Colorado Initiative 74, property tax reduction; 4 impacts to real estate

In an effort to slow the double digit increase in  taxes, there is a new initiative, 74, that could be on the ballot in November. The proposed constitutional amendment would drastically alter how property taxes are calculated in Colorado. How will this initiative impact real estate owners and prospective buyers. How will prices be impacted. Will this initiative pass?

The state’s title board approved language for the ballot initiative on Wednesday, meaning its backers now can gather signatures from voters. If they succeed, the choice will go before voters this fall.

 Key points of initiative 74:

The underlying goal of initiative 74 is to slow the double digit pace of property tax increases.  As prices throughout Colorado has risen substantially so have property tax bills.   Below are the four key points of the new initiative to slow property tax growth.

1. 3% Cap: property taxes could increase the lesser of 3% or the Consumer Price Index for the Denver metropolitan area (CPI)
2. Base would “reset” upon sale: as a property is sold, the “base” would be adjusted. For example, assume that someone lived in a house for 30 years, when the property is sold, the new owner’s taxes would be substantially higher.
3. Values fall: Annual valuations until property regains “base” amount. Currently properties are revalued every odd number year, going to an annual valuation would be a huge undertaking for county appraisers.
4. Does not impact Mill Levy rates or Property tax rates

What is the impact of initiative 74 on County revenues?

According to a legislative analysis; Under the proposed limit, local governments’ property tax revenues could still grow, but they would miss out on about $1.2 billion of potential new revenues in fiscal year 2023-24, and more going forward.

It is important to note that the revenue “loss” is not actually a true loss.  The reduction is revenue is based on increased skyrocketing values.  Furthermore, there are mechanisms that cities/counties can use to keep revenue stable such as increased mill levies for schools, fire/police, etc…

Recall that in most markets, taxes went up between 20-40% in the last cycle (2021 revaluation) due to soaring home prices.  This law would allow property taxes to increase a maximum of 6% in 2023 (3% for 21-22 and 3% for 21-23).

What will initiative 74 mean for real estate? 4 impacts

1. Existing property owners: If you are a property owner, the new law will drastically reduce future increases. After years of skyrocketing property tax increase and a prospective increase of another 30-40% scheduled for 2023, existing property owners will see a huge benefit on the rate of future tax increases.
2. Real Estate Inventory: if real estate taxes are basically locked with a fixed increase of 3%/year regardless of the increase in value there will be considerably less reason to sell. Let’s say you bought a condo in a ski town for 500k in 2023, and in 2030 that condo is now worth 1.5m.  Your taxes for math purposes would be equivalent to a 650k value (3%*10 years), which is over 50% less than what you would pay under the current tax law.  In expensive markets like Denver or the resort communities, by capping the tax rates many will opt not to sell as any replacement property would cost considerably more with a higher tax basis.  With less people willing to sell, inventory will be reduced.
3. More expensive for new purchasers: New purchases will face substantially higher costs than existing owners as property taxes will be based on the new sales price.  As noted above, someone who has owned a property for a while would pay substantially less in property taxes than a new buyer.
4. Increase property values: With less inventory available due to existing property owners “locking in” low tax rates, property values will continue to increase in desirable markets across Colorado.

Will initiative 74 pass?

If it makes the ballot, the measure will be a test of a new state law that requires initiatives to detail their fiscal effects. Voters often find tax breaks appealing. But the language on voters’ ballots would frame the change as a “reduction of $1.3 billion in property tax revenue” that would affect “counties, school districts, water districts, fire districts,” among others.  A lawyer for the proponents argued that the warning of lost revenue was too broad since various districts will be affected differently due to their different tax laws.

In 2023 existing property owners are poised for tax increases of 30% plus in most markets which will add several thousand dollars a year of increased costs.  With inflation currently outpacing wage gains, there will be a push to lower expenses.  Over the past several years in cities like Denver voters have passed just about any increase in taxes.  With the tide starting to change with an economic slowdown and higher inflation there is a greater than 50% shot that this initiative will pass.

Summary

As voters got rid of Gallagher, which limited property tax increases, they are now faced with substantially higher property taxes which has led to a movement for a permanent cap.  Initiative 74 drastically reduces the pace of future increases to the lower of 3% or CPI.  This new initiative will have large impacts on real estate with inventory falling, prices rising, and existing property owners benefiting.  With a decelerating economy and taxes poised to jump 30% plus in 2023, there is good chance that this initiative will pass.

Additional Reading/Resources:

1. https://leg.colorado.gov/content/concerning-property-valuation-3
2. https://coloradosun.com/2022/04/27/colorado-property-tax-relief-battle/
3. https://www.cpr.org/2022/03/16/colorado-property-taxes-could-be-capped-by-2022-ballot-measure/

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Written by Glen Weinberg, Owner Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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