TABOR + Gallagher: A toxic mix for Colorado public schools

Written by: Leslie Colwell
Date Posted: August 24, 2018

In the first installment of our multi-part series on school finance in Colorado, we dig into the meaty topic of Colorado’s Constitutional Conundrum: the interaction of the Taxpayer’s Bill of Rights, or TABOR, and the Gallagher Amendment. The top-line takeaway: Our preK-12 funding system and state budget are structurally broken and unsustainable without fixes to our methods for acquiring revenue, and the stakes are high for Colorado kids. Here’s a short version of this complicated story.

The road to school finance unsustainability is paved with good intentions

In 1982, Colorado voters passed the Gallagher Amendment. Its intent was clear: to limit residential property tax increases by making sure that the amount of property taxes collected on homes would always be lower than the amount collected from commercial properties like businesses and farms. Gallagher established a permanent ratio for revenues collected: 45 percent from residences, 55 percent from non-residences.

Gallagher also dictated the assessment rate for property. An assessment rate is the percent of a property’s value that is subject to taxation. For non-residential/commercial property, the permanent assessment rate was set at 29 percent. The residential assessment rate was then allowed to float up or down to keep the 45 percent/55 percent revenue ratio. When the Gallagher Amendment went into effect in 1983, the residential assessment rate was 21 percent.

For a residence worth $100,000 in 1982, this meant that the taxable or assessed value of the home was $21,000. For a commercial property worth $100,000, the assessed value of the business was $29,000.

The 45/55 ratio locked into place required the assessment rate for residential properties to decline if home values grew faster than businesses—which is exactly what happened for much of the 80s and 90s. The housing boom that Colorado has experienced over the course of three decades, including new home developments and rising market values of existing homes, has driven dramatic reductions to the residential assessment rate, to just 7.2 percent today.

Let’s take a look at what that has meant for our house that was worth $100,000 in 1982:

1982 Residential Assessment Rate: 21%                                2018 Residential Assessment Rate: 7.2%

Actual value: $100,000                                                                    Actual value: $300,000*

Assessed value: $21,000                                                                Assessed value: $21,600

Assuming a hypothetical market value increase* over 36 years, this example shows how it is possible that the market value of a home could increase by 200 percent, but the assessed value of the home would increase over the same period by only .03 percent. In short, a home that was worth $100,000 in 1982 had roughly the same assessed value as a home worth $300,000 in 2018.

Residential property now represents 75 percent of all valued property, but may only provide 45 percent of property tax revenue. Colorado Legislative Council has projected another ratchet down in the residential assessment rate in 2019, to 6.1 percent.

Market value

The result? As the residential assessment rate has decreased over time to maintain the 45/55 ratio, the amount of property tax revenue being collected has decreased as well. This meets the original goal of Gallagher (to control increases in the property tax paid by homeowners). But the effect was a negative impact on public education, and other services funded by property taxes like fire and police protection.

The authors of the Gallagher Amendment foresaw the possible loss in program funding, but they knew that counties and school districts could raise their property tax rates (mills) to offset the losses in assessed value. This is exactly what happened until 1992 when TABOR passed.

What happened when Gallagher collided with TABOR?

Sold on the idea that the people should be able to approve tax increases, Colorado voters passed the Taxpayer’s Bill of Rights in 1992. Proponents’ goals were twofold: 1) require voter approval for any tax increase, and 2) set limits on the amount of revenue collected by state and local government.

TABOR further weakened the property tax base for public services like education because without voter approval, counties could no longer increase tax rates to offset Gallagher’s automatic declines in the assessment rate.

In most years, the value of residential property grows faster than commercial property. In the last decade, however, oil and gas booms across the state meant commercial property values were actually growing faster than residential home values in some years. To maintain the 45/55 Gallagher ratio, the assessment rate on homes should have increased. For example, in 2013, the rate should have increased from 7.96 percent to 9.13 percent. This could not happen because of TABOR. Under TABOR, the residential assessment rate can only be pushed downward.

Gallagher and TABOR

Taken together, Gallagher and TABOR contribute to an automatic, permanent property tax cut on homes that neither voters nor lawmakers approved. Colorado has lost control of its revenue system.

Impact on school finance and the state budget—and most importantly, kids

Public education is unique in that any revenues that are not raised at the local level through property tax must be backfilled by the state. As local revenues have eroded over 30 years, the legislature has been forced to make up a growing and unsustainable amount of education funding. This means significantly more pressure on the state budget over time. Local revenues make up less and less of overall education funding; 36 percent today, from a high of 57 percent three decades ago. During the same period, Colorado has dropped to near the bottom in overall funding of schools, with a per-student allocation nearly $2,800 below the national average today. Multiplied by 25 kids in a classroom, that gap represents nearly $70,000 per classroom that Colorado schools would receive if our state’s per-pupil funding were on par with the national average.

state share and local share

While Colorado homeowners experience property tax breaks, classrooms experience forced cuts. If something is not done to address these aspects of TABOR and Gallagher in the coming years, this imbalance will only get worse – meaning less funding will be available not only for preK-12 schools, but for roads, higher education, and other state priorities.

Next week, we’ll look at a separate but related problem created by TABOR: inequity in the property tax rates (mills) paid by property owners across Colorado.

Want to learn even more about TABOR and Gallagher? Check out these helpful resources:

  • In 2017, Colorado Public Radio produced “The Taxman,” a three-part podcast detailing how the Taxpayer’s Bill of Rights came to pass and the many ways it has impacted Colorado school finance and the state budget over time.
  • Also in 2017, 9News produced a segment about Gallagher’s impact on rural counties. The Arvada Fire Department has a helpful video explaining many of the Gallagher basics and how fire districts and other local services must figure out how to operate without the help of state backfill dollars.
  • Check back in the next few weeks to hear more about Amendment 73 and what that would mean for schools.
Leslie Colwell

About Leslie Colwell

Leslie Colwell serves as the Vice President of K-12 Education Initiatives, leading the Campaign’s work to improve education in the state of Colorado. Before joining the Children’s Campaign in August of 2014, Leslie worked to facilitate partnerships and produce policy agreements, especially in the area of education as an Associate at The Keystone Center. Her professional experience includes working as Legislative Director for State Senator Mike Johnston, managing his education policy portfolio (including his office’s work on HB12-1238, Colorado’s READ Act, and SB13-033, ASSET), and directing a policy fellowship for educators for three summers. Leslie has also worked on Teach For America’s alumni team, and before that taught 6th grade Math and Earth Science as a TFA corps member at Mary McLeod Bethune Middle School in Los Angeles. She currently serves on the board of the Colorado Latino Leadership, Advocacy & Research Organization (CLLARO) and on the steering committee of the Colorado Afterschool Partnership.