HomeMy WebLinkAboutMemo - Mail Packet - 1/31/2017 - Memorandum From Travis Storin Re: Gallagher Amendment And 2017 Residential Rate AdjustmentsProperty taxes are computed as:
Actual Value × Assessment Rate × Mill Levy = Property Tax
To maintain the 45/55 relationship between residential and non-residential properties, the
variable in the above equation that gets adjusted is the Assessment Rate for residential property.
This process is approved by the General Assembly and managed by the Colorado Division of
Property Taxation. The Assessment Rate for non-residential property, meanwhile, remains a
static 29% under the provisions of the Gallagher amendment. This “Gallagher Adjustment” has
taken place nine times since the adoption of the amendment. At Gallagher’s inception, the
Assessment rate was 21% for residential property. By 2016 this rate fell to 7.96%. This means
that $1 million in residential property is assessed at $79,600 while $1 million in non-residential
property is assessed at $290,000.
Table 1 below displays the relationship of residential assessment rates to non-residential rates
subsequent to the passage of the Gallagher Amendment:
Table 1:
Enacted Assessment Rates
Years Residential Non-Residential
1983-1986 21.00% 29.00%
1987 18.00% 29.00%
1988 16.00% 29.00%
1989-90 15.00% 29.00%
1991-92 14.34% 29.00%
1993-94 12.86% 29.00%
1995-96 10.36% 29.00%
1997-98 9.74% 29.00%
1999-2000 9.74% 29.00%
2001-02 9.15% 29.00%
2003-04 7.96% 29.00%
2005-06 7.96% 29.00%
2007-08 7.96% 29.00%
2009-10 7.96% 29.00%
2011-12 7.96% 29.00%
2013-14 7.96% 29.00%
2015-16 7.96% 29.00%
Gallagher adjustments are only triggered when appreciation in residential property values takes
place at a faster relative pace than nonresidential properties. Colorado’s high-growth housing
market combined with recent trends in the oil and gas sector have created conditions where a
Gallagher adjustment downward from the current 7.96% is highly likely for the 2017 tax year
(2018 collections).
This periodic Gallagher adjustment effectively dampens growth in, or even decreases, the
property tax collections of local governments in that the full increase in residential valuations is
not passed directly to taxpayers. Further, nonresidential properties effectively pay a considerable
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tax premium when compared to residential properties, and this gap widens with each Gallagher
adjustment. Statewide commercial property accounts for approximately 25% of total property
value but makes up 55% of the assessed value.
Finally, the Taxpayer Bill of Rights (TABOR) amendment of 1992 intersects with the Gallagher
amendment in an impactful way. While the Gallagher amendment results in automatic reductions
in the residential Assessment Rate, the opposite situation where there is higher appreciation in
non-residential property vs. residential property do not trigger an automatic increase to the rate.
This is due to TABOR provisions that require any tax increase to have voter approval.
Recent Events
On January 13 the Colorado Department of Local Affairs (DOLA) published preliminary
findings of the Residential Assessment Rate Study used for determining the target residential
assessed value percentage and the necessary residential Assessment Rate. A final report is
submitted in April of 2017 to the General Assembly, and the Assembly will select the new rate to
enact. The preliminary study finds a target Assessment Rate of 6.56% and a target residential
assessed value split of 43.79%. Historically this preliminary study’s Assessment Rate has been
highly correlative to the rate that is ultimately enacted by the General Assembly. A link to this
study is included at the bottom of this memo.
On January 14 The Denver Post published an article outlining several of the fiscal tensions the
Gallagher Adjustment may have across the state. As the adjustment is done at a statewide level,
communities outside of the Front Range Urban Corridor are disproportionately affected given the
concentration of growth that has taken place in that part of the state. In some locations property
tax collections are expected to drop despite increases in valuations. A link to this article is
included at the bottom of this memo.
Implications for the City
The City reported $20.0 million in property tax collections in 2015. The City remits 67.5% of
this to Poudre Fire Authority by IGA and the remaining 32.5% goes to support ongoing services
in the General Fund.
All else equal, the potential Gallagher Adjustment from 7.96% to 6.56% would represent a
17.6% decrease in residential property tax collections. However, through staff communications
with the Larimer County Assessor’s Office and review of the DOLA study, 2017 residential
valuations are expected to grow at a higher rate than 17.6% vs. the 2015 valuations (two-year
assessment cycle), resulting in an estimated overall increase in assessed value of 5%-8% in 2017
(2018 collections year) in spite of the potential Gallagher Adjustment.
While this estimate is early and subject to change and the Assessor’s Office has not completed its
2017 reappraisals, it is unlikely that the City would experience a decrease in 2018 or 2019 in
property tax collections. For reference, the 2017-2018 adopted City budget assumed 2% growth
per year in property tax revenues and as of now this estimate appears to be appropriately
conservative. In short, this does not impose an immediate challenge to balancing the City budget.
However, the implications to longer term financial planning are very serious and will likely
require voter intervention at some point. Fort Collins would need to see increases in valuations in
excess of the periodic Gallagher reduction in order to stay net-neutral in property tax revenues.
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In effect, this implies that Fort Collins residential valuations would need to appreciate faster than
the rest of the state’s residential markets during times in which residential properties are
increasing in value faster than commercial.
Supporting Attachments:
http://www.denverpost.com/2017/01/13/tax-soaring-home-values-colorado/
https://www.colorado.gov/pacific/dola/residential-assessment-rate
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