Five Colorado cities, including Denver, filed a lawsuit against the state Thursday over a new law that exempts building materials used for public schools from sales taxes, arguing it would decrease their revenue base by millions of dollars.
Denver, Boulder, Commerce City, Pueblo and Westminster sued in Denver District Court, challenging House Bill 1024, which Gov. Jared Polis signed into law in April. The bill, set to take effect on Aug. 10, extends an existing sales tax exemption for building materials used in public works projects to also apply to public school construction projects within home rule municipalities.
Home rule municipalities are self-governing localities with the power to make their own laws and avoid state interference in local issues. The lawsuit claims the bill violates the state constitution by imposing state control over the taxing authority of home rule municipalities.
“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,” said Denver City Attorney Kristin Bronson. “HB22-1024 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.”
There are 104 home rule municipalities in Colorado, 69 of which self-collect sales and use taxes, including Denver, Boulder, Commerce City, Pueblo and Westminster, according to the lawsuit. Those municipalities do not exempt school building materials from sales taxes.
The lawsuit alleges that the tax exemption would hurt home rule municipalities on a local level, such as by decreasing Denver’s sales tax revenue by $2 million to $4 million annually. On average, Pueblo would lose $3 million to $4 million annually; Boulder would lose $450,000; Commerce City, $600,000; and Westminster, $100,000.
Sen. Chris Hansen, D-Denver, who sponsored the bill, said lawmakers anticipated this kind of legal challenge would arise but took action to address the issue in the bill.
Lawmakers added an amendment to the bill, stating that the current tax exemption disparities between home rule municipalities and other municipalities harm the state’s ability to provide public schooling. The amendment said that, by refusing to provide the tax exemption, home rule municipalities increase the cost of providing public education and incentivize schools to go to cheaper municipalities, rather than municipalities where they are needed the most.
“We believe there is a clear statewide interest to help boost education construction, especially since we face a $17 billion backlog across Colorado,” Hansen said.
Bill sponsor Rep. Shannon Bird, D-Westminster, said the Colorado Supreme Court has previously ruled that home rule authority is not absolute, particularly when a state law and local ordinance conflict.
“Cities that levy this tax are not only costing taxpayers in their jurisdictions more to build schools, but they are also impeding the state's constitutional responsibility to provide a uniform system of public education,” Bird said. “Schools are valuable assets and necessary resources in all of our communities. ... It’s not fair for students and it is certainly not fair to taxpayers.”
The lawsuit claims that the taxation independence of home rule municipalities extends to activities argued to be a matter of statewide concern.
The bill easily passed the Colorado legislature with bipartisan support, receiving a 49-12 vote in the House and a 20-12 vote in the Senate.
The lawsuit requests that the Denver District Court block the implementation of the bill.