The big tax change in Colorado’s school finance act, explained

Under the dome, Colorado State Capitol
Under the dome, Colorado State Capitol

To head off a deepening crisis and address longstanding problems in school funding, Colorado lawmakers are trying to find a way to reset school district property taxes around the state. 

This year’s Public School Finance Act, which passed out of the state House and Senate on largely party line votes, includes a complex change that would challenge tax and revenue rules that have governed Colorado for nearly three decades. 

“There is a fundamental structural issue that has to get fixed,” said Speaker of the House K.C. Becker, a Boulder Democrat and sponsor of the school finance act. “We’re getting closer and closer to that point where the entire school funding system is completely collapsing.”

The change wouldn’t cause taxes to go up right away nor would it bring in any immediate new revenue. But it would create a mechanism for the legislature to raise taxes in the future without asking for voter approval and put more of the cost of K-12 education on school districts and their taxpayers.

Republicans objected to the provision — state Sen. Paul Lundeen, a Monument Republican, called it a “Trojan horse” — as a violation of the Taxpayer’s Bill of Rights, a Colorado constitutional amendment that requires a vote of the people to raise taxes. 

“Many of your constituents will perceive this as an effective tax increase without the protective measures put in place by TABOR to have a vote on them,” said state Rep. Colin Larson, a Littleton Republican. “This is an end run around TABOR protections. This is not a solution I support.”

Proponents and opponents alike expect this matter to end up in court. Here’s what this tax change would do and why it matters. 

What problem are lawmakers trying to solve?

Colorado’s school finance system uses state money to equalize per-student funding across the state’s 178 school districts. The state fills in funds that local districts lack, according to a complex formula. When this system was put in place in 1988, local taxpayers covered about two-thirds of the cost of education, while the state picked up the remaining third.

This started to change in 1992, when Colorado voters adopted the Taxpayer’s Bill of Rights. Known as TABOR, it caps how much tax revenue can grow year over year. If a school district expected to bring in money above that cap because property values had increased, it had to reduce its mill levy — or tax rate — to bring in less money.

Around the state, mills started to drop, and the state was on the hook for a greater and greater share of K-12 costs. Today, the old ratio is reversed, with the state covering about two-thirds of the cost of public education and districts picking up the rest.

In 2007, the legislature froze school district tax rates, with the highest at 27 mills, to prevent further erosion of the local share. This left a patchwork of local taxes that bear little relationship to a community’s property wealth. Taxpayers in the mountain resort community of Aspen pay a little more than 4 mills, while those in the working class steel mill city of Pueblo pay 27 mills. Current law bars districts from even asking voters to raise those base tax rates. 

K-12 education now takes up about 36% of Colorado’s general fund, crowding out other priorities from human services to road repair, even as the state funds its schools $3,000 per student below the national average when regional cost differences are taken into account. 

This problem isn’t new, but it’s about to get a lot worse.

For 2020-21, Colorado schools face 5% across-the-board cuts to per-pupil funding, and reduced grant-funded programs. The state is expected to double the annual amount it withholds from schools to pay for other budget priorities to almost $1.2 billion. That legal maneuver will divert about 14% of the education budget.

Next year, declines in commercial property values are set to trigger corresponding tax decreases in residential property, which could cost districts roughly $490 million. The state would have to backfill about half. Lawmakers hope voters make a change that would avoid this drop in revenue, but there’s no guarantee. 

Economists predict the downturn will continue to affect state tax revenue into the 2021-22 budget year, and unlike this year, there likely will not be a major federal relief package to offset the impact. Plus, lawmakers raided reserves and a variety of one-time sources of money to limit cuts in this budget year. That maneuver won’t be available either.

All of this could add up to a gaping hole in K-12 funding that the state will be hard pressed to meet. One way to ease the pressure would be to shift more of the costs back to school districts and local taxpayers. 

How can Colorado do that without getting local voters to agree?

Legislators could change the law to allow districts to ask voters to raise those base tax rates, but as long as the state is backfilling school budgets, voters would have little incentive to pay more. The state could also withhold money to encourage — or coerce — voters to raise local taxes. Past proposals have proved too politically challenging to move forward.

This proposal takes a different approach. It’s based on the idea that school district property taxes never should have gone down in the first place. 

Another provision of TABOR allows voters to let school districts keep all revenue generated by existing taxes, rather than reduce rates or give a refund. All but four of the state’s 178 school districts held such elections — known as de-brucing, after TABOR author Douglas Bruce. But their tax rates continued to go down because a 1994 school finance law modeled on TABOR required it. The Colorado Department of Education interpreted that law as overriding any local election to allow districts to keep revenue and avoid reducing taxes. 

The declines in property tax rates stopped with the 2007 mill levy freeze. The Colorado Supreme Court later upheld the freeze in the 2009 Mesa decision

That’s where this new proposal picks up. It treats past tax rate reductions as a mistake that should now be corrected. The School Finance Act would set mill levies at either 27 mills or the tax rate that was in effect when voters de-bruced, whichever rate is lower. Districts that could cover their basic education costs at a lower tax rate would be set at that level. 

Proponents argue voters already agreed, in some cases nearly a generation ago, to these higher tax rates.

Will my property taxes go up?

Not yet, but possibly in a year or two. After setting a higher tax rate for many districts, the School Finance Act would create a credit that cancels out the increase. That means this change doesn’t bring in any new revenue for the 2020-21 fiscal year. 

But future legislatures could roll back the tax credits.

Becker emphasized that lawmakers might never do this, and tax rates might stay right where they are. But the only reason to put this mechanism into law is to find new revenue and shift more of the cost of K-12 education to local districts.

The rollback of credits could be done incrementally, to avoid a shock to taxpayers, or in a targeted way to ease the impact on districts with low property wealth that would otherwise face unsustainable increases, Becker said.

If the credits were repealed entirely, local taxes would generate an estimated $350 million for K-12 education from somewhere other than the state budget.

Supporters of this change also see it as a matter of fairness.

“Why is it my school district and my taxpayers should have to pay more than others?” asked state Rep. Cathy Kipp, a Fort Collins Democrat who represents the Poudre district, where taxpayers already pay 27 mills. “Someone has to pay to educate the children. We should not expect just a few people in the state to shoulder the burden.”

Is this even legal?

Supporters and opponents both expect the matter to end up in court. 

Richard Collins, a law professor at the University of Colorado, said proponents have a good case, though not a slam dunk. He predicted a split vote if it goes to the Colorado Supreme Court.

“This is a repeat of the Mesa County case in some ways,” he said, referring to the unsuccessful challenge of the mill levy freeze. “The question is whether TABOR requires voter consent, or if it’s a correction of a statute.”

Becker said lawmakers need to press the issue.

“If this is not the solution, I lean on anyone to figure out what it is,” she said. “Every year, we hem and haw that it’s getting worse and worse.”

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