Taxes & Budget

A Denver district court recently struck down an unauthorized tax increase that cost Colorado taxpayers $117 million last year and would cost Colorado taxpayers  $1.5 billion over the next five years.  These figures alone demonstrate the significance of this ruling to Colorado citizens.  This article summarizes the facts leading up to this legal dispute and the significance of this ruling to Colorado taxpayers.

 In Mesa County Board of County Commissioners v. Colorado Department of Education, a Denver district court ruled that an amendment to Colorado’s School Finance Act – which raised over $117 million in additional property taxes this fiscal year alone without prior voter approval – was unconstitutional under TABOR.  The Department of Education and the Governor (who intervened in the case), are expected to appeal directly to the Colorado Supreme Court. 

 Here is some background to better understand the case:  In 1992, the voters of Colorado enacted TABOR, which, among other things, limits the growth in total revenues a school district in Colorado can receive.  Section 7(c) of TABOR further limits the amount of property taxes a school district can receive in a given year, limiting the growth in property taxes collected in a school district to TABOR’s growth plus inflation limit.

 In 1993, the General Assembly amended the School Finance Act to ensure that the property taxes raised for the local share of “Total Program Funding” for public-school education in each school district not violate TABOR’s property tax revenue limit under TABOR § 7(c).  The General Assembly recodified this provision in 1994 at C.R.S. § 22-54-106(2)(a)(III) (hereinafter the “School Finance Mill Levy Provision”) in House Bill 94-1001. 

 The School Finance Mill Levy Provision, C.R.S. § 22-54-106(2)(a)(III), protected property owners in each school district from the impacts from increased property valuations by limiting the growth in the amount of revenue a school district could receive from property taxes pursuant to TABOR’s property tax revenue limit in TABOR § 7(c).  As it existed before the 2007 amendment, school districts were required, inter alia, to impose

[t]he number of mills that may be levied by the district under the property tax revenue limitation imposed on the district by section 20 of article X of the state constitution. . . .

C.R.S. § 22-54-106(2)(a)(III) (emphasis added).  Under the School Finance Mill Levy Provision, mill levies to be assessed against property owners in each school district were required to be adjusted downward if property values rose to make the local property tax portion of “Total Program” funding revenue compliant with the property tax revenue limit in section 7(c) of TABOR.

 “Total Program” is the total amount of money provided for school districts under the School Finance Act.  It is the amount of money that the State appropriates to cover a range of school finance concerns including pupil count, base funding, personnel costs, at-risk factors, instructional supplies, materials and equipment, and a capital insurance reserve that is used for capital expenditures.  The State’s share paid to the school districts is referred to as equalization funding.

 Shortly after TABOR was adopted by the voters, most if not all school districts discovered that the total revenues they were receiving exceeded their overall TABOR revenue limit under TABOR §§ (7)(b) and (d).  School districts were not accepting all of the equalization funding due them under the School Finance Act as well as monies from other sources such as vending machine concessions, activity fees, and non-federal grants.

 To address this issue, and only this issue, school districts (primarily during the mid-to-late 1990s) conducted de-Brucing elections, permitting them to “collect, retain and expend” “all revenues” they could obtain from whatever sources, including the full equalization funding allotted the districts under the School Finance Act.  The plaintiffs introduced an array of evidence at trial in the Mesa County case, including the school board resolutions sending the de-Brucing measures to the voters and TABOR election notices related to these elections, that showed that voters never intended to approve any change in TABOR’s property tax revenue limit.

 For example, the resolution from the Mesa County District 51 Board, authorizing the 1999 TABOR revenue limitation measure, describes TABOR’s limitations that “will continue to impair the District’s ability to apply for or accept state-funded grants and lottery funds, and to receive other non-tax revenues such as fees collected and interest earned on investments,” and notes that “the inability to accept state grant funding and other non-tax revenue does not reduce the tax burden on District residents.” (Emphasis added).

 In the 2007 legislative session, the General Assembly effectively repealed the School Finance Mill Levy Provision set forth in C.R.S. § 22-54-106(2)(a)(III).  The manner in which this effective repeal was accomplished was by adding language to C.R.S. § 22-54-106(2)(a)(III) (added language appearing in all caps):

(2)(a) Except as provided in paragraph (c) for this subsection (2), for reorganized districts, for 2007 property tax year and property tax years thereafter, each district shall levy the lesser of:

(III) FOR A DISTRICT THAT HAS NOT OBTAINED VOTER APPROVAL TO RETAIN AND SPEND REVENUES IN EXCESS OF THE PROPERTY TAX REVENUE LIMITATION IMPOSED ON THE DISTRICT BY SECTION 20 OF ARTICLE X OF THE STATE CONSTITUTION, the number of mills that may be levied by the district under the property tax revenue limitation imposed on the district by section 20 of article X of the state constitution . . . .

SB 199 (emphasis added).  The effect of adding this language was to, in most districts, freeze the mill levy calculation for each school district (which, pre-amendment, required a downward adjustment when property values increased to make the property-tax portion of district revenues compliant with the TABOR property tax revenue limit under TABOR § 7(c)), thereby raising property taxes from taxpayers in those districts.  Importantly, looking at the text of each de-Brucing ballot measure, not one of them expressly provided for voter approval of any change in the property tax revenue limitation for that school district, although the language of SB 199’s amendment assumes that the measures caused such a change.

 SB 199 caused taxpayers in 115 school districts to pay increased property taxes in this fiscal year, 2007-08, of over $123 million.  Because 30 districts will pay less (approximately $5 million) as a result of SB 199’s cap on mill levies of 27 mills, the net increase in property taxes paid this fiscal year is over $117 million.  The Legislative Council in January of 2008 calculated the estimated impact of SB 199 over the next five years.  The total estimated amount of increased property taxes taxpayers would have paid over this period is approximately $1.5 billion. 

 TABOR § 4(a) requires “voter approval in advance” for a “tax policy change directly causing a net tax revenue gain to any district.”  On May 30, 2008, the district court held that SB 199 constituted such a change and struck down SB 199’s amendment of the School Finance Act because there was no voter approval for such a change in tax policy leading to billions of dollars in increased property taxes in the coming years. 

 The court rejected the defense argument that the local de-Brucing elections constituted voter approval.  The court found that the Department of Education had itself advised the school districts that the de-Brucing elections conducted under its supervision did not amend TABOR’s property tax revenue limit, that the de-Brucing elections did not involve TABOR § 7(c) but rather TABOR § 7(b), and held that voters never approved a change in the manner of calculating their property taxes.

 The court declined to order the refund of the wrongly collected $117 million at this time.  The court suggested that this issue could be addressed by the Colorado Supreme Court on appeal. 

 The parties are expected to join in asking the Colorado Supreme Court to rule on the case expeditiously.  If the decision is upheld, property taxpayers in Colorado will save billions of dollars in property tax collections that would have been taken from them without ever voting on such a huge tax increase.

Richard Westfall is a Partner at the law firm of Hale, Friesen LLP and is the lead attorney challenging the tax increase in Mesa County Board of County Commissioners v. Colorado Department of Education.