Colorado’s Unique Tax Code

1. Colorado’s Unique Tax Code Carol Hedges Executive Director

2. Colorado Uses Constitution For Tax Policy • Makes Changes More Difficult • Results in many work arounds to adapt to changing circumstances • Implies that tax “policy” rises to the level of civic principles • Revenue moves with economic activity Constitutional Tax Policy does not • REQUIRES VOTERS TO BE THE INFORMED TAX POLICY DECISION MAKERS

3. Timeline of Fiscal Policy Action Prop 103 Negative Factor, HPF, 228 Amend 66 SB 267 Mill Stabilization Amendment 23 Gallagher TABOR Ref. C 2009 2005 2017 2013 1992 1982 2000 2011 2007 2016

4. Three basic pots of money in the State budget $32.5 billion total budget in FY2019-20 Federal Funds $8.75 billion General Fund $12.2 billion Cash Funds $9.46 billion Total budget includes $2.1 billion “reappropriated funds”

5. General Fund Revenue Sources Sales, use, and excise taxes Individual Income Taxes Other Sources Corporate Income Taxes FY2019-20 $12.6 billion “other” is insurance premium taxes and a few others

6. What does the money buy? Transportation Other Courts Public Health Human Services Schools Colleges Public Safety Healthcare FY2019-20 Colorado General Fund $12.2 billion

7. Constitutional Policy

8. Gallagher

9. Back to 1980s…. K-12 Funding Mix Local Share State Share Residential Assessment Rate 21%

10. Explanation: Gallagher Amendment • Adopted by voters in 1982 • Creates uniform method of property assessment • Requires periodic reappraisal • Establishes the percent of state property tax revenue that can be generated by residential and commercial property (roughly) (45% res—55% com) • Sets the commercial assessment rate at 29% • Statute set residential assessment rate at 21%

11. Context: Gallagher Amendment • Inequities in property valuation system were creating discontent • Residential property was becoming more important in the overall property tax picture • Property tax revolts were arising across the country—Prop 13 in California • Needed a broad coalition to pass the constitutional measure at the ballot

12. A Little Detail on Property Taxes Property Tax = Property Value X Assessment Rate X Mill Levy determined locally by market value established at local district level set by the state by property category —e.g. residential, commercial X 7.2% X 80 mills = $2,018 = $25,220 $350,000

13. X 29% x 21% x 7.2% Residential Assessed Value ~45% Non-Residential Assessed Value ~55%

14. Market Value Today is 75% Residential which well exceeds the target of 45% Residential 77% Residential 45% Nonresidential 23% Nonresidential 55% Market Value Target Share

15. TABOR:Art X Section 20

16. Back to 1992…. Residential Assessment Rate 14.34% Denver Broncos were 8-8 under head coach Dan Reeves

17. Context: TABOR • Residential Assessment Rate fallen to 14.34% from 21% in 1982 • Presidential election year. Strong support for Ross Perot. • Amendment limiting civil rights for gays on ballot • Just coming out of national recession and collapse in shale market.

18. Explanation: TABOR • Taxpayers Bill of Rights is an amendment to the Colorado Constitution approved by voters in 1992 • It passed the fifth time that a tax and/or spending limitation had appeared on the ballot since 1978, and the third time a comprehensive limit had appeared

19. Explanation: TABOR (Article X Section 20)Major Provisions Caps Revenue Constrains the Legislature’s Choices Limits Options Sets Election Provisions

20. Explanation: TABOR (Article X Section 20)Major Provisions Constrains the Legislature’s Choices The Legislature Can’t Raise Taxes Art X Sec 20 (4): “districts must have voter approval in advance for: …any new tax, tax rate increase, mill levy above that for the prior year, valuation for assessment ratio increase for a property class, or extension of an expiring tax, or a tax policy change directly causing a net tax revenue gain to any district.”

21. Explanation: TABOR (Article X Section 20)Major Provisions Limits Options The Legislature Can’t Use the Certain Policy Options for Taxation Art X Section 20(8): Revenue limits. (a) New or increased transfer tax rates on real property are prohibited. No new state real property tax or local district income tax shall be imposed. Neither an income tax rate increase nor a new state definition of taxable income shall apply before the next tax year. Any income tax law change after July 1, 1992 shall also require all taxable net income to be taxed at one rate, excluding refund tax credits or voter-approved tax credits, with no added tax or surcharge.

22. Explanation: TABOR (Article X Section 20)Major Provisions Sets Election Provisions Ballot Titles Focus on Money not Purpose: (Art X Section 20 Sec 3 (c)) Ballot titles for tax or bonded debt increases shall begin, "SHALL (DISTRICT) TAXES BE INCREASED (first, or if phased in, final, full fiscal year dollar increase) ANNUALLY...?" or "SHALL (DISTRICT) DEBT BE INCREASED (principal amount), WITH A REPAYMENT COST OF (maximum total district cost), ...?"

23. Explanation: TABOR (Article X Section 20)Major Provisions Caps Revenue The Legislature Can’t Use the Money it Collects At Current Tax Rates (Article X Sec 20 Sec 7) State revenue can’t grow faster than the change in the rate of CPI + Population Growth State cap is set to the rate of inflation and population growth. County cap is set to the rate of inflation and local growth (% change in real property) School cap is student growth and local growth

24. What are TABOR Rebates? When state revenues (Fiscal Year Spending) exceed a voter approved cap, the Colorado Constitution requires money be refunded to taxpayers.

25. Reasonable Means to Return Money “…districts may use any reasonable method for refunds under this section, including temporary tax credits or rate reductions” -Colorado Constitution—Article X Section 20

26. Legislators decide the method to return money above the cap Currently 3 Mechanisms: Senior Homestead Property Tax Exemption Six-tier sales tax mechanism Temporary reduction in the income tax rate

28. Revenue Subject to TABOR Comes from Taxes and Fees

29. Formula Doesn’t Measure What Government Buys

30. Inflation and population growth are not good measures of spending for governments • CPI-U measures what consumers buy like food and housing but doesn’t accurately measure the cost of providing for the growing cost of services like education, transportation and healthcare. • The formula’s blunt measure of population growth doesn’t acknowledge that some of the fastest-growing populations place a higher demand on government services. Source: Institute on Taxation and Economic Policy “A Closer Look at TABOR”

31. Amendment 23

32. Back to 2000 Residential Assessment Rate 9.74% Broncos were 11-5 under Mike Shanahan

33. Context: Amendment 23 • During the 2000’s, back to back recessions resulted in reductions in state revenue. • Despite growing economy of the 1990’s, per pupil funding for schools in Colorado did not keep up with inflation. This had a lot to go with Gallagher, TABOR, and the School Finance Act.

34. Explanation: Amendment 23 • Adopted in 2000 by voters • Diverted a portion of state income tax to a reserve fund (State Education Fund) for schools • For 10 years, it required per pupil funding to grow by inflation plus 1% • Required growth in per pupil funding (categorical funding and base funding) of at least inflation in perpetuity • Required state to use general funds for K-12 funding as well as reserve funding unless in a recession

35. Response: Amendment 23 • Amendment 23 “protected” K-12 per pupil funding for the first seven years of the decade. • The pressure on the rest of the budget resulted in significant pressure to change A 23

36. Referendum C

37. Amendment 23

38. Context: Amendment 23 • During the 2000’s, back to back recessions resulted in reductions in state revenue. • Despite growing economy of the 1990’s, per pupil funding for schools in Colorado did not keep up with inflation. This had a lot to go with Gallagher, TABOR, and the School Finance Act.

39. Explanation: Amendment 23 • Adopted in 2000 by voters • Diverted a portion of state income tax to a reserve fund (State Education Fund) for schools • For 10 years, it required per pupil funding to grow by inflation plus 1% • Required growth in per pupil funding (categorical funding and base funding) of at least inflation in perpetuity • Required state to use general funds for K-12 funding as well as reserve funding unless in a recession

40. Back to 2000 Residential Assessment Rate 9.74% Broncos were 11-5 under Mike Shanahan

41. Response: Amendment 23 • Amendment 23 “protected” K-12 per pupil funding for the first seven years of the decade. • The pressure on the rest of the budget resulted in significant pressure to change A 23

42. Back to 2005 Broncos were 13-3 under Mike Shanahan Residential Assessment Rate 7.96%

43. Context: Referendum C • Recession of early part of century plus the A23 transfers to SEF forced significant reductions in revenue • Amendment 23 protected K-12 but caused pressure in other part of state budget. • TABOR limit was based on prior year’s revenue which had the effect of locking in recession spending levels (ratchet effect)

44. Explanation: Referendum C • Adopted in 2005 by a statewide vote. • Set aside the state spending formula for 5 years, eliminating the requirement to refund growth in excess of the limit. • Changed the calculation of the formula to eliminate the ratchet effect*. Referendum C Cap

45. Response: Referendum C

46. Impact of Ref C Over $25 B in state revenue retained and used for education, health care and transportation

47. How Does This Affect You? Low taxes--45th in the country You probably pay a larger percent of your income in taxes, on average, than the wealthiest Coloradans Fewer Tax supported services --unmet transportation and education needs Impacts of growth more difficult to address AND YOU HAVE THE RESPONSIBILITY TO DECIDE WHAT’S NEXT

48. We Can’t Fix Our Upside Down Tax System

49. Questions? Colorado Fiscal Institute 720-379-3019 www.coloradofiscal.org