of the home’s value, based on the current assessment rate of 7.96 percent.

Enter TABOR

Property values have been increasing since the housing market’s recovery, so assessment rates should be on the rise as well. But rates continue to drop because of another amendment to the Colorado Constitution, the Taxpayer Bill of Rights.

Passed in 1992, TABOR mandates that any tax increase be approved by voters. So far, no state legislator has been willing to introduce a bill to increase assessment rates, and thereby increase taxes on homeowners.

“It was not seen as a particularly positive thing,” Frizell said. “We did hit a time frame, beginning in 2005, where the calculated rate actually increased, but because TABOR restricts increasing (rates), the Legislature opted not to take that to a vote of the people.”

In 2003, the residential tax assessment rate fell to 7.96 percent, where it stood until April 17, when it was set at 7.2 percent to prevent collecting more revenues than needed to maintain the 45-55 split.

The conflict between TABOR and Gallagher, and the revenue shortage it’s created, are a lot to decipher, and state Rep. Brittany Pettersen, D-Lakewood, said voters aren’t to blame if they don’t fully grasp the predicament.

“The math doesn’t make sense,” Pettersen said. “Our economy in Colorado is doing very well, yet we’re seeing cuts to our budget like we’re in a recession... It’s just such a complicated confusing mess.”

Pettersen added that cuts to the education budget affect availability of programs in elementary and secondary schools, as well as how much the state covers for college tuition.

Colorado Senate Majority Leader Chris Holbert, R-Parker, said he approved TABOR and Gallagher, believing they were intended to give voters more control over how their tax dollars are spent. But he said that since most homeowners pay their property taxes through an escrow account at their bank, they may not think twice about the issue.

“People probably say ‘Yay! Less taxes,’ but these are the primary funding sources for our schools,” Holbert said. “People may not put those two together.”

‘What are you doing?’

Frizell believes the issue requires citizen engagement, and added that she’s seen more involvement from the electorate since the 2016 election. “I would love for them to ask the question of their state legislators: `What are you doing?’ “

Holbert and Pettersen agreed that any change in the state Constitution will have to start at the grassroots level. Pettersen said she has some hope that legislators can reach across the aisle to work on a solution, provided voters initiate the process.

“We need enough pressure from our constituents to do something,” Pettersen said. “Anything that’s solved at the state Capitol comes from our constituents.”

Holbert said he thinks voters would reject any legislation perceived as a simple tax increase, but added that they may feel differently if they understood how paying less in property taxes can lead to higher mill levies.

“If a school district needs more money,” Holbert said, “the residents of that district need to understand that they could increase the mill or they can go back and work toward increasing the property tax assessment rate... It might be a question people would say yes to if they understood it.”

Frizell said it may seem unlikely that Coloradans will ask the Legislature to raise their taxes, but it may be the only way out of the conundrum.

“I don’t like paying taxes any more than anyone else, but at the same time you have to pay for the services you’re getting,” Frizell said. “Sometimes, if something seems too good to be true, it is.”

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