Short-Term Rental Tax-Increase

State Senator Bob Gardner (R-Colorado Springs) says he proposed a short-term rentals tax-increase at the General Assembly in order to “start a conversation.” And on that score he succeeded, by creating one of the most heated early debates of the 2020 legislative session.

At issue wasn’t just the question of how to tax the state’s growing number of short-term rental properties, however, but part of a long-running debate over a complicated web of Colorado tax law. And that conversation is far from over, even though Gardner’s bill was shelved, according to those closely involved.

The bill (SB20-109), which was postponed indefinitely by the Senate Finance Committee on February 11, proposed treating short-term rental properties as commercial entities for tax purposes, effectively raising the property tax rate from 7% to 29%, but only if the owners live at the property for only 30 days or less throughout the year. Although the bill died, the Senate Finance Chair assigned a committee with the task of studying ways to address the disparity between residential and commercial property tax rates, leaving the door to future action ajar.

Bed and Breakfasts

“Maybe what we need to do is lower the assessment rate on beds and breakfasts,” Gardner told The Denver Channel on Jan. 23, by way of explaining the impetus behind the bill. “Maybe we need to lower the assessment rate on hotels and motels of a particular size, that would be as good of a solution or better, to me, than taking all short-term rentals and calling them commercial.”

Gardner got the idea for the bill after attending the Colorado county assessors’ winter conference, according to El Paso County Assessor Steve Schleiker. “The purpose of the bill [was] to start this hard conversation at the state level,” Schleiker said. “Bob Gardner came to the assessors’ winter conference. Bob came because he knew we were talking about short-term rentals. [Colorado Springs councilmember] Bill Murray was also there. We all feel this is a state matter rather than a local matter because of the Gallagher Amendment.”

The 1982 Gallagher Amendment & 1992 Taxpayer’s Bill of Rights

Gardner’s proposal is just the latest in a reinvigorated attempt by lawmakers to grapple with the 1982 Gallagher Amendment, which dictates how property in Colorado is valued, assessed, and taxed. The Amendment mandates that 45 percent of taxes need to come from residential properties, and 55 percent from commercial properties (which is referred to often as the 45/55 split).

With the passage of the Taxpayer’s Bill of Rights in 1992, which required voter approval of tax increases, any change in Gallagher’s 45/55 split would also require voter approval, making it a difficult knot to untie, politically-speaking. The rarity of voters approving a residential tax increase means residential property tax rates have continued to decrease, while the commercial rate was frozen at the 29 percent rate.

While Republicans argue that Gallagher keeps Colorado from being as small-business friendly as it needs to be, Democrats use the idea of a broken tax system to bolster the narrative that the state budget is strangled by outdated laws, including not just Gallagher but also TABOR. Many on both sides of the aisle believe repealing Gallagher is the best solution, and a task force weighed alternatives to Gallagher back in 2018.

“The reality is that you don’t have to have an alternative to Gallagher to repeal Gallagher,” State Senator Jack Tate (R-Arapahoe) said. “The commercial rate needs to come down. Gallagher does not affect everyone the same. As a result there are winners and losers, and we need to get together to make it fair for everyone.”

Alternatives to the Gallagher Amendment

Tate and a group of bipartisan legislators were a part of the Alternatives to the Gallagher Amendment Committee back in 2018. Raising the tax rate on short-term rentals to the commercial level was only one of eight proposals, but the argument for a more fair and equitable tax policy definitely made it out of committee.

Schleiker hosted a series of open house forums in which he tried to educate the public on how the Gallagher Amendment and TABOR affect all property owners, from the standpoint of the assessor’s office. “I do know over the last several years the legislature has been looking at how to fix the Gallagher Amendment,” Schleiker said. “We may be over thinking [short-term rentals]. Make bed and breakfasts residential, [or] take it to the Colorado voter. The voters can determine if you provide lodging, your assessment rate should be 13%.”

Schleiker said he does not support the idea of imposing a commercial tax rate on short-term rental properties, especially for senior citizens and the military.

Short-Term Rentals paying Their Fair Share?

“I have a lot of concern converting STR to a commercial rate especially owner-occupied rentals,” Schleiker said. “The gig economy is here, and it’s not going anywhere. I actually think it’s a great thing. The cost of living today is nowhere near where it was 10 or 15 years ago. People’s income is not keeping up with the cost of living, and their coming up with a solution of short-term rentals. I’m guessing a lot of those people are senior citizens [and active duty military].”

A group of Colorado Springs short-term rental owners has long feared that lawmakers would use the emerging new industry as a scapegoat to fix other issues. When the Colorado Springs City Council passed a new ordinance further restricting the operation of short-term rentals, those approving the ordinance framed it as a vote in favor of neighborhoods, businesses, and affordable housing.

Colorado Springs Short-Term Rental Alliance

“Our group is roughly 92% Colorado Springs residents. It’s local people who are using their first home to invest back into the city that they live in,” Ryan Spradlin, co-founder of the Colorado Springs Short-Term Rental Alliance, said. “[Colorado Springs City Council] keeps leaning on this argument that every house that gets used takes a home away from a permanent resident here. Incentivize low-income housing permits rather than penalize local homeowners. You can’t force my hand in a particular direction just because you have a problem in the city.”

Gardner’s proposal may have been intended as a conversation starter, but a Democrat controlled legislature might take this as a gift-wrapped opportunity to hike taxes and dictate any proposals a future committee makes regarding the burgeoning short-term rental industry.

“I think we’re overthinking the Gallagher Amendment, and maybe we need to focus more on the 45/55 split,” Schleiker said. “[We should] De-TABOR the Gallagher Amendment and have a floating rate for both [residential and commercial. Put a ceiling and base on the rates, and revisit every three to four years, fluctuating based on the local market.”

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The Maverick Observer, or “The Moe” as we affectionately call it, is an online free-thinking publication interested in the happenings in our town. We launched in February 2020 to hold our politicians and businesses accountable. We hope to educate, inform, entertain, and infuse you with a sense of community.

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