Faced with rising property-tax bills, Americans are revolting. In this election, voters in Georgia, Florida, North Carolina, Wyoming, and three other states will decide on 12 measures to cut and limit property taxes. This follows dozens of property-tax relief measures enacted in Texas, Ohio, North Dakota, and other states in recent years.
But, as politicians regularly demonstrate, cutting taxes is easier than cutting spending and services. Unless states and constituents decide which local services to cut, today’s property tax relief may become tomorrow’s debt or tax hikes.
Anger and frustration over rising property taxes are righteous and understandable. Since 2020, property tax bills have been driven up by the 56% nationwide increase in property values. This is especially pronounced in fast-growing red states, where large COVID-era population influxes have increased home values. In Texas, for example, the state comptroller reported that median home prices rose by about 40% between 2019 and 2023.
Economists like property taxes because they are stable, difficult to avoid, and efficient, but homeowners see them differently. Unlike most taxes, property taxes can rise even when a household’s income or spending does not. A family may face a much larger property tax bill because nearby homes sold for higher prices or a local tax board simply estimates their home’s value has gone up in the past year.
Property taxes are the financial backbone of America’s local governments, accounting for roughly 44% of the revenue they raise themselves, compared with only 9% from sales taxes. Supporters of these ballot measures hope that reducing property tax revenues will force cities, counties, and school districts to cut unnecessary spending. But given the scale of the revenue involved, significantly reducing or abolishing property taxes would require major spending cuts or proportional reductions in the services local governments are expected to provide.
Part of what makes these proposals appealing to lawmakers right now is that some governments appear able to afford them. Unexpectedly strong sales and capital-gains tax collections in recent years, combined with years of federal pandemic aid, led to unusually large financial reserves. But that cushion is temporary and shrinking. Permanently restricting governments’ ability to raise revenue should be accompanied by permanent changes to their expenses.
History shows it is unlikely that every dollar cut from property-tax revenue will lead to a dollar of spending being cut from education, police and fire departments, parks, roads, and other local services. Instead, the bill eventually comes due in three places: state and federal taxes, local taxes, or debt.
The first possibility is that taxpayers simply pick up more of the bill. Texas provides a clear example. The state reduced local property taxes by raising its mandatory school-district homestead exemption, the portion of a residence’s value that is exempt from taxation, from $100,000 to $140,000. But, knowing the impact on school funding, the state committed to compensate school districts for the resulting loss in local revenue. What state lawmakers marketed as tax relief was largely a shift in how education is financed, from local to state.
Constituents and policymakers may also ask the federal government to shoulder services it can’t afford. Congress continues to run massive deficits, and the national debt recently surpassed $40 trillion. State and federal aid already accounts for 36% of local revenues.
The second possibility is that local governments will try to replace property-tax revenue with other taxes and fees, which can be difficult because few other revenue sources can generate comparable sums. For Florida to raise the same amount of revenue through sales taxes as it currently gets from property taxes, the average combined state and local sales-tax rate would have to more than double, from 7% to 15%, without accounting for the likely drop in purchases, according to the Tax Foundation. This would not provide homeowners with tax relief; it would shift the cost from one tax to another.
The third possibility is that the bill is shifted onto future taxpayers. State and local governments already carry roughly $5 trillion in long-term debt, composed of bonded debt, unfunded pension benefits, and unfunded retiree health-care obligations, Reason Foundation finds. Amid lower tax revenues, some local governments may respond by borrowing more, deferring maintenance, or reducing contributions to public employee retirement plans. In those cases, taxpayers get a smaller property-tax bill today only to face worse infrastructure, higher debt costs, and more expensive public pension bills later.
Another concern is the uneven way property tax cuts are being made. A statewide homestead exemption, like Florida’s proposed $250,000 on the ballot and Texas’s enacted $140,000 exemption, sounds straightforward, but a universal dollar amount applies differently across tax bases. According to the Census Bureau, the median home value in Miami is $518,100, while in Daytona Beach it’s $287,700, where one in five residents lives below the poverty line. Raising the homestead exemption constrains poorer cities more than richer ones, even though poorer cities may have greater demand for basic public services and fewer alternative revenue sources.
Tax limits can legitimately constrain local governments and encourage creative ways to save, but, by and large, if lawmakers and taxpayers want their local governments to cost significantly less, they should be prepared to decide which programs and responsibilities to shed. If surpluses are what’s funding this relief, a one-time rebate is a more honest approach. Otherwise, taxpayers may be surprised to find that the tax relief they received in one envelope may reappear in another.
A version of this column first appeared at RealClearPolicy.