Amend. 32: A reasonable compromise
Let’s start with a mind picture. Inflate a balloon, the kind that’s long and thin. Tie a knot in it. Now squeeze the center with your hand and watch the ends expand. Squeeze it with another hand. Now, ask a few friends to join in and squeeze with their hands. With each squeeze the balloon deforms more and more. POP! Oops. Guess it got over-squeezed.
Congrat-ulations! You are now an expert on state finance.
Tax policy is a lot like fashion trends. Over the years one idea seems to percolate into the public consciousness, creates a surge of electoral interest, and often leaves a legacy of unintended consequences.
In the past couple of decades these tides of fashionable tax ideas have washed over Colorado in evenly spaced waves.
In 1982 it was the Gallagher Amendment that served as a limit on property tax increases.
In 1992 it was TABOR (Taxpayer Bill of Rights) that put a lid on tax increases.
And in 2000 it was Amendment 23, which directed more funding toward education.
Individually, each of these initiatives had compelling reasons for attracting a voter majority. However, as the mechanisms of each of them interact, they’re squeezing the balloon of Colorado’s economy in ways that may very well drive our economy toward the same shell-shocked implosion that California is experiencing.
The Gallagher Amendment (which is what Amendment 32 is about) was designed to protect homeowners who were seeing a rapid rise in the value of their property from being hammered with large tax increases.
It created a formula that divided the tax burden between businesses and homeowners. The formula was a 55-45 split with the idea that commercial property taxpayers would pay the larger share.
What the amendment did not anticipate was that a lot more homes would be built as Colorado grew in the 1990s. This explosion of home-building spread the property tax out across more residences and had the net effect of lowering the average homeowner’s tax bill. However, commercial building wasn’t growing as fast, and the business share of property taxes increased.
Over the years that increase has been significant: commercial property owners pay a whopping 356 percent more per square foot on property tax than residential homeowners.
The way this trend is continuing, as a homeowner the good news would be that your property taxes might continue to fall. But, remember our balloon? A hard squeeze in one place is going to cause a bulge in another, and it’s not only the Gallagher squeeze, but TABOR and Amendment 23 squeezes that will increase their grip on Colorado’s budget balloon.
The allure of lowering our residential property tax bills sounds very appealing, but if even more tax burden is shifted over to the commercial side, the desirability for businesses to expand or relocate to Colorado will diminish.
That can mean lower sales tax and income tax to the state. And with Amendment 23’s constitutional requirement to fund education more aggressively (which the majority of property taxes are earmarked for) those additional funds will be coming from the general budget and sucking dollars out of other critical service areas.
Sooner or later it’s not hard to envision our state leaders coming back to us with a request to raise sales taxes, income taxes, or both. California, here we come.
Voting yes for Amendment 32 will prevent this dangerous flaw in the Gallagher Amendment from creating a toxic interaction with TABOR and Amendment 23.
Passing Amendment 32 will freeze a homeowner’s property tax assessment at 8 percent, but I’m not going to kid you. By freezing the assessment at 8 percent (it’s currently floating downward at 7.96 percent), the property taxes on your home will probably go up. For an average home that would be about $6 this year and $119 in five years. This is because it’s a reasonable assumption that your home’s value will increase over time.
You’ll hear critics say that this freeze is a break for business. I honestly don’t see it that way. As a business owner, I always understood that business carried a higher obligation.
For instance, a commercial telephone line is no different from a residential line except it costs nearly twice as much. That built-in subsidization helped provide universal phone service. Employers not only pay more in property tax, but they also underwrite Social Security payments and often help underwrite health insurance.
For larger corporations, the increasing burden of a growing property tax is probably manageable. However, that burden poses a much more ominous challenge to small- and medium-sized businesses. And it is these businesses that are the true engine of our state’s economy.
The Gallagher Amendment is a two-edged sword that swung one way, can have a negative effect on business growth, and swung the other way, can lead us to a state fiscal crisis.
Some critics of Referendum 32 say that the real issue is that Gallagher, TABOR, and Amendment 23 all need to be adjusted in a unified effort. You know something? They’re absolutely right, but they’re misguided in assuming that we live in a perfect world where every voter has a passion for economics.
In the real world, the one you and I live in, we’ve got a lot better chance of hitting a few singles instead of swinging for the fences. Even Douglas Bruce, the father of the TABOR amendment, has concluded that Amendment 32 reasonably addresses a tax reduction plan run amok. If politics make strange bedfellows, then ballot box economics creates bad shotgun weddings. Voting yes for Amendment 32 will hopefully buy us a little time to better figure out how to avoid a looming train wreck in state funding.
(Note: In preparing this column I reviewed quite a few policy and opinion articles. The most fascinating article, even to a non-economist like me, is a 203-page state study that in remarkably easy-to-understand language and graphs, provides a great explanation of state finance. It’s called: “House Joint Resolution 03-1033 Study: TABOR, Amendment 23, the Gallagher Amendment, and Other Fiscal Issues.” If you would like a copy, send me an e-mail and I will forward it to you.)
Don Cohen is a Colorado native, entrepreneur and former high-tech CEO. He is executive director of the Vail Valley Economic Council and can be reached by e-mail at firstname.lastname@example.org