Addressing Housing (Un)Affordability in Colorado Through Targeted Tax Policy
The Rent is Too Damn High
On average across the state, a person must work 92 hours a week at minimum wage to afford a two bedroom apartment at the statewide average Fair Market Rent, which is about $1,500. For comparison, spending around $800 on rent is considered affordable for a Coloradan who earns 30% AMI––that’s almost half of the Fair Market Rent rate. Across Colorado, people on fixed incomes, working people, and their families struggle to afford to remain housed. Essential service workers, teachers, and nurses often cannot afford to live close to where they work. A single mother earning an average teacher’s salary in Colorado cannot afford to house and support her family without a second job.
The hourly wage needed to afford a two-bedroom apartment at Fair Market Rent and work a 40 hour week is $28.94, but the average hourly renter wage in Colorado is $23.55. A $1,225/month rent is considered affordable for someone earning around the state’s average renter wage of $23.55/hour, compared to the average Fair Market rent of $1,505/month for a two bedroom apartment. Affordability is defined as spending no more than 30% of a household’s income on housing costs. Colorado ranks eighth in the nation for most unaffordable housing costs, according to research from the National Low Income Housing Coalition.
Across Colorado Counties, the Cost of Housing Outpaces Wages
The affordable housing shortage is more severe for Coloradans with low incomes: for every 100 renter households, there are only 29 housing units available and affordable for Coloradans with extremely low incomes (at or below 30% local AMI). There is a shortage of over 114,000 affordable housing units for Coloradans within this income range and a deficit of more than 142,000 units for those with very low incomes (between 31-50% AMI), compared with a shortage of 27,000 for those with low incomes (between 51-80%). To restore the healthy balance between supply and demand in the housing market, Colorado’s State Demographer estimates that over 485,000 additional units must be added to the market by 2030.
Over 1 out of 3 Coloradans are renters, and half of renters are cost-burdened, which means a household spends more than 30% of its income on housing costs. Nearly one in four Colorado renter households are severely cost-burdened, which means a household spends more than 50% of its income on housing costs. Compared to people with middle incomes, Coloradans with low, very low, and extremely low incomes are increasingly more likely to be cost-burdened or severely cost-burdened.
When developing affordable housing policy, it’s important to target Coloradans with the lowest incomes who face the most severe shortage; simply adding to the housing supply is not enough.
Options in the Tax Policy Toolbelt to Address Housing Affordability
TABOR is a major hindrance to directly funding the expansion of affordable housing through the budget, which is why tax expenditure mechanisms are often used as a work-around for funding programs in Colorado, via credits, deductions, or exemptions. However, housing affordability policies should be targeted to support those who are struggling the most to make ends meet. Additionally, affordable housing policy should include a funding mechanism that raises revenue dedicated solely to investing in new and increasing housing needs.
Targeted Relief Through Tax Policy
Property Tax Circuit Breaker
Residential property tax relief can take two forms: across-the-board tax cuts for taxpayers at all income levels and targeted tax breaks that are given only to particular groups based on income. One common type of targeted property tax relief program is known as a “circuit breaker.” Like an electric circuit breaker, a tax circuit breaker protects taxpayers from an overload. That is, when a taxpayer’s property tax exceeds a certain percentage of income, the circuit breaker reduces the property taxes in excess of that level. Consider a simple property tax circuit breaker set at 4% of income. Mary makes $20,000 and owes $1,400 in property taxes. The circuit breaker allows her to pay 4% of her income ($20,000 X 4% = $800). But she owes more than $800, so Mary would get $600 in property tax relief from the circuit breaker ($1,400 – $800 = $600).
This allows property tax relief to be means-tested and targeted. In other words, a homeowner paying $4,000 in property taxes that makes $250,000 a year wouldn’t trip the circuit breaker, but a homeowner paying $4,000 in property taxes that only makes $15,000 would.
Expand Renters’ Circuit Breaker
Thirty states in the U.S. currently have some kind of housing circuit breaker program in place, and over two-thirds of those states––including Colorado––extend their programs to at least some renters. Since at least a portion of property tax liability is passed on to tenants, it is important to extend the savings of property tax relief to include renters, but like any equitable affordable housing policy, a Renters’ Circuit Breaker should target tenants who are cost-burdened and need relief the most.
Renters’ Circuit Breaker programs (sometimes called a “Renters’ Credit” or a “Renters’ Property Tax Refund”)––are implemented in a variety of ways in different states. In Colorado, there is a limited Renters’ Circuit Breaker available in the form of a rent rebate for older Coloradans with low incomes and people with disabilities, and the rebate is refundable up to a maximum of $1,000 per filer. Minnesota is one example of a state that has a more expansive Renters’ Property Tax Refund; to receive this rebate, a tenant must have lived within the state for over 183 days, paid rent for housing that has property tax liability, received income under a certain threshold, and cannot be claimed as a dependent. In Minnesota, the refund amount that tenants may receive increases based on the number of dependents in the household as well as if the tenant or their spouse is 65 or older, or disabled.
In Colorado, expanding the state’s rent rebate to include renters with low incomes regardless of age is one strategy for advancing targeted affordable housing policy.
Raising Revenue Dedicated to Sustainably Affordable Housing Investment
Attainable Housing Fee
2023-2024 #3 – Establishment of a New Attainable Housing Fee is an initiative that has been titled as a potential ballot measure for November 2023, if sufficient signatures are collected. This measure would establish a Community Attainable Housing Fee, which would be leveraged on real estate transactions at the rate of 0.1% of the value of the property.
Revenue from the proposed Community Attainable Housing Fee would be directly funneled into the Colorado Attainable Housing Fund, and would only be used for certain purposes related to affordable housing. Those purposes include the construction, maintenance, rehabilitation, or repair of attainable housing for both rental and ownership purposes; the provision of financial assistance for individuals, nonprofits, and localities to purchase, refinance, rehabilitate, or repair attainable housing; and any new or existing programs that the Colorado Division of Housing determines appropriate to expanding the availability of attainable housing.
Establishing a Community Attainable Housing Fee provides an opportunity for Colorado to make sustainable, equitable, and economically efficient investments in developing housing that is affordable for more people at various income levels, which supports those with low and fixed incomes as well as middle income workers like teachers, nurses, and firefighters.
Repealing the Real Estate Transaction Tax Ban
In 2022, CFI published a report on a potential Real Estate Transfer Tax (RETT) in Colorado. A RETT is paid when the title of a property is transferred between owners, separate from property taxes and recording fees. These taxes are often based on the value of a property, with a base amount exempted, making them a means-tested policy. Thirty-seven states levy a RETT. Colorado does not because RETTs are banned under TABOR. Many states use their RETT revenue to fund affordable housing. Despite being banned, CFI analyzed how much revenue a real estate transfer tax could bring to the state.
In Colorado, a 0.5% real estate transaction tax that exempts the first $200,000 of value of a home could generate $375 million into the State Affordable Housing Fund. (This would be $2,000 on a $600,000 home sale). This funding mechanism is sustainable, as opposed to the current State Affordable Housing Fund mechanism established under Proposition 123, which would not yield any dedicated housing revenue in years that Colorado revenue falls below the TABOR rebate cap.
Implementing a real estate transfer tax is equitable and efficient because it allows the state to invest this revenue dollar-for-dollar into expanding the availability of affordable housing for people who fall into a diverse range of income levels. This funding mechanism could also generate revenue to fund means-tested economic relief for homeowners and renters with low incomes.
Repealing the RETT prohibition would require a vote of the people at the ballot, brought either through signature gathering or legislative referral.
These are fiscal strategies to address the housing crisis — but there are many other policy tools as well. In the 2023 legislative session, we were disappointed to see state lawmakers vote down bills that would have implemented stronger eviction protections and allowed local districts the option to implement rent stabilization. Moving forward, we hope to see more support amongst legislators for targeted strategies that expand the accessibility of affordable housing for those who are struggling to make ends meet the most. Furthermore, Colorado needs a sustainable source of revenue that is solely dedicated to investing in a broad range of resources that promote housing affordability, accessibility, and security.
