Gov. John Hickenlooper on Tuesday asked Colorado lawmakers for a 50 percent increase in sales taxes on recreational marijuana starting July 1 to send an additional $42 million to public schools.
The Democrat wants to increase the recreation sales tax on pot to 12 percent effective July 1, the same day the levy is scheduled to fall to 8 percent. The current tax rate is 10 percent.
The move is part of his plan to fill a $135 million shortfall in school funding caused by a constitutional provision that mandates a cut in residential property taxes — a primary source of money for local classrooms.
In addition, Hickenlooper proposed to cut the senior homestead property tax exemption in half, freeing another $68 million for schools. The shift would allow seniors to claim a tax break on the first $100,000 in their home value, rather than the first $200,000 allowed in current law.
Both moves would require approval of the Democratic-controlled House and Republican-led Senate.
The shortfall was triggered by a little-understood provision of the state constitution known as the Gallagher amendment. Under Gallagher, residential assessed values can make up no more than 45 percent of the state’s overall assessed value. That means that when home values rise at a faster clip than that of commercial properties, as they have in recent years, it can trigger a statewide cut to residential tax assessments.
Since 2003, the assessment rate for residential properties has been unchanged, at 7.96 percent of market value. But next year, according to a study released Friday by the Department of Local Affairs, that’s projected to drop to 6.56 percent.
That’s left local governments that rely on property taxes bracing for cuts — in some cases, residential tax collections could drop by as much as 18 percent. And it’s left the state with a funding problem of its own. The state is required by law to replenish the cuts to county schools.
“One part of the constitution lowers property taxes for schools and shifts the burden to the state, and another part of the constitution says the K-12 school budget has to grow,” said Henry Sobanet, the governor’s budget director. “This is a prime example of why we call our budget rules a ‘fiscal thicket.’ “
Still, the shortfall isn’t as bad as previously feared. The governor’s office had previously projected a $170 million cut to school funding. But larger-than-expected growth in the the tax base has reduced that to $135 million, the governor’s office said in its request.
Most years, Gallagher doesn’t come into play; this will be the first cut triggered by the amendment since 2003. But when it does, it can have cascading and long-term consequences for state and local governments alike. Because of the Taxpayers Bill of Rights, the rate can’t go back up without voter approval, so historically when Gallagher has forced a cut, it’s been here to stay — even if the ratio tips in the other direction in the future.
The proposal to increase the pot tax a year after the lawmakers approved a tax cut is sure to face resistance. And earmarking the new revenue for schools would represent a significant expansion of how pot tax money is spent.
The current law directs most of the money to marijuana-related expenses, such as drug prevention and treatment, but it does allow lawmakers to direct it other purposes.
Although Hickenlooper’s proposal would shore up some of the state’s obligations for education, it would do little to help other governments affected by the cuts. Counties, cities and special districts that provide services such as law enforcement, fire protection and sanitation all rely on property taxes to varying extents.
A forecast from the Colorado Legislative Council found that the cuts are expected to hit places outside the Denver area the hardest.