New Data on Property Tax Elimination
My New Lincoln Institute Working Paper
Property tax elimination is popular—and why wouldn’t it be? But when taxpayers are asked whether they would like to repeal or substantially erode the property tax, a question that could be put to voters in states like Ohio and Florida, they’re really being asked half a question at best. The missing part: how would you like to replace it?
Not only is it necessary to shift much or all of the burden to some other tax, but decisions must be made about how to allocate that new revenue back to schools and local governments. The result is high income or sales tax rates (or both), but also dramatic redistribution of revenues. Taxes that used to remain local, paying for local amenities, are replaced by statewide taxes that, under most possible configurations, heavily subsidize the jurisdictions that previously levied the highest property taxes, and which have the most expensive property.
In a new Lincoln Institute working paper, I quantify what this means using Ohio as an example, but the results should be of interest in any state where property tax elimination is on the table. Perhaps the most notable (if unsurprising) takeaway, besides the absurdly rates for alternative taxes: under the most plausible scenarios, property tax replacement yields enormous tax increases for rural, and to a lesser extent, low-density suburban areas, while massively subsidizing urban areas.
(There’s an irony here, inasmuch as the most ardent support for property tax abolition often comes from the jurisdictions most likely to experience extraordinary tax increases.)
The cause is twofold: one, the replacement taxes often (but not always) fall more intensely on suburban and rural communities; and two, any redistribution designed around backfilling lost revenue will inevitably subsidize areas with higher real estate costs and higher taxes—in other words, cities.
Here’s what that means in practice for Ohio:
Full replacement of the property tax would require replacing the 2.75% single-rate state income tax with a flat tax of 8.24% (in addition to the local rates that average 2.04% for an average rate of 10.29%), and any realistic graduated-rate system would have a top state rate above 12%, and much higher if that structure is highly progressive.
Sales tax replacement would involve raising the state sales tax rate from 5.75% to 13.36%, yielding a combined state and local average sales tax rate of about 14.53%.
Rural counties’ net tax liability would increase almost 26% under a sales tax swap, about 18% under a typical graduated rate income tax, and a little under 8% with a single-rate income tax as property tax replacement.
Because population-and-inflation adjustments cannot capture changes in the composition or use of local property, had property taxes been repealed 20 years ago, and replaced by inflation- and population-adjusted final collections, rural areas would receive 19% less than they do now and suburban counties would be down 8%, while urban counties would be up 1%.
You can find the full paper here. If you’re dealing with questions about property tax elimination in your state and want to talk, I hope you’ll reach out. I’m happy to answer any questions, and if you’re interested in any state-specific work on this issue (papers, short-form content, presentations, etc.), please let me know.
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