School Finance Act lays important foundation for future property tax reform
At 56 pages, this year’s School Finance Act (SFA) was longer than usual and included a number of technical and substantive changes that were necessary because of the COVID-19 crisis. One of the more complicated changes establishes a placeholder that could potentially address a long-standing structural problem in Colorado’s property tax system that funds education.
The change is the result of conversations across several years between members of the Joint Budget Committee, the School Finance Legislative Interim Committee, and many others who have determined that the wide variance in property tax rates across the state needs to be fixed. This is a problem that the Children’s Campaign has been shining a light on for many years.
What exactly is the problem?
In Colorado, the way we generate money for public education has become increasingly complicated, and our communities with low property wealth tend to pay the greatest price. Our state’s complex interaction of constitutional provisions has created a wildly uneven property tax system that generates revenue for education. Some taxpayers pay a mill levy, or tax rate, of 1.68 mills (in one school district) and others pay 27 mills (in 39 school districts). In every case, the state backfills the difference between the amount raised locally and what the district needs to educate students.
Previous legislative proposals have suggested setting a uniform mill levy that school districts would be expected to reach over time, either by repurposing existing mill levy overrides, or by asking local voters to increase the mill levy. This year’s SFA takes a different approach, because it’s based on the idea that mill levies never should have declined in the first place.
A quick history lesson: among other important provisions, the Taxpayer’s Bill of Rights (TABOR) capped how much tax revenue can grow each year. After 1992, any school district experiencing property value growth that generated revenue above the TABOR cap saw its mill levy reduced, to bring in less money. Between 1994 and 2002, nearly every school district (174 of 178) held successful “de-Brucing” elections, where voters approved broad language authorizing the school district to keep and spend all revenue generated by existing taxes, rather than reduce rates or give taxpayers a refund.
However, the Colorado Department of Education interpreted the TABOR limits as still applicable to property tax revenue, essentially ignoring the successful de-Brucing elections. This interpretation led to permanent reductions in property tax rates whenever districts exceeded the TABOR cap, even after they’d de-Bruced. Mill levy reductions compounded over time. In 1993-94, when TABOR first took effect, school district mill levies averaged 38 mills. When districts de-Bruced, the average total program levy was 32 mills. The reductions required by CDE after successful de-Brucing elections dropped the average levy to 19 mills, where it sits today. As mills dropped, the state was on the hook for a growing share of K-12 costs. Today, the state covers about two-thirds of the cost of public education and local districts cover one-third; in the late 1980s, this ratio was reversed.
The declines in mill levies ended with the 2007 mill levy freeze (SB07-199), a freeze that was upheld by the Colorado Supreme Court in the 2009 Mesa ruling. In essence, the Supreme Court’s ruling clarified that CDE was wrong in continuing to force mill levies down to stay under TABOR’s limit after districts had de-Bruced, because “the local school district elections validly waived that [property tax revenue] limit” and furthermore “CDE’s interpretation cannot supersede the General Assembly’s legislation.”
The Supreme Court left it to the General Assembly to implement the ruling. To date, the General Assembly has not corrected CDE’s error.
What does this year’s School Finance Act do about the problem?
This year’s School Finance Act aligns statute with the Mesa ruling, treating past tax rate reductions as a mistake that must now be corrected, since voters already agreed (through their de-Brucing elections) to higher tax rates.
Essentially, Sections 33 through 38 of the SFA reset the way the state calculates a district’s property tax rate. School district total program mill levies will be set at either 27 mills (currently the highest allowable rate) or the number of voter-approved mills the district imposed as of the date of its de-Brucing election, whichever is lower. Districts that can fully fund their education costs locally would be set at that level. The local board of education will then offset any levy that is higher with a corresponding credit for the amount of the difference.
How will the change affect school districts and taxpayers?
While mill levies will technically increase, the change has no impact on property tax or revenue collected because of a corresponding mill levy credit that will need to be approved by local boards of education. Using the Falcon 49 school district as an example:
- The district levies 24.5 total program mills in 2019-20, but levied 31 TPMs when their de-Brucing election passed in 2000.
- The SFA language would set their mill at 27 (because it is the lesser of 27 mills or the district’s mill when it de-Bruced). Through a resolution, the local board of education will then approve an offsetting mill levy credit of 2.5 mills, keeping them at 24.5 mills for purposes of calculating local and state share of funding.
The language creates a mechanism to test the Mesa ruling, potentially through a court challenge. The legislature could choose to phase out the mill levy credits in the future, which would have the impact of equalizing property tax rates across the state and increasing the amount of school funding that comes from local property tax revenue (instead of state General Fund backfill). This phase-out could be done incrementally, or in a targeted way to ease the impact on districts with low property wealth.
Why does the SFA change matter?
Having this language in the School Finance Act allows the legislature to continue to debate the merits of a uniform mill levy or some other form of property tax equalization. The Children’s Campaign has been supporting an overhaul of the entire school funding system for years, and this small change opens a door to solve the revenue side of that equation.
Combined with the referred measure that would repeal the Gallagher Amendment, there could be a different set of options available next year to address what is expected to be an extremely difficult budget year. For the 2020-21 year, schools face a 14 percent across-the-board cut to per-pupil funding, and reduced grant-funded programs. Declines in commercial property values are set to trigger corresponding tax decreases in residential property, which would cost districts roughly $490 million per year (if nothing is done about Gallagher). Next year legislators likely won’t have a major federal relief package to offset cuts, and they also won’t be able to repeat the one-time maneuvers that allowed them to limit budget cuts this year. One way to ease the pressure on the state over time would be to shift more of the costs back to local property taxpayers by phasing out mill levy credits.