Ask The Indy: Breaking down the tax changes in Amendment 73

A Colorado Independent reader, who wished to remain anonymous, asked how the property tax adjustments in Amendment 73, the school funding measure, would work.

The short answer: It’s complicated. But we’re going to break it down.

Amendment 73, a measure backed by the campaign committee Great Schools, Thriving Communities, is projected to raise $1.6 billion for education in the first year. Most of that money would go directly to school districts for everything from preschool and English Language Acquisition programs to special education classes.

The amount would be a 17 percent increase over the $9.7 billion Colorado schools received in total education funding last year, according to the legislature’s joint budget committee. That nearly $10 billion includes not just state funding, but cash from fees, as well as federal and local funds. The state kicked in about $5 billion of that $10 billion total.

If it passes, the money Amendment 73 raises for schools would come from three groups: Homeowners, who may pay more in property taxes; corporations, which would pay a higher tax rate; and, paying by far the largest share, individuals and joint filers who make more than $150,000 a year. High earners would see their state taxes go up by a certain percentage depending upon their incomes.

Teachers unions support the measure as long-overdue help for struggling schools. They point to studies that show Colorado teachers earn less than their national counterparts and that Colorado’s per-pupil spending falls under the national average. As of Oct. 29, various groups and individuals backing the measure had spent a  total of about $1 million promoting the measure.

Conservative and libertarian groups oppose Amendment 73, arguing state spending on education is the highest it’s ever been and that more spending does not necessarily equate to greater academic achievement. Opponents, both groups and individuals, have spent a total of nearly $2 million fighting the measure.

State Treasurer Walker Stapleton, the Republican candidate for governor, has said he is “adamantly opposed” to the amendment, while Democratic nominee Jared Polis has not taken a position.

Related: Where Colorado’s candidates for governor stand on some of the big ballot questions

If you want to know how the amendment would work, keep reading. If you just want the bottom line as a taxpayer, the Colorado School Finance Project has a handy Amendment 73  impact calculator. Plug in your address, home value and individual or joint-filer income and it will provide an estimate of how much more or less you might pay in taxes and how much your local school district will gain.

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Anonymous, our inquisitive reader, wanted to know specifically how the property tax changes would work. Here goes:

It’s worth remembering that you don’t pay property taxes based on the current market value of your home, but rather on a percentage of the assessed value (which is based on sales of comparable homes). That percentage is called the assessment rate, and it has historically been adjusted by the state legislature every other year.

This is where things start to get complicated. Back in the early ’80s, the Gallagher Amendment required the majority of property taxes come from nonresidential property. So, the assessment rate for residential property is always set lower than that for nonresidential property — it’s supposed to stay at a 45 to 55 percent ratio. The nonresidential rate was fixed at 29 percent. The residential rate fluctuated to keep the ratio in balance. In 1983, after Gallagher was adopted, the residential assessment rate was 21 percent, which is kind of unbelievable by today’s standards in Colorado. But as housing prices rose, the residential assessment rate was adjusted downward — again to maintain the ratio. The Colorado Fiscal Institute has a great video explaining how this worked. As local tax money to schools dried up, the state backfilled from the general fund.

Things got tougher in 1992 with the passage of the Taxpayer Bill of Rights, which put limits on how much the state can raise and spend and made any tax increases — including the assessment rate — subject to voter approval. The practical impact is the residential assessment rate, once adjusted downward, can’t be raised again without voter approval. Property tax money, including that for schools and fire and drainage districts, withered. 

Amendment 73 seeks to stop the downward ratcheting of the residential assessment rate for school funding by setting it at a fixed 7 percent. For everything else that might reap the benefit of property taxes, the assessment rate will behave as it usually does, adjusted every other year to maintain the ratio, but never increasing. 

Last year, the residential assessment rate was 7.2 percent. Next year, it’s projected to drop to 6.1 percent.

So, let’s say you have a $360,000 home which was the typical single-family home value in Denver last year. At last year’s 7.2 percent assessment rate you would have paid property taxes on $25,920, a fraction of the market value. Next year’s projected 6.1 percent assessment rate would have meant you would pay taxes on on $21,960. A fixed 7 percent has you paying taxes on $25,200.

But the assessment rate isn’t the only thing that affects what you will pay in property taxes. There are two other variables in the equation: the market value of your home and your local tax rate.

So, the general answer to whether you will pay higher residential property taxes is the wildly unsatisfying, “it depends.”

And, what you may ask, happens with nonresidential assessment rates? They will be split in two, with the rate for school districts dropping to 24 percent and everything else remaining at the current fixed 29 percent.

Fire districts, also caught in the Gallagher-TABOR bind, are now looking for their own workarounds. More than 50 districts are asking voters to grant them an exemption so they don’t have to keep cutting their budgets.

Colorado has some of the lowest property tax rates in the nation. In 2016, the Tax Foundation, a non-profit educational think-tank, ranked it seventh lowest in terms of its effective property tax rate, which is the percentage of your home’s actual value that you pay in property taxes.

All this said, the financial engine that drives Amendment 73 is not property taxes. No, the big money would come from the increase in income taxes on high earners — an estimated $1.4 billion in 2019.

What’s going to happen to my income taxes?

Colorado currently has a flat tax rate of 4.63 percent. If Amendment 73 passes, new tax brackets would be created for individual or joint household earners making more than $150,000 per year.

Here’s what Amendment 73’s brackets would look :

The new tax brackets would affect 8 percent of individual and joint income tax filers, according to the Legislative Council.

Related : Amendment 73: Understanding the tax increase for education on your Colorado ballot

The corporate tax increase would generate another $229 million. That tax would go up from 4.63 percent to 6 percent, according to the Legislative Council. It will be applied to all corporations, except for so-called S-corporations or small, personal corporations.

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How much money does education need?

An assessment of all Colorado public schools completed in 2009 showed that there were $13.9 billion in construction needs. Another assessment began in 2016 but is only 7 percent finished. Still, it found a 28 percent increase in construction needs from 2009.

The legislature is required by the Public School Finance Act of 1994 and Amendment 23 of the Colorado constitution to give districts funds based on a set formula that is tied to inflation, the number of pupils and cost of living within the district. But after the Great Recession, lawmakers could not sustain those funding requirements for education and lowered the formula to balance the budget, according to the Legislative Council.

The legislature did not cut actual per pupil funding for education, which has increased every year since it was added, but had schools been fully funded based on formula projections, they would have received an additional $6.6 billion over the past nine years, according to the Colorado School Finance Project.

Linda Gorman, an economist at the Independence Institute, points out that more spending on schools has not been necessarily shown to impact academic achievement.

“Some sort of theoretical cut in what you’d like to spend, is not the same as cutting actual spending,” Gorman said.

Amie Baca-Oehlert, president of the Colorado Education Association, said teachers in Colorado are being forced to work two or more jobs to sustain themselves because of their salaries. Low salaries have contributed to a teacher shortage as well, she said.

“Districts cut things like mental health support, school counselors, social workers, psychologists. Many of them cut things like art, music, and P.E. or afterschool activities like sports. It’s just all over the map the things that have been cut,” she said.

Colorado’s per pupil funding average, projected for fiscal year 2018-2019, is $8,137, according to the legislature’s Joint Budget Committee. The national average in 2015 was $11,392, according to the U.S. Census Bureau. Spending varies widely by state, with some states spending upwards of $20,000 per student compared to below $7,000 in others.

Colorado had the fourth-lowest average starting salary for teachers in the 2016-2017 year, at $32,980, according to the National Education Association. The average salary for a teacher in Colorado is $52,000, however teachers in the majority of districts earn below the average, according to CDE data.

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