Colorado’s Prop 123 affordable housing initiative could face rocky future

If lawmakers run into issues, they could choose to ‘turn off’ the spending

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Few issues affect Coloradans as much as rising housing prices. The state will take a step toward addressing the problem — to the tune of hundreds of millions of dollars per year — as officials implement Proposition 123, approved by voters in November.

In just 12 years, the median cost of a single-family home in the Denver area jumped from about $200,000 to three times that amount, according to the latest report by the Colorado Association of Realtors. The trend was similar statewide.

Under Proposition 123, state officials are required to set money aside for more affordable housing and programs to help Coloradans acquire homes and stay housed. Though the measure didn’t raise tax rates to fund those programs, it will, eventually, reduce the Taxpayer’s Bill of Rights, or TABOR, refunds that Coloradans receive — by $86 per taxpayer for 2024, for example. 

Yet voters in November also sought to reduce their taxes and, taken together, the changes could lead to difficult decisions down the road, said Scott Wasserman, who leads the nonprofit Bell Policy Center, which advocates for economic mobility for Coloradans. He called the passage of the measure “bittersweet.”

“I think what makes it bitter is that it passed in conjunction with Proposition 121,” a measure voters approved to lower the state income tax rate, Wasserman said.

Proposition 121 is expected to take a roughly $400-million bite out of the state budget next year while Proposition 123 will eventually increase spending about $290 million yearly.

State Rep. Rod Bockenfeld, a Republican who represents rural areas east of Denver, including parts of Adams, Arapahoe and Elbert counties, did not share Wasserman’s concern that the new measures could be problematic for state spending. However, Bockenfeld, who serves on the state legislature’s Joint Budget Committee, acknowledged the picture could change when the state faces strong economic headwinds.

“There’s a certain point where if we hit a severe downturn and we go into a deep recession, then a reduced tax rate will reduce state revenues,” Bockenfeld said.

Though the state struggles like the rest of the country with high inflation, the situation hasn’t been characterized as a recession or severe, though concerns that could happen linger.

How 123 works

Proposition 123 defines affordable housing based on two factors: household income and housing costs, according to the state’s “blue book” voter guide.

Under the proposal, affordable housing means housing for renters making up to 60% of the area median income or homeowners making up to 100% of the area median income. For context, in the metro area, the median income is $117,800, and 60% of median income is $70,700.

Under Proposition 123, local communities have flexibility to respond to housing needs.

The money could go toward grants and loans to local governments and nonprofits to acquire land for affordable housing developments; assistance to develop multifamily rentals, including apartments; programs that help first-time homebuyers; preventing homelessness through rental assistance and eviction defense; and grants to raise capacity at local government land-use departments.

The measure also could support “equity” sharing with tenants in housing projects. Equity is important because it allows people to gain financially from the rising value of their property and do things such as borrow money based on it.

“We know that home equity is a part of how you build intergenerational wealth,” said Wasserman.

He noted that people who are renting don’t have that opportunity to build equity.

Overall, the measure could help create more higher-density, environmentally sustainable homes, according to the voter guide.

Some in the housing industry say they can’t make a profit building “the kind of housing we need,” Wasserman said.

The measure, he added, tells housing developers, “‘We’re here to help you make it.’”

TABOR makes for difficult math

But the math isn’t easy. Part of what makes the equation difficult is TABOR, the state constitutional amendment that limits government spending. Under TABOR, revenue above the limit — sometimes called a “TABOR surplus” — gets refunded to taxpayers. The $750 rebate check that Coloradans received this year were a result of TABOR.

Colorado is seeing “very large TABOR surpluses,” in the ballpark of $3 billion this year and next year, Wasserman said. Although that sounds like a lot of money, it goes quick.

For example, money from the state’s “general fund” — which supports basic services, like K-12 education and public assistance — recently totaled $12.5 billion.

In years when state revenue comes in over the TABOR limit, Proposition 123 is estimated to decrease the amount returned by $43 per taxpayer in tax year 2023 and $86 per taxpayer in tax year 2024, according to the voter guide.

Meanwhile, Proposition 121, the measure to lower Colorado’s income tax, will also decrease refunds to taxpayers in years when state revenue exceeds TABOR’s limits. In those years, taxpayers generally may end up keeping money that would have been refunded anyway, Bockenfeld said.

“It leaves the money in the pocket of citizens rather than giving it to the government and the government giving it back,” Bockenfeld said.  

Education often a target for cuts

Colorado’s new normal under Propositions 123 and 121 may not present hard choices when the economy is strong and the state takes in large sums of tax revenue. But during an economic downturn, Colorado may not see a so-called TABOR surplus of revenue. 

That’s when priorities may end up on the cutting block, according to Wasserman.

Proposition 123 allows the state legislature to reduce part of the new housing funding to balance the state budget, according to the state’s voter guide. Essentially, if lawmakers find themselves in enough of a pinch, they can “turn off” parts of the measure, Wasserman said.

The alternative is typically cuts to education, especially higher education, meaning housing and education could be competing not to be cut.

In such a situation, “you’re not able to increase education funding based on growth or needs of schools,” Wasserman said.

In a tight spot, it’s possible state lawmakers could turn off the flow of funding to Proposition 123, according to Legislative Council Staff, the nonpartisan research arm at the state Capitol. The measure explicitly contemplates the fact that lawmakers might want to reduce the spending for budget balancing, so it says they are allowed to cut about half. But in practice, lawmakers could cut the spending entirely, according to staff. 

Yet whether lawmakers would actually choose to override the will of the voters remains to be seen. 

Another complication: When there is enough money, Colorado lawmakers can dip into the TABOR surplus for another purpose. The state allows a property tax exemption for qualifying senior citizens and disabled veterans, referred to as the homestead exemption. The senior homestead exemption can be paid for by the TABOR surplus, Wasserman said, potentially cutting into the available funds for affordable housing.

“That pool of money which is coming from our existing tax rates — it’s a life raft, and it’s like we’re shrinking the size of the life raft,” Wasserman said.

He also looks at Proposition 121 in anticipating future budget problems.

“If the state ends up as a result of this election cutting things, it’s not going to be because of 123 — it’s going to be because of 121,” he claimed. “I can’t be emphatic enough about that. We can shut off parts of 123 … we can never, ever, ever get the money back from 121.”

Proposition 123, Colorado, affordable housing, election 2022, results, TABOR, Denver metro

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