There is no question that the statewide vote approving Amendment B, which repealed the 1982 amendment to Article X, § 3 of the Colorado Constitution (“Gallagher Amendment”), was a significant financial step forward for fire protection districts, municipal fire departments, and other governmental emergency services agencies (collectively, “Emergency Services Agency(ies)”) that rely heavily, or exclusively, on residential property tax revenue to provide their critical life-saving emergency services to Colorado’s citizens. Prior to approval of Amendment B, the Gallagher Amendment fixed the ratio between total statewide property tax collections from residential and nonresidential property, with residential property generating 44.6% of the statewide property tax collections, and nonresidential property generating 55.4% of the statewide property tax collections (“Gallagher Split”)1. At the time the Gallagher Amendment was originally added to the Colorado Constitution, residential property had an assessment rate of 21% and nonresidential property had an assessment rate of 29%.2
As originally conceived, the Gallagher Amendment required the Colorado General Assembly to adjust the residential assessment rate (“RAR”) up or down as necessary to maintain the Gallagher Split, while the nonresidential assessment rate remained fixed at 29%.3 The General Assembly had no discretion under the Gallagher Amendment or its implementing statute to deviate from this requirement.4
To satisfy the constitutional mandate to maintain the Gallagher Split, the Division of Property Taxation was required to calculate the RAR necessary to maintain the Gallagher Split using a formula set forth in the implementing statute.5 The Division then biennially reported the adjusted RAR to the General Assembly, which enacted it through legislation amending § 39-1-104.2(3), C.R.S.
In the 1980s and 1990s, the aggregate statewide valuation of residential property increased at a significantly higher rate than the aggregate statewide valuation of nonresidential property.6 Consequently, to maintain the Gallagher Split, the General Assembly decreased the RAR, which fell from 21% in 1983 to 9.74% for the 1997-98 cycle.7 Because the assessment rate for nonresidential property remained fixed at 29%, this trend resulted in an increasingly significant disparity between the effective property tax rates for residential and nonresidential properties.8
Then, in 1999, the growth in the aggregate statewide valuation of nonresidential property outpaced that of residential property.9 As a result, the Gallagher Amendment and its implementing statute required the RAR to be increased to maintain the Gallagher Split. However, the General Assembly did not increase the RAR, because lawmakers believed that increasing the RAR would violate Section (4)(a) of Article X of the Colorado Constitution, commonly referred to as the Taxpayers Bill of Rights (“TABOR”), which had been enacted seven years earlier in 1992.10 Specifically, Section (4)(a) of TABOR requires prior statewide voter approval for certain events, including any “valuation for assessment ratio increase for a property class.”11
To date, there have been seven biennial cycles (or fourteen years) in which the Gallagher Amendment required the General Assembly to increase the RAR to maintain the Gallagher Split.12 In each instance, the General Assembly kept the RAR the same as the prior year notwithstanding the clear requirements of the Gallagher Amendment. The General Assembly’s decision not to increase the RAR “broke” the tax formula established by the Gallagher Amendment, making it a permanent “downward ratchet” of the RAR. This outcome contradicted the Gallagher Amendment’s plain language, which required the ratio between the aggregate statewide valuation of residential and nonresidential property to remain the same by floating the RAR both up and down as necessary to maintain the Gallagher Split.
During the 2020 Legislative Session, the General Assembly enacted, and Governor Polis signed into law, SB20-223, which would take effect only if the voters approved Amendment B. With the passage of Amendment B, SB20-223 creates a moratorium, effective January 1, 2020, on changing property tax assessment rates. Accordingly, at least for assessment year 2020 (for tax revenue collection in 2021), the RAR is set at its current rate of 7.15% and non-residential property will continue to be assessed at 29%.
Although the statewide repeal of the Gallagher Amendment was a positive step toward the stabilization of residential property tax revenues, the repeal did not affect TABOR in any manner. So, while the Generally Assembly remains free at any time after tax year 2020 to decrease the assessment rate for any class of property (i.e., residential, commercial, vacant land, etc.), the General Assembly will not increase the assessment rate for any class of property without a prior statewide vote of the citizens. Until TABOR is amended to remove the requirement of a statewide vote to increase the assessed valuation rate for a class of property, Emergency Services Agencies that rely heavily, or exclusively, on property tax revenue, are still at risk of further reductions in revenue due to decreases in assessment rates and are unlikely to see an increase in revenue through the General Assembly’s increase in the assessment rate for one or more classes of property.
The uncertain future of the assessment rate for residential and non-residential property is demonstrated by the fact that Colorado Rising State Action, a conservative action organization that opposed the repeal of the Gallagher Amendment, has indicated it will submit a bill during the upcoming 2021 Colorado Legislative Session that would seek a statewide vote on a ballot to decrease the RAR to 6.5% and the non-residential assessment rate to 27%. If in 2021 or a subsequent year the RAR or the assessment rate for non-residential property is reduced, there are few options for Emergency Services Agencies. Seeking voter approval for a mill levy increase is one option and probably the safest approach because the Colorado courts have provided guidance on the appropriate ballot language and election process. There also is a possibility that, if an Emergency Services Agency’s prior revenue stabilization ballot was broader in scope than just increasing its mill levy if the Gallagher Amendment forced a decrease in the RAR, then the Emergency Services Agency may be able to increase its mill levy in the future to offset lost revenue due to the decrease in the assessed valuation rate, potentially even for non-residential property. All Emergency Services Agencies that previously received voter approval to stabilize their revenue/de-Gallagherize should check with their legal counsel to see if their prior ballot language was broad enough to apply to a decrease in the assessed valuation rate for any class of property or if it was limited to a Gallagher-mandated RAR adjustment only.
The information here is being provided for general educational purposes and does not constitute legal advice. Readers are urged to consult their legal counsel on the potential impacts of TABOR now that the Gallagher Amendment has been repealed.
1 Colo. Dep’t of Local Affairs Div. of Property Taxation, Report to the General Assembly: RAR Study (Preliminary Findings) for 2019-2020, at p. 20, Addendum P (Jan. 15, 2019), hereinafter “2019-20 Preliminary RAR Report”, available at https://drive.google.com/file/d/1o3HgqYCkWnDIQkRQx4YIxPi2Z0EiQHDz/view?,authuser=0.
3 Article X, § 3(1)(b) states, in pertinent part:
For each year in which there is a change in the level of value used in determining actual value, the general assembly shall adjust the ratio of valuation for assessment for residential real property which is set forth in this paragraph (b) as is necessary to insure that the percentage of the aggregate statewide valuation for assessment which is attributable to residential real property shall remain the same as it was in the year immediately preceding the year in which such change occurs.
4 Colo. Const. Article X, § 3(1)(b) (stating the General Assembly “shall adjust the ratio” to maintain the Gallagher Split) (emphasis added); see also § 39-1-104.2(5), C.R.S. (stating that the General Assembly “shall, by law, adjust the residential rate in order that the percentage of aggregate statewide valuation for assessment which is attributable to residential real property for such year equals the target percentage”) (emphasis added).
5 Id. at § 104.2(5) (“The residential rate shall be based on a documented estimate of the total valuation for assessment of all taxable property in the state arrived at by projecting the percentage of change in the level of value for each class of taxable property to all taxable property in such class in the state.”); see also id. at § 104.2(6) (stating that the RAR determined by the Division “shall ensure that the percentage of the aggregate statewide valuation for assessment which is attributable to residential real property shall remain as it was in the year immediately preceding the year in which such change occurs”).
6 See Richard B. Collins, The Colorado Constitution in the New Century, 78 U. Colo. L. Rev. 1265, 1314 (2007).
7 A historical recap of the RAR is found at page 3 of the 2019-20 Preliminary RAR Report.
8 The “effective property tax rate” equals actual taxes paid as a percentage of actual value.
9 2019-20 Preliminary RAR Report at 3.
10 Colo. Dep’t of Local Affairs Div. of Property Taxation, Report to the General Assembly: RAR Study (Preliminary Findings) for 2015-16, at 3 (Jan. 15, 2015), hereinafter “2015-16 Preliminary RAR Report”, available at https://drive.google.com/file/d/0B6gVatVqDPX4dlVkLXc4MUpFQTg/view?,authuser=0. The 2015-2016 cycle is the most recent instance where the General Assembly should have increase the RAR, and thus the Division’s Preliminary Report for this cycle discusses in detail the conflict between Gallagher and TABOR.
11 Colo. Const. Art. X, § 20(4)(a) (emphasis added).
12 2019-20 Preliminary RAR Report at 3.