Frequently Asked Questions on the Property Tax
Q: Are there any states that are currently considering eliminating property taxes completely or eliminating school-related property taxes?
A: No state has completely abandoned the use of the property tax as a source of revenue for public schools. States have shifted from a reliance on local property tax revenues as a substantial source of funding. In these cases (e.g., Indiana and Michigan) the state took on a larger role in the administration of the property tax revenues, in essence shifting from local property tax reliance to state property tax oversight. By oversight, I mean that the state sets the tax rates or tax ceilings or floors for local school districts (or parent governments). For instance, when Indiana, made this transition, the state eliminated a number of special local property tax levies and replaced the lost revenue with an increase in state sales and use tax rates (from six percent to seven percent). More on Indiana House Bill 1001 (2008) is available here.
Instead of eliminating the local property tax, many states have placed limits on local property tax growth, California’s Proposition 13 being the most well-known. The Significant Features of Property Tax database housed on the Lincoln Institute of Land Policy website contains an entire section on property tax limits.
Q: In the past, has any state considered eliminating property taxes completely or eliminating school-related property taxes?
A: One recent example is North Dakota. Constitutional Measure No. 2 was placed on the 2012 ballot by petitions circulated by a sponsoring committee.
If approved, this initiated constitutional measure would have amended the North Dakota Constitution for purposes of eliminating property taxes, poll taxes and acreage taxes. The measure would have required the Legislative Assembly to replace lost revenue to cities, counties, townships, school districts, and other political subdivisions with allocations of various state-level taxes and other revenues, without restrictions on how these revenues may be spent by the political subdivisions. However, North Dakota voters chose by a large margin not to abolish the local property tax.
Also, this 2011 review of state tax reform efforts provides an excellent overview of the thinking behind some of the efforts to move away from local property taxes that fund public education.
Q: Is this an issue that NCSL monitors? Why or why not?
A: Each year, NCSL surveys legislative fiscal staff regarding major state tax actions. NCSL maintains a database of these actions. Any substantive shifts away from the property tax would be reported through this annual survey.
Q: Does NCSL anticipate this becoming a larger trend? Or is this an issue that will likely continue to be isolated to a few states?
A: The property tax has incredible staying power. Andrew Reschovsky’s research has demonstrated its resiliency during economic downturns when other taxes (sales, income, for instance) prove to be more volatile. Predictability in revenue collections is a highly sought after feature for state and local policymakers and administrators responsible for setting and implementing school budgets. If a state were to eliminate the property tax, it would have to swap out those revenues for other revenues, likely income, sales or excise taxes, which tend to be far more volatile, and in some instances more regressive, than the property tax. For these reasons, Daphne Kenyon has demonstrated that targeted relief for property taxpayers has been the preferred option for policymakers when tax revolts erupt or when the elimination of the property tax is on the table.
For these reasons I don’t see states abolishing, whether at the state or local level, reliance on the property tax.