2022 Colorado State Ballot Proposition #123: “Dedicated State Income Tax Revenue for Affordable Housing”
September 14, 2022
Executive Summary
Colorado has rapidly become one of the most expensive states to live in the country. High population growth combined with a sustained underproduction of new housing has led to a highly strained housing market. With an estimated housing unit shortfall between 93,000 to 216,000 units, and the fluctuations in demand amidst the pandemic, the average cost of for sale homes and median rents have skyrocketed.
As tensions rise across Colorado cities in response to housing unaffordability, the urgency to address the housing unit shortfall has stirred the State Legislature to act. $1.2B[i] of the American Rescue Plan Act’s one-time funding was allocated towards a myriad of affordable housing initiatives in 2021 alone.
To address the unit production shortfall, Proposition #123[ii] has qualified for the ballot, requesting that Coloradans dedicate 1/10th of 1% of federal taxable income from the State’s General Fund to create Colorado’s first statewide voter initiated affordable housing fund. While the measure does not increase tax rates, the money transferred to the new affordable housing fund will lower future TABOR refunds by an equivalent amount. In years with no TABOR refund, the transferred funds would normally be allocated to other state uses which will require monitoring in future years. Like it or not, Proposition #123 interfaces with the deeply entrenched cultural elements that TABOR presents in the minds of Colorado voters.
It’s not hyperbole to state that Proposition #123 is an ambitious measure that has the potential to drive transformational changes to our Colorado housing market. The measure presents a number of exciting new tools such as:
A dedicated and permanent affordable housing funding mechanism, 3X the Division of Housings 2021 state allocation, that empowers the state to address the ongoing subsidy needs of affordable housing development[iii]. This is a segment of the demand for affordable rental and home ownership that the non-subsidized market struggles to serve under today’s constraints.
A Fast Track Approval Policy focused on reducing the elongated, costly housing approval process timelines that are plaguing Colorado local governments. The 90 Day Fast Track Approval Process, a requirement of local government participants, is an evidence-based[iv] mechanism to reduce the overall cost of affordable housing production that if embraced by local governments, has the potential to deliver affordable housing units to market in a far more efficient manner.
Funding for Land Banking to purchase and hold land via grants and low interest loans helps local governments and developers “attack the cost” allowing a greater percentage of affordable housing projects to “pencil out”[v] across Colorado’s high-cost real estate markets.
A Tenant Equity Vehicle, which addresses the lack of wealth building opportunities impacting renters whose average net wealth is $8,000[vi] compared to $300,000 for homeowners as of 2021, by providing a means to vest renters in the program’s performance “via funding for a down payment for housing or other related services.”
However, there are challenges the measure presents that require attention.
Stated bluntly, the measure is only as successful as the number of local governments that decide to opt into the program. If the capture rate of local governments is weak, due to any number of reasons, the program will be faced with a multitude of challenges.
First, is the uncomfortable reality that Coloradans who have voted for the successfully adopted measure could fail to benefit from its investments, due to their local government choosing not to opt in.
Secondly, if the measure struggles to enroll local governments, the fund may grow larger with each passing fiscal year. With a lack of performance that is subject to fierce scrutiny at the state legislature. Facing competing state priorities for other critical budgetary needs at the risk of lawmakers reappropriating the funds increases exponentially.
Furthermore, as the program administrator, the Division of Housing within the state Department of Local Affairs, will face intense pressure to be flexible and respond to local government demands with key requirements such as the 3% growth targets and fast track approval process, in order to enroll as many jurisdictions as possible. The pressure to enroll local governments sets the stage for disaggregated, and inconsistent standards across the state, straying from the original intent of the measure, mitigating the value proposition of the measure as written.
Additionally, while the measure does not raise tax rates, it transfers 1/10th of 1% of federal taxable income from the state’s General Fund, to fund affordable housing programs – funding that would normally be earmarked for other uses, the General Assembly’s Joint Budget Committee (JBC) must evaluate the program outcomes closely. In the years ahead, the JBC must ensure the measures outcomes are commensurate with the people’s investment, providing the required rate of return as it relates to the measures interaction with other critical state budgetary needs.
To address the challenges the measure presents, and maximize its strengths, proponents, supporters, elected officials and Coloradans alike should consider the following recommendations if the measure passes.
Address the Potential of a Growing Fund Balance – Institute a Performance Based Cap.
Address the Risk of Reappropriation – “Re-Bruce” Any Reappropriated Funds.
Resist Attempts to Loosen the Measures Requirements for Accepting Funds – Stay True to the Measures Value Proposition.
Resist Hyper Localism – Incentivize Local Governments to Adopt Regional Fast Track Approval Policies.
Drive Continuous Improvement – Require a Periodic Fund Performance Analysis.