Demystifying the Property Tax Debate

The Issue

The basics of property taxes are hard enough to understand. But even more difficult is understanding what tools will best support communities confronting housing shortages and climbing property values. Lawmakers must address the lack of affordable housing that impacts people across the state, from our mountain communities to our cities, from the Eastern Plains to the Western Slope. 

Half of Colorado renters are cost-burdened, and homeownership is increasingly out of reach as house prices skyrocket in a tight housing market and the rate of first-time homebuyers plummets. Affordable and stable housing and homeownership are essential for the social and economic well-being of Coloradans. Failing to address these issues will exacerbate existing inequities in Colorado.

Years of fixed ratios for property taxes, under the now-repealed Gallagher amendment, have left commercial assessment rates extremely high, and while Colorado’s residential assessment rates are among the lowest in the nation, rapidly rising home values have burdened low- and middle-income homeowners with new costs. 

However, adjustments to this status quo mean revenue reductions for communities around the state and increased costs for state government. Governments heavily rely on property tax revenue to fund public schools, fire and police departments, local mental health services and more. Increases in one year can often make up from drops in revenue in past years. Additionally, communities need to keep pace with costs like housing prices when compensating service professionals like teachers, firefighters, and EMTs. 

Now, policymakers and stakeholders across the state are contending with different ways to bring property tax relief, while maintaining needed funding for public priorities. Below, we examine key mechanisms to address property taxes that are currently being considered in Colorado. None of the options below are new, and some have rich and complicated histories. 

At this moment, our state legislature is examining options for how to deliver targeted property tax relief and how to pay for that in fair and responsible ways. Here are some of their options.

Different approaches to property taxes

Growth Caps

Responding to rising property values, various groups have proposed ballot initiatives capping the growth of property values. Property value growth caps have been implemented in several states. The results have been disastrous. Beyond causing severe market distortions, these caps lead to significant revenue losses for local governments, since property value growth often exceeds the level set by the caps. Taxpayer inequities and the loss of local control are other common concerns, as seen following the passage of Prop 13 in California. 

Fundamentally, these types of measures attempt to place a hard cap on the growth rate of the value of residential and commercial properties, or on total property taxes paid. Currently, caps of 2-4 percent are being considered in Colorado. These would constitute a severe limitation on tax revenue, as assessed values grew at 21 percent in the last statewide assessment. By implementing an artificial cap, local communities would be locked into a permanent policy solution for a temporary situation. Growth caps further limit our ability to generate revenue for schools, firefighters, and other local services. Additionally, these caps would apply across the board, disproportionately benefiting Coloradans in high-value homes. Further tax breaks for the wealthy are the last thing our state needs.

Luxury property

Luxury property is fundamentally different from most property that is purchased by families to have a place to live. Luxury homes are most often defined by their value, either as a top percentage of the market, or by having a value above a certain cutoff. Treating luxury property differently than the average single-family home is important for tax fairness and to help ensure that local governments have sufficient revenue to fund public investments. 

Luxury property can be used to raise revenue in several ways. One way is by taxing luxury property at a different rate than other single-family properties, or through an additional luxury property tax. Alternatively, fees can be leveraged on luxury property based on its value. Additionally, some states, such as New York and Washington, have progressive real estate transfer taxes that are paid at the time of sale and are tied to a home’s value. Colorado’s constitution forbids new or increased real estate transfer taxes, so instituting proposals similar to New York’s would require amending the constitution. 

There are several creative ways to approach raising revenue from luxury property. Two measures have been proposed in Colorado, and define luxury residential property as residential property valued at over $2 million in 2023, adjusted for inflation moving forward. Given Colorado’s constitution, which treats all property uniformly, changes to the constitution are required to create progressive property taxation. These measures would impact approximately 17,000 luxury homes across the state.

Tax Exemptions or Credits

Often, lawmakers want to target relief to make sure limited resources are going to those that need them most. Exemptions are popular tools that can target populations that have been specifically impacted by rising property taxes. The most common example of property tax exemptions in Colorado is the Senior and Disabled Veteran Homestead Property Tax Exemption. For qualified homeowners, 50 percent of the first $200,000 of an individual’s home value can be exempt from property tax. While imperfect because its qualifications exclude many lower-income and older Coloradans of color, the Senior and Disabled Veteran Property Tax Exemption offers a replicable example for new property tax exemptions.

A targeted approach, where the first tens of thousands of one’s home value is exempted, could make a huge difference for low- and middle-income homeowners. This would also ensure that the already wealthy are not disproportionately benefitting from property tax reductions, while also avoiding reducing revenue to schools and local communities that depend upon property tax revenues.

A similar way to achieve these goals is the use of tax credits. Tax credits reduce one’s tax bill when taxes are due – whereas exemptions reduce taxes owed prior to filing. Credits can also be targeted fairly easily, as seen with the state-level Earned Income Tax Credit and Child Tax Credit. Furthermore, the state can use revenue over the General Fund cap to fund these tax credits. By using tax credits, our state can also tap into TABOR rebates in years when state revenue goes above the TABOR cap. 

Legislators need to ensure that property tax relief is targeted towards the people that need it. Using money that is already going back to taxpayers to achieve that goal, through either tax credits or exemptions, is another tool for Colorado’s lawmakers to consider.

Moving Forward

The big question for the Colorado legislature is how to pay for property tax relief without jeopardizing important public programs that rely on General Fund dollars. One potential idea is to use the revenue over the General Fund revenue cap to target relief to homeowners and renters that need it. The state is projected to send over $1.8 billion next year to taxpayers because of the constitutional restraints in our system. Unfortunately, much of that money will go to millionaires and billionaires who do not need it. Instead of giving more public money to the already wealthy, lawmakers should look at repurposing it for property tax relief for low- and middle-income families across Colorado. While voters might be able to have their say in November on some of the questions above – depending on what qualifies for the ballot – the legislature has the first opportunity. Lawmakers need to focus on delivering property tax relief for the people that need it, while not giving more tax cuts to the already wealthy. The dollars over the revenue cap give the legislature a perfect way to do that.

Property taxes affect many of us, and the legislature needs to hear from you. Wherever you stand, make sure your voice is heard as these complicated issues are worked on by our elected officials.