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Several Colorado cities are suing the state over a new law that would keep them from collecting sales and use tax on building materials for public schools.
HB22-1024 passed the legislature this year with bipartisan support in both chambers. Gov. Jared Polis signed it into law in April and it is slated to go into effect in August. In short, lawmakers said they wanted to keep taxpayers from paying extra on school buildings.
“Most times you levy a tax on yourself to build the school and pay off the bond,” sponsor Rep. Shannon Bird, a Westminster Democrat, said. “If there’s another tax on that, you’re now taxing yourself to pay off another tax over 25 or 30 years, and with interest.”
She noted that a sales tax of even just a few percentage points can add millions to projects. A 4% sales tax on $25 million worth of building material is an extra $1 million added to the cost, for example.
But the municipalities — Denver, Boulder, Commerce City, Pueblo and Westminster — are arguing the law is an unconstitutional usurpation of their right to levy taxes.
“The authority to levy sales and use taxes to raise revenue is the heart of home rule municipalities and a critical function of municipal operations,” Denver City Attorney Kristin Bronson said in a statement. “HB 22-1024 unlawfully intrudes on the Colorado Constitution, and the residents of home rule municipalities have the full right of self-governance in local and municipal matters.”
A spokesperson for the governor said the law is a cost-saving measure and accused Denver of jacking up costs.
“At a time of rising construction costs, it is ridiculous that Denver is trying to force schools to pay more,” spokesperson Melissa Dworkin said. “We should be doing more to reduce the costs of building classrooms and updating our schools with needed repairs and technology, and this tax exemption is a good start.”
Of the state’s 272 incorporated municipalities, 104 are considered home rule cities. It allows the local government to form charters and establish laws on local matters that can supersede state law. However, on statewide matters or those of mixed concern, state law supersedes local rules, according to a legislative briefing.
Of 69 home rule governments that collect sales and use tax, the ones suing the state do not exempt sales tax collection on school building materials, according to a Denver press release. Denver typically collects between $2 million and $4 million in local sales and use tax on school building materials each year, according to the release.
Commerce City’s City Council voted unanimously Wednesday to join the lawsuit, according to a press release. While it does collect sales and use tax on school construction material, it’s not joining the suit because of that, its mayor said in a statement. Instead, it’s about preserving home rule rights.
“The city’s stance on this matter does not reflect a desire to tax or otherwise impede public school construction,” Mayor Benjamin Huseman said. “Rather, this lawsuit challenges the notion that the state of Colorado has grounds to dictate such decisions in our home rule city, when those decisions rightfully should remain with local voters through their local elected officials.”
However, the sponsoring lawmakers said they considered that when drafting the bill. Since the state often helps fund school construction, the sales tax on materials becomes a state interest, sponsor Sen. Chris Kolker, a Centennial Democrat, said.
He doesn’t think the cities are intentionally gouging state taxpayers, but that they are raising money off the backs of taxpayers trying to improve education. He called it “common sense” not to add sales tax to things already being paid for with tax dollars.
“We as a state backfill school districts on their funding,” Kolker said. “When their funding is now being reduced because of a sales tax — which is typically exempted on nonprofits — then that requires more of that funding coming from us to backfill the needs of the school district.”
Sponsor Sen. Chris Hansen, a Denver Democrat, noted that an amendment was added to the bill aimed specifically at heading off challenges like this one. The amendment emphasized the state’s responsibility to provide a thorough and uniform education,” and said the local taxes imperil that. None of the lawmakers said they were surprised by the lawsuit.
“The urgent need that we have in the state, and how far behind we are with school construction is a super important part of this debate,” Hansen said, noting estimates of a $17 billion backlog in school construction in the state. “I think it really makes it a compelling statewide interest, and hopefully the courts agree with that.”
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