In 2020, Coloradans voted to repeal the Gallagher Amendment, which had kept the state’s residential property taxes in check, but allowed commercial property taxes to rise over time.
Homeowners now found their property taxes rising along with the skyrocketing valuations. Given the number of jurisdictions that have convinced voters to permanently lift revenue limits under the Taxpayer’s Bill of Rights (known as de-TABORing), many Coloradans suddenly find themselves with no meaningful taxpayer protections.
As the state legislature has passed a series of stop-gap measures–while casting about for a permanent settlement–Colorado’s free market think tank, Independence Institute, decided to develop a model property tax policy of its own. We looked at what other states had done in response to the problem, arriving at some basic principles, and applied them to create a model property tax structure for the state to implement in the near future.
Meaningful property tax relief
There are three basic components to any property tax calculations: the assessed value of the property (which may not be its market value), the assessment rate, and the mill rate. Multiply those three things together to get the property tax for a property. The total amount that a district or municipality collects is called its mill levy.
In 1978, California voters passed Proposition 13, widely hailed as the first successful salvo in a nationwide tax revolt. The measure rolled back valuations several years, and only re-assessed property when it changed hands, amounting to an assessment limitation.
But it also amounted to a subsidy for people staying in their homes, limiting new construction and resale inventory, operating most strongly in areas with the highest property values, where new housing was most needed. With later modifications, properties that stay in the family can be valued at far lower rates than similar properties that have been sold.
Contrast that with Utah’s 1985 Truth in Taxation law. When property tax revenue for a jurisdiction will exceed the previous year’s take, the appropriate legislative body – county commission, city council, or school board – must hold public hearings and publicly vote to keep it. Shame works, and has helped to limit property tax revenue growth.
Finally, we looked at Texas property tax changes, implemented in 2019 and 2023 and instituting a year-over-year mill levy cap of 3.5%, excluding new construction or annexed property for counties, cities, and other large jurisdictions. If revenues will exceed that cap, a popular vote is automatically held on allowing the district to keep the money. School district funding follows a similar principle, but is more complicated and includes a statewide mill levy floor, because the state backfills schools to a minimum level of funding. A school district must conduct an efficiency audit before scheduling a tax ratification election.
For Colorado, we wanted to limit tax increases while allowing for natural growth due to inflation and development, with as much local control as possible. We also focused on the total tax collected rather than any of the components, especially assessment rates.
This led to the following model property tax policy for Colorado:
- State assessment rates will stay where they are.
- Local government mill levies will be capped at the previous year’s revenue plus inflation, exclusive of new development and annexation.
- School districts are capped at the previous year’s revenue plus inflation, plus the change in school population.
- Property taxes tied to specific bond measures would be excluded from the cap.
- Mill levy caps could be waived by a vote of the public.
- Local governments and school boards with waivers would be required to pass a specific piece of legislation each year to keep the excess.
Focusing on the mill levy avoids the kinds of distortions created in California by Proposition 13 and its successors. Starting from the current assessment rates assures stability during a transition. We also avoid micromanaging the mill rate at the district level.
For a government charged with providing a variety of services, tying its limit to the value of the property being taxed makes sense. By contrast, tying a school district’s limit to the school population makes the most sense. In each case, the citizens may waive the limits, but the choice to exercise that option must withstand annual public scrutiny.
The legislature falls short
Which brings us to House Bill 24A-1001, the result of the recent special legislative session on property taxes. While an improvement over the current situation, we find it disappointing when measured against our model.
Keeping the assessment rates constant creates stability, although raising the residential rate is less desirable.
The law does impose or lower year-over-year limits on revenue increases, but in a severely flawed way, relying on a flat percentage that may or may not reflect the realities on the ground during any given year. It lowers the local government limit from 5.5% to 5.25%, but many jurisdictions have already permanently waived the former limit, and it’s unclear if those waivers will need to be renewed.
The new 6% limit on school districts is welcome, but the only reason for making it larger than the local government limit seems to be to placate the teachers’ unions. The silver lining is that it will require a statewide vote to waive, and Coloradans have been resistant to statewide tax increases over the last few decades.
Perhaps the manipulation most fraught with potential danger is the use of different assessment rates for the same residential property for local governments and school districts. The state has only the blunt instrument of assessment rates to work with, but creating different rates for different districts opens the door to all sorts of unintended consequences and potential abuse down the line. Citizens already have the ability to impose whatever different mill rates they want in these districts; it’s difficult to see what is added by complicating the calculation.
Fortunately, while the law passed has plenty of moving parts, they are for the most part independent of each other and thus readily amendable. We look forward to future legislation and ballot measures to move the state in the direction of our model policy.
Joshua Sharf is a senior a fellow in fiscal policy the Independence Institute, and author of the Institute’s model property tax policy report.
