In the 1970s, the United States experienced an unprecedented public revolt against high property taxes. That movement became the springboard for a wider revolt against overbearing government. Fifty years later, America is in the midst of a new property-tax revolt, with some now calling for an end to the tax altogether.
Opposing unnecessary taxation is always a noble goal in theory. But property taxes are the best available source of local revenue. If the revolutionaries succeed, they may actually create a more overbearing government and slow growth further.
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The full extent of the property-tax revolt today is significant. Ohio state representative Bill Roemer, who led a property-tax reform bill last year, called it “the number one issue we hear about from Ohioans.” Kansas representative Steve Huebert said that “the number one issue we heard about was property taxes” and “it wasn’t even close.” There are major efforts in Georgia, Nebraska, North Dakota, South Dakota, Wyoming, Indiana, Ohio, and Florida to eliminate all or almost all property taxes.
Just as in the 1970s, the new property-tax revolt was prompted by a rapid increase in home prices. Since property taxes are based on home value, these price increases often yield a higher tax bill: about a 0.6 percent increase for every 1 percent increase in home value, per a paper from the Lincoln Institute of Land Policy. Increasing home prices are the most likely reason the real per capita cost of property taxes has gone up 40 percent since 2000.
Homeowners thus have legitimate reason to complain. But ending property taxes would be a cure worse than the disease.
First: there are no good local alternatives to property taxes, which provide about three-quarters of all local tax revenue. A Tax Foundation study found that repealing property taxes in Florida would make it necessary to raise sales taxes to between 10 percent and 33 percent per purchase, depending on the county. In practice, sustaining these different tax rates would be nearly impossible, since people could easily drive across borders to buy cheaper goods.
The likely alternative—centralization of taxes at the state level, especially through higher income and sales taxes—would undermine growth. That’s because local governments are more favorable to growth when they can absorb its fiscal benefits through property taxes. A study in the Journal of Housing Economics found that countries with centralized finances tended to restrict housing growth. Countries that allowed local governments to keep more revenue, by contrast, permitted more development.
Many on the Left hate local property taxes precisely because they lead to more building. As one academic article explains, “The urban planners’ most frequent objection to local tax reliance [is] that it induces too much growth.” One reason places like Texas and Florida have grown is that these states allow local governments to keep much of the fiscal benefit from growth.
We’ve seen centralization’s harms in America. After California cut and capped property taxes under 1978’s Proposition 13, the legislature had to figure out how to distribute those taxes that remained. The result was a system, known as AB 8, which forever froze the distribution of property taxes as it was in the 1970s. If a local area had a mosquito-control district and a library district that got a certain proportion of property taxes when Prop 13 passed, for example, they received largely the same proportion of revenue decades later.
The system led local governments to be less favorable to growth and less able to respond to it. And it led Sacramento to assume ever more of the fiscal burden, which now manifests in the highest income taxes in the country.
While abolishing property taxes is counterproductive, there are many ways to reform them. States can create—or tighten, for those that have them—what are known as “levy limits,” which restrict the total amount of revenue governments pull in from property taxes. That means that if home values go up, local governments have to reduce the tax rate to keep their revenue steady.
States can also reform the way property taxes fund schools, to which about a third of all property taxes go. Many courts, even in red states such as Kansas, have required states to provide absurdly high levels of what the courts deem “adequate” funding or have required states to “equalize” funding across school districts. One of the best ways to limit tax increases would be to push back against these rulings and against state funding systems that mandate too much school spending, or which prevent local school districts from keeping most of their own property taxes.
Despite all of its problems, the property tax continues to be the best way to fund local governments and the best way to make local governments partners in growth. With appropriate adjustments, we can ease the burden of property taxes without eliminating their benefits.
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