Inequities in Colorado’s senior homestead property tax exemption

By Chris Stiffler

Introduction

Many older Coloradans and veterans with disabilities have come to rely on the tax savings they receive from the state’s senior homestead property exemption. Although the original intent of the law was to allow more people to remain in their homes, analysis of the available data by the Colorado Fiscal Institute found the exemption does not help as many people as it could. That analysis showed:

• About half of older Coloradans don’t qualify for the exemption, either because they rent or because they haven’t lived in their homes for more than 10 years.
• The exemption disproportionately benefits white homeowners over homeowners of other races.
• Those who qualify for the exemption are slightly less likely to be experiencing poverty than all older Coloradans.

Background

Amid fears of property taxes growing faster than older Coloradans’ incomes, Colorado voters approved Referendum A in the year 2000. In doing so, they amended the state constitution to give older Coloradans a property tax break. The policy, which eventually became known as the senior homestead property tax exemption, first became available in 2002. A few years later, voters approved Referendum E, which extended the favorable tax treatment to veterans with disabilities. The goal, according to the proponents, was to allow more people to remain in their homes.

The exemption applies to older Coloradans and veterans with disabilities who have lived in their homes for at least 10 years. The law exempts 50 percent of the first $200,000 of the house’s value. For homes worth more than $200,000 in market value, the state reduces the value by $100,000 before calculating how much property tax is owed. For homes worth less than $200,000, only half of its market value is used to calculate property taxes. The exemption is not available for older Coloradans and veterans with disabilities who rent, or for who those who have owned their homes for less than 10 years. The 10-year rule also neglects to include people who may have lived in their home for more than 10 years but choose to move into a smaller home and have not yet lived there for the necessary 10-year period.

The exemption saved the average homeowner $575 and benefitted 245,802 older Coloradan households, along with 5,858 veterans with disabilities, in 2017. That adds up to a little more than 13 percent of all housing properties in Colorado. However, as with any tax expenditure, there is a tradeoff in revenue.

The revenue lost from the Senior Homestead Exemption doesn’t affect funding for local services because Colorado’s constitution requires the state to reimburse local governments for the revenue they lose by exempting these homesteads from property taxes. However, services and institutions funded primarily by state tax dollars – such as transportation, K-12 education, and higher education – are impacted.

When the state budget faces tightening due to economic downturns, lawmakers have the power to adjust the percentage of the value of each home that is exempt and can even reduce the exemption to zero (for all but veteran households) as they did in six of the nine years from 2003-2011.

Who receives the benefit of the homestead exemption?

Of the 484,613 households in Colorado with at least one older homeowner, just over half qualify for the current homestead exemption. 30 percent of households with at least one older Coloradan don’t own their homes, meaning they are unable to qualify. Another 19 percent are older homeowners who haven’t lived in their current residence for the 10 years needed to qualify for the current homestead exemption property tax break.

Additionally, the homestead exemption is more likely to benefit older whites than older Coloradans of other races: 60 percent of older white households qualify for the exemption, but only 40 percent of older black households and just 21 percent of older Latinx households qualify. Taken as a whole, even though people of color make up more than 25 percent of the total population above age 65, they make up just 13.6 percent of total homestead exemption qualifiers.

Older Latinx Coloradans are much less likely to own homes than older Coloradans who are white. A full 72 percent of older Latinx households don’t own homes compared to only 18 percent of older white households.  

Similar to the racial disparities described above, older Coloradans who qualify for the homestead tax exemption are less likely to be experiencing poverty than the total population over age 65. 32 percent of older households are above 500 percent of the federal poverty line and 35 percent of those eligible for the exemption are above 500 percent of FPL. 

Homestead exemption and TABOR rebate mechanisms

The Taxpayer Bill of Rights (TABOR) places a cap on how much revenue the state can collect in taxes and fees each year. If the state collects more than the revenue cap allows, it returns money to taxpayers in the form of rebates. Article X, Section 20 (1) of the Colorado Constitution allows excess revenue to be refunded using “any reasonable method.” Since 1992, legislators have created 21 mechanisms to refund revenue above the limit. Of those, eighteen have been repealed and three remain. One of the three remaining is the property tax exemption reimbursement mechanism.

Since FY2017-18, the first TABOR rebate mechanism is the senior homestead exemption, meaning the state reimburses local governments from the General Fund for the property tax lost from the exemption. The TABOR rebate money can cover a portion of the homestead exemption – it doesn’t have to fully fund the entire rebate mechanism like the temporary reduction in the income tax rate which only triggers on if the TABOR surplus is a certain amount. Having the first TABOR rebate mechanism as the homestead exemption affords more General Fund flexibility during TABOR rebate situations.

Note on word choice in this report

People who identify with a Latin American or Hispanic ethnicity may prefer to be identified in various ways including as Hispanic, Latino, Latina, Latinx, or with a more specific country of origin. In this report we use the gender-neutral term “Latinx” wherever possible. We also use “Hispanic” where appropriate, for instance in cases when a data source uses that term.

Methodology and data sources

Administrative data on homestead exemption recipients were provided by the property tax division of the Colorado Department of Local Affairs. These data have detailed information about the exemption value of each property that utilizes the homestead exemption but doesn’t provide demographic data on the recipients like age, race, income and years in current residence.

This is where U.S. Census data comes into play. Because census data has variables on income, property value, property taxes, age, and years living in current residence, we were able to slice the 2017 PUMS microdata into the survey respondents who qualified for Colorado’s current senior homestead exemption (i.e. those aged 65 years or older who have owned their home for at least 10 years). These are not necessarily the exact individuals who utilized the program, just those who are eligible.

The property tax variable was a categorical variable that was converted into a continuous variable by assuming the midpoint (e.g. if 3=property tax between $100 and $200, this was converted to $150).  Both the “housing” and “population” microdata were utilized because the property value and property tax variables are in the housing dataset while age is in the population dataset. We cat walked the “age” variable from the population microdata set using the serial number coded “serialno,” keeping only household records where “relp==0.”  Of these records, we calculated which individuals qualify for the current homestead exemption using the ACS variable “MV” which is “when moved into current residence.” This allowed us to see which households have been there for at least 10 years. Administrative records show 227,611 older Coloradans claimed the senior homestead exemption in 2017, while the 2017 Census data shows 249,537 are eligible (when multiplying the census weight variable times respondents). We determined the demographic data from the census data on those 249,537, which was 3,138 unique census records.