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
The structure of our talk is as follows: we give you the context and history or each of these items on the timeline. We explain what each item did. And then you’re in the position to understand the response or ramifications of each and the mischief that the interactions between these cause.
2005
2009
1982
1992
2013
2017
2000
2007
2011
2016

4. Three basic pots of money in the State budget
$32.5 billion total budget in FY
Federal Funds
$8.75 billion
General Fund
$12.2 billion
3 basic pots of money in the entire state budget: federal $$$, cash funds, and taxes
Cash Funds: are the specific fees raised for specific purposes---think motor vehicle fees when you register car every year.
Can’t raise a fee on a farmer and use it for “general purposes” that’s what the General Fund is for.
General Fund is the pot of money that our elected officials have the most discretion over.
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
About 30 percent comes from the state sales tax. (that’s the 2.9% states sales tax you pay on items subject to sales tax in CO).
Most of the General Fund comes from individual and corporate income taxes.
Think the GF as the collective pot of money that Coloradans throw their tax dollars into.
Corporate Income Taxes
FY $12.6 billion “other” is insurance premium taxes and a few others

6. What does the money buy? FY2019-20 Colorado General Fund $12.2 billion
Transportation
Courts
Other
Public Health
Human
Services
Schools
Colleges
Public Safety
Here is what those collective tax dollars buy: K-12 is the biggest piece, followed by healthcare (most of that spending is for Medicaid).
Healthcare FY
Colorado General Fund $12.2 billion

7. Constitutional Policy

8. Gallagher

9. Residential Assessment Rate
Back to 1980s….
Local Share
State
Share
K-12 Funding Mix
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
set by the state
by property category
—e.g. residential, commercial
established at
local district level
X 7.2%
$350,000
= $25,220
X 80 mills = $2,018

13. x 21% X 29% Residential Assessed Value Non-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. Residential Assessment Rate
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
Constrains the Legislature’s Choices
Caps Revenue
Limits Options
Sets Election Provisions
TABOR was 1,900 words. Nobody read it. A lot of people haven’t even ever heard of it. They think it’s a shopping mall. If they know one thing about it, it’s that that it requires them to vote on taxes.
It also says we can’t have certain kinds of taxes, graduated income tax, statewide millage.
Itr also sets election provisions on how we vote on taxes and how the ballot language must appear. Four horsemen: “SHALL TAXES BE RAISED”
TABOR limits how big government spending can grow. If it grows faster than the cap allows, we have to issue tax rebates.

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.”
If people do know what TABOR is, this is generally the only provision of TABOR that they know about. “They have the right to vote on any tax increase.”

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.
33 states have a graduated income tax structure that helps capture more revenue from upper income earners. It also helps balance out the regressive nature of the sales tax. (10 states have a flat tax and 7 states don’t have an income tax).

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), ...?"
It’s the reason why we had to vote on marijuana 3 times.

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
"Local growth" for a non-school district means a net percentage change in actual value of all real property in a district from construction of taxable real property improvements, minus destruction of similar improvements, and additions to, minus deletions from, taxable real property. For a school district, it means the percentage change in its student enrollment

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
In the past there was a long list of TABOR rebate mechanisms ranging from foster care tax credits, to motor vehicle registration fees, tax credit for rural healthcare providers, pollution control equipment purchase credit…..

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
6-tier divides taxpayers into categories depending on their income levels and distributes rebates to each category. This is a progressive way to return dollars since lower income/ middle income get a higher portion of their income back.
Reduction in income tax rate is very beneficial for upper income earners. Think Von Miller.

28. Revenue Subject to TABOR Comes from Taxes and Fees

29. Formula Doesn’t Measure What Government Buys
The broad-based measure of the CPI calculates the prices of a bunch of items. This doesn’t accurately reflect what government needs to buy. In fact the stuff government buys tends to have its prices grow faster than the broad-based measure that TABOR dictates in the formula.
The a grocery cart of goods that contains phone bills, shirts, toothpaste, hair cuts, medical services, plane tickets, food. The CPI measures the prices of all of them.
But the grocery cart that government buys is roads, teachers, healthcare. They all grow faster.

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.
The broad inflation variable doesn’t allow the state to keep up with the growing costs of services. The state uses a Consumer Price Index for All Urban Consumers (CPI-U) to measure inflation. The CPI-U is an index designed to measure changes in the cost of goods and services that consumers buy—like housing, food, and transportation. The CPI-U does not, however, accurately measure the cost of providing state services, things like education, infrastructure, and medical care.
First, the formula’s blunt measure of population growth doesn’t acknowledge that some segments of the population grow much faster than the overall population, and that in many cases the fastest-growing populations place a higher demand than average on government services. Colorado’s 65-and-older population, for instance, is projected to grow 132 percent between 2012 and 2040, compared to the total population which is projected to grow around 50 percent over this time. The state’s school-aged population—those under the age of 18—is also projected to grow faster than the overall population(about 55 percent between 2012 and 2040)ii. With a significant component of the state budget being spent on these two populations (medical care and K-12 education accounted for 64 percent of general fund spending in Fiscal Year 2012), this differential in population growth has considerable fiscal implications that the TABOR formula ignores entirely.
Source: Institute on Taxation and Economic Policy “A Closer Look at TABOR”

31. Amendment 23

32. Residential Assessment Rate
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. Residential Assessment Rate
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. Residential Assessment Rate
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
What did Ref. C do- 5 year time out, rewrote formula for computing revenue cap which addressed the ratchet effect (prior years spending vs. prior years limit)

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