by Julie Pelegrin
Recently, every real property owner in Colorado received a property tax bill for 2016. The bill states the actual value of the real property, the assessed value, the number of mills levied by the various local governments with jurisdiction over the property, and, finally, the amount owed. For many persons, their annual property tax bill is one of life’s great mysteries. Who collects this money? How do they calculate the property tax owed? How is real property valued for taxation? What is the Gallagher amendment everyone talks about, and how does it affect property tax? And what is a mill, anyway?
First, the easy part: A primer on property tax.
Counties collect property tax for themselves and on behalf of the other local governments or special districts that are located within each county. When you look at your bill, it will probably have a mill rate for the county, the municipality, the school district, and maybe one or more special districts in which your property is located.
A mill is one-thousandth of a dollar, which means one mill is equivalent to one-tenth of a cent or $0.001. The mill rate is the total number of mills that a local government – or multiple local governments – levies against the assessed value of a piece of property. To calculate your property tax bill, the county treasurer multiplies the assessed value of property by the total mill rate and divides the product by 1,000.
Every two years, each county assessor determines the actual value of all taxable real property located in the county. Under the Taxpayer’s Bill of Rights (TABOR), the county assessor must determine the value of residential property solely by using the market approach to appraisal, which is based on recent sales of comparable properties. The assessor uses market value and other methods to determine the actual value of other taxable real property.
But your property tax bill isn’t based on the actual value of your property; it’s based on a percentage of the actual value, which is called the assessed value. The percentage is called the valuation for assessment ratio, commonly referred to as the assessment rate. There are actually two assessment rates. The assessment rate for residential real property is 7.96% for the 2015-16 property tax year, and the assessment rate for all other taxable real property for every property tax year since 1985 is 29%.
This is how your property tax bill is calculated. The county assessor calculates the assessed value of your residential real property by multiplying the actual value of your residential real property by 7.96%. Then, the county treasurer multiplies the assessed value of your property by the number of mills levied by the local governments where your property is located and divides the product by 1,000, and – voila – you have your property tax bill.
So here’s the hard part: The Gallagher Amendment.
In 1982, the General Assembly referred a constitutional change dealing with property tax to the statewide ballot; the change passed at the general election held that fall. Part of that referred measure is called the Gallagher Amendment, and it controls the assessment rate for residential real property.
The Gallagher Amendment directs the General Assembly to review the assessment rate for residential real property every other year, starting in 1985. The General Assembly was required to look at the total statewide assessed value of all taxable real property in 1985 and calculate what percentage of that total came from taxable residential real property. And for every year since then, the General Assembly must make sure that the percentage of the assessed value of taxable residential real property relative to the assessed value of all other taxable property remains essentially the same.
Part of the constitutional change passed in 1982 set the initial residential real property assessment rate at 21%, subject to subsequent adjustments by the General Assembly, and fixed the assessment rate for all other taxable real property at 29%, with no authority for adjustments. So, to maintain the percentage of assessed value of residential real property relative to the assessed value of all other taxable real property, the General Assembly can only adjust the assessment rate for taxable residential real property. And the adjustment usually lowers the residential assessment rate.
Since 1985, the assessment rate for taxable residential real property has dropped from 21% to 7.96% to keep the proportion of statewide assessed value of taxable residential real property to the assessed value of all other taxable real property at about 46% to 54%.
What’s the real impact of decreasing the assessment rate for residential real property?
A lower assessment rate for residential real property usually means that homeowners and landlords pay less property tax, but it generally has a negative impact on property tax collections by school districts and other local governments (the state does not collect property tax). Most school districts have more residential real property than other real property. So, as the residential assessment rate has decreased, the amount of property taxes that these school districts and other local governments collect has decreased, because the school districts and local governments can’t raise the mill levy to offset the rate decrease without voter approval under TABOR.
Also, in some years, the assessment rate for residential real property should actually have been increased to maintain the proportion of assessed value, but increasing the assessment rate requires voter approval under TABOR. So, in those years, the assessment rate for residential real property has remained unchanged and the amount of property tax revenue that the school districts collect is lower than it otherwise would have been if the residential assessment rate had increased.
All of this means that the state must use more state revenues to pay the costs of public education. It also means that the amount of property taxes collected statewide by local governments has generally decreased, which means the state pays for more services that would otherwise be provided locally.
So, while the Gallagher Amendment helps keep your residential property tax bill down, it decreases the amount of property tax revenues available to pay for local government services and increases the demands on the state budget.