The root cause of the many locally-owned, small business failures I have witnessed in Boulder is simple: the shop-keeper can’t pay the Boulder property tax increases paid as expenses on top of their rent. So, they fail. But rising commercial property values and higher taxes alone are not the reason for these Boulder business failures.
The reason is that Colorado currently taxes commercial property at 3.64 times the residential rate, for the same market value of the property. This means, roughly, for every $1 million in assessed Boulder property value in 2017, a residential building will pay $ 8,000 per year in county property taxes, but a commercial building will pay: $29,200 per year in county property taxes.
Blame the 1982 Gallagher amendment which was intended to protect against rising residential property taxes. Gallagher was placed on a statewide ballot and passed as an amendment to the Colorado Constitution. But now, 25 years later, this state law has created the unintended consequence of killing our small businesses.
The result here in Boulder? Virtually no locally-owned Boulder businesses still exist. Look around, most are gone. These tenants simply can’t afford the property tax increases which “pass-through” to them under their commercial leases. And their leased properties are reassessed every two years, nearly always resulting in a large tax increase they must pay.
The cool and unique Boulder businesses I found when I arrived in 1971 are absent. During the last several years, as a small-scale landlord, I lost two, long-established, women-owned, local Boulder businesses. The buildings they occupied had their taxable values raised by 85 percent in a four-year period by the county assessor. This, combined with the ratchet effect of the Gallagher amendment, ended them for good. And it was not about their rent (before tax), their rent was below market, and was lowered to try to keep these tenants. The fact is that neither the tenant, nor I, could keep up with property value increases of 85 percent in four years, grossly compounded by Gallagher’s nearly 4x multiplier.
Gallagher mandates that 45 percent of the state’s property taxes are collected from residential property, while 55 percent are collected from commercial property. Gallagher further requires that the “assessment ratio” for commercial property be fixed at 29 percent, while the residential ratio is allowed to change to maintain the 45/55 split. This means in 2017 that $1 million of commercial property has an assessed value of $290,000, while $1 million of residential property has an assessed value of $79,600. This 7.96 percent versus 29 percent disparity is what causes the commercial tax to be 3.64 times higher than the residential tax, despite having the same assessed market value.
Gallagher worked just fine when first passed in 1982 because the residential property assessment ratio then was 21 percent, close to the fixed commercial ratio of 29 percent. But during the 25 years since then, immense increases in Colorado’s residential values have caused the residential ratio to plummet to its current 7.96 percent in order to maintain the legally required 29 percent commercial ratio.
Boulder will soon be limited to multinational franchises and international financial institutions who can pay these out-sized taxes. Think Chase-Morgan, Panda Express, KFC, and Staples on every other corner. No disrespect is intended to these successful, mega-businesses, but the concern here is for our small, locally-owned businesses.
Is this a slow-moving tragedy that no one can stop? The Boulder City Council can’t prevent it; they don’t set the property tax rate, and property tax collections comprised only 12 percent ($39 million) of the city’s 2017 budget. Nor can the county assessor end this; the assessor is required by state law to determine the market value of property. And the state legislature couldn’t stop this if it voted to do so; a statewide vote would still be required.
There are two ways I see to stop these failures:
1. Boulder County reduces its budget very significantly, or
2. A new measure is put on the ballot, and voters agree in a statewide referendum to raise their home property taxes by a large amount.
Since neither option appears even remotely likely to occur, are we helpless to prevent locally-owned business failures? I believe that miracles occur every day. But Gallagher looks like it will continue to grind on our small businesses until they fail.
As I see it, our Boulder small businesses are a part of our soul. It breaks my heart, that against our will, we seem helpless to stop them from failing.
Bart Costello is a Boulder attorney, small business and commercial property owner.