The Gallagher Amendment Does More Harm Than Good

One of the hidden but important contributors to high housing prices in Colorado (which disproportionately hurts the less affluent, even though superficially the tax break for residential real estate would seem to reduce housing costs) is the Gallagher Amendment. This state constitutional provision in Colorado intentionally undervalues residential real estate for property tax purposes and overvalues non-farm business property for property tax purposes.

As a result, residential development increases demand for local government services more than it increases tax revenues, while business property increases tax revenues more than it increases demand for services. Retail businesses which not only pay high property taxes but also pay sales taxes over perform in generating tax revenue relative to local government service costs even more.

This creates strong incentives for local governments (which are the primary regulators of land use) to use land use regulation powers, like zoning laws, to lure new retail development away from existing developments in predatory rent seeking behavior (leaving losers with dead malls and storefronts), encourages local governments to allow other kinds of development of businesses in their territory, and discourages local governments from authorizing zoning for residential development, especially affordable housing which generates the least tax revenue while imposing the highest costs for local government services.

Therefore, local governments statewide all have strong economic incentives to allow less affordable housing to be built than they would in a world without the Gallagher Amendment. This limits the supply of housing generally, and affordable housing, in particular, which drives up the cost of housing in Colorado.