Gallagher Amendment

The Gallagher Amendment – May 2020

School funding is complicated – almost everyone in Colorado has figured that out by now.  One of the complications to school funding is the Gallagher Amendment.  In some legislator town halls or other conversations you may be hearing more about Gallagher this year than you have in the past.

Here’s why (this explanation courtesy of Colorado Association of School Boards):

Total Program Funding for schools begins with the local share – the portion that is raised through local property taxes.  Many entities rely on property taxes to fund their operations – counties, libraries, and fire districts to name a few.  The Colorado Constitution mandates that property taxes assessed on personal residences can only make up to 45% of the total property taxes the state collects. That means that business property taxes must make up the remaining 55%.  In order to keep the numbers in balance, the Colorado tax code calls for a calculation called the Residential Assessment Rate (RAR).  At the time the so-called Gallagher Amendment was included in the Colorado Constitution, property taxes on a personal residence were calculated at 21% of the assessed value.  If you owned a home valued at $100,000, you paid property taxes on $21,000 of that value.  Thanks to the combination of TABOR and Gallagher, the RAR on personal residences has ratcheted down to the current 7.15%.  This means Colorado homeowners now pay their property taxes on approximately $7,000 of value on each $100,000 of home value.

The result of this is property taxes on business property are significantly higher, often double the taxes paid by homeowners.  Many communities in Colorado don’t have property that is assessed at a high value.  The result for school districts is that the state “backfills” the difference between what local property taxes can raise and what is required to fund what is know as Total Program Funding (TPF) – with the caveat that the state has not been able to meet this requirement as tracked through the Budget Stabilization Factor.

All of that is a long introduction to information that State Property Tax Administrator JoAnn Groff presented to the Joint Budget Committee (JBC) as a brief addendum to the May revenue forecast.  The mechanics of how the Residential Assessment Rate is calculated, like everything related to Colorado finances, is complicated.  She explained the next assessment cycle is 2021-22, with 2021 as the reassessment year.  But the cutoff date for valuing properties for that cycle is June 30, 2020. She said growth in values seemed to slow starting in March.  But home values seem to be holding while the value of commercial real estate is dropping.

The Division of Property Taxation estimates a 33% drop in value for oil and gas and a 20% drop in commercial, while estimating that residential will go up 10% in value.

“The impact to school districts,” is that the residential assessment rate likely will have to drop next year from 7.15% to 5.88%.

Groff calculates that will mean a $246 million drop in district Total Program Funding revenues – which the state will have to backfill in 2021-22 – a $490 million drop in all district revenues, including MLOs and bonds, and a $203 million drop in revenues for counties.  Again, an important caveat is that when the state does not have the revenue to backfill K-12, the Budget Stabilization Factor increases.

“Pretty sobering,” she said.  “You are going to see a drop in the residential assessment rate in a significant way based on the COVID-19 impact…All districts are going to have an impact.”

As of May 28, there is word that Colorado legislators are considering referring something to the November ballot that would repeal Gallagher.  This Colorado Sun article covers the discussions going on now about a bi-partisan bill that would do that:

Lawmakers call for repealing Gallagher Tax Limit –

Bonus:  Here’s the Gallagher Amendment explained in a video by the Colorado Fiscal Institute:

We realize a lot of the information we share regarding school funding may seem wonky, at best, and a good deal of the time just plain mind-bending.  We share it so you, as Colorado voters, can make informed decisions – because  according to TABOR, voters must approve new taxes and tax increases.  You are making big decisions at the ballot box that will either negatively or positively affect generations of Colorado citizens – it only makes sense that you understand the impact of your decisions.