Opinion: The current property tax battle is just the tip of the iceberg

The Legislature, the Governor, and Advance Colorado and Colorado Concern, the groups behind Initiatives 50 and 108, struggled to write a bill in the special session to reduce property taxes further than the 2024 session’s SB24-233. The stimulus was the increased property tax burden that resulted from rapidly increasing property values in many areas of the state. They accomplished that goal, a bill was passed and the groups pulled their initiatives from the ballot.

That was good work. But unfortunately, there are still some fundamental problems with the tax structure that have not been addressed. So, I expect that these issues will reemerge down the road.

Our local and state governmental entities are mostly funded in five fundamental ways: income/capital gains tax, sales tax, property tax, fees and Federal grants. Fees may be for operating costs (charged per unit and based on cost, like for water treatment and delivery) or for capital facilities needed because of growth (charged based on expected usage, like water tap fees used to buy water rights and build reservoirs, treatment plants, and pipelines). Fines for violations of laws are generally (but not always) a minor part of budgets.

Property taxes are charged by school districts (both for operating costs and new schools), some water districts (including operating and/or capital costs, depending), fire districts (same), county governments (same), and so on. They are charged based on property value, but the percentage of the value (the assessment rate) used to calculate the taxes is very different for different types of properties. For example, residential might be down in the 6% range whereas commercial might be up around 29% (plus, sometimes, a relatively small downward “value adjustment”). But this structure leads to various fairness concerns.

The recent bump in property taxes was mostly in the Front Range cities and resort areas. There, increased demand for residential property due to the pandemic shift to remote work rapidly forced residential values up. (The demise of the Gallagher Amendment, which limited residential versus commercial taxes, also contributed.) Demand for housing was already increasing, but the COVID bump further escalated this. Since property taxes are charged based solely on valuation and not need, people’s taxes went way up, out of proportion to the costs of providing facilities and services.

To me, this indicates a need to first adjust the assessment rate down for properties (mostly residential) in those counties most affected by the pandemic bump. This would bring property taxes down to where they would have been without the bump. The second step would be to put in place an automatic adjustment system, based on county-specific data, that would keep tax levels in sync with normal cost of living increases. The combination would fix this part of the problem for the long haul. 

There are other major inequities with property taxes. For example, some property taxes are charged in ways that are totally unrelated to the costs imposed. Schools are not directly needed by commercial properties (but are for their workers’ kids), yet these properties pay at assessment rates multiple times higher than residential. Some water districts collect property taxes, but property values bear little relationship to individual water use. New water rights, reservoirs, etc., should rightfully be charged using impact fees on the new development that is creating the needs, and not imposed on those who have already paid for their part. Fire protection is more related to property values at least, but then assessment rates should be equal, not much higher for commercial properties. And the lack of impact fees for new fire stations is an important missing piece.

Other capital-intensive facilities needed because of growth, like parks and rec centers, libraries, and road expansions, all equitably deserve development impact fees. To address the need for more alternatives to adding lanes to expand road capacity (especially where this cannot be done), a new form of development impact fee could subsidize the buses, trains, car-pools, bike lanes, etc., necessary to keep traffic levels and air quality at acceptable levels. This could be a one-time fee to fund a capital reserve whose earnings would pay for these services or an ongoing charge.

Finally, affordable housing deserves more of the Legislature’s attention. We need mandatory inclusionary housing requirements that would require developers to build a significant fraction of permanently affordable units along with their market rate ones. And we need mandatory jobs-housing linkage fees so that new employment developments pay for housing for those workers who could not otherwise afford to live where they work.

All this is lots of work; it’s time to get started.

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