The sharp increase in property tax rates in Colorado following the repeal of the Gallagher Amendment in 2020 is arguably the most pressing concern in the state, right up there with crime and housing. SB24-233, signed into law shortly after being approved by the General Assembly this past legislative session, was meant to provide a long-term solution, but fell short of the expectations of some. As a result, two initiatives have been proposed for this November’s ballot, both of which, if passed, would override SB 233 and impose what proponents claim would be a permanent solution to the matter. However, while both measures would indeed reduce property tax rates throughout the state, they would simultaneously impose some chilling negative, if unintended, consequences.
Initiative 50, which has already been approved for the ballot, would place a 4% annual cap on property tax increases statewide, and require voter approval for any amount over that cap that a local government may wish to retain. Importantly, there are no exemptions nor any mechanism to backfill lost revenue to local governments written into the initiative language.
Initiative 108, which is awaiting signature validation from the Secretary of State’s office, would reduce residential property tax rates from 7.15% to 5.7%, and reduce non-residential (commercial) rates from 29% to 24%. Unlike Initiative 50, 108 would require the state to backfill any lost revenue to local governments and special districts.
Initiative 50 is particularly worrisome in that it lacks any mechanism for exempting municipal bond debt – the primary tool utilized by metro districts. That means that, should the initiative pass, metro districts would be denied sufficient revenue from new construction to cover the payment of their existing debt – absent voter approval, which is never certain.
The problem becomes quickly obvious; if metro districts that issued bonds to finance development are denied the mechanism with which to pay the debt service on those bonds, those bonds lose value, and the bond market will come to a screeching halt – in fact, we have already seen the first early signs of a nervous bond market in the state.
There is also a legal concern; key provisions of the U.S. Constitution protect the validity of contract, and prohibit the states from enacting laws that would inhibit existing contractual arrangements. When metro districts issued bonds to finance their development, they entered into a contractual obligation to impose a certain number of mills for a specified time, sufficient to pay back that debt. Initiative 50, by impeding on the satisfaction of those obligations, raises serious legal questions; as such it can be expected that years of expensive litigation will follow.
Initiative 50 presents another problem as well – namely, it is exceedingly unclear how “voter approval” for any retained revenue would work. By aggregating all the property tax revenue in the state into one state-wide pool, Initiative 50 would transfer property tax decisions from local governments to the state. If a local government, for instance, wanted to retain an amount greater than the 4% cap in order to service bond debt obligations, under the constructs of Initiative 50, that would have to go to a state-wide vote. In other words, voters in Denver and Boulder could be voting on the financial future of a metro district in Colorado Springs.
Of a final concern is the promise by proponents that many of these issues can simply be dealt with by the legislature, as it considers enabling legislation next year should these initiatives pass. That, however, merely adds yet another layer of uncertainty to the question, and puts the financial future of metro districts in the hands of a legislative body which may or may not be favorably predisposed to the model.
While everyone wants a viable, long-term solution to the problem of rising property taxes, it is imperative that it be done properly. Proponents of these measures appear willing to negotiate a more viable solution, in which case a special legislative session may be called to adopt a compromise in lieu of the ballot measures. The details of what that may look like remain to be seen, but in any event the issue of property taxes will continue to dominate state-wide policy discussions for at least the next few weeks. Stay tuned…