Not All Property Tax Cuts Are Created Equal

W e can at least say this of last Tuesday: It was a great day for homeowners upset over their property taxes. Across five states, voters approved seven ballot measures to directly reduce or otherwise limit local taxes on different kinds of property. Conservatives, instinctively anti-tax in almost every instance, cheered these initiatives.

Yet nuance is needed. Given that taxation is the necessary price of government, conservatives have long accepted that some taxes are better than others. Likewise, some kinds of property taxes are preferable to others, and therefore, not all cuts to property taxes are created equal. Some may even be worse than the status quo.

Start with the basics: Why do we have property taxes? Residents of towns and cities across America choose to spend a great deal of money through their local governments — on schools, roads, police, courts, public hospitals, and the like. Funding these services requires revenue. Of the funds they raise themselves, rather than transfers from their states, local governments typically collect money from charges and sales taxes, but far more from property taxes.

Economists generally agree that taxes on tangible, immovable property such as land and buildings are one of the best — or most efficient — forms of taxation. That’s because they influence economic decision-making the least. They don’t directly penalize a productive activity, like working or investing, as income taxes do. They don’t tax one category of consumption more heavily than another, as retail sales taxes can. At worst, property taxes may discourage construction projects or other property improvements. But much of the burden falls on land, whose quantity is fixed, and the rest is spread across old and new buildings alike.

If a city or county got rid of its property tax entirely and replaced it with, say, a sales or income tax, residents would still have to pay for local services. They would simply pay in a more destructive way that makes their economy less productive in the long run.

So, if property taxes are the least-bad option for raising revenue, how should they be structured? There are three main components that determine what each property owner pays. First, the assessed value of the property sets the base of the tax. From that assessment, any special deductions or exemptions are subtracted. Then, a flat millage rate is applied to the newly eligible base. This rate usually ranges from a small fraction of a percentage point to just under 2 percent.

Changes in any of these factors can affect what owners pay in a year. In recent years, many Americans have seen their tax bills rise as their home values boomed. Those who haven’t sold their homes have realized little financial benefit from a hot market, but their property taxes have gone up as local governments adjusted assessments upward.

The answer for angry taxpayers seems simple: limit the assessments. Last Tuesday, voters in Florida successfully lowered the annual assessment-growth cap for non-homestead property from 10 percent to 5 percent, in addition to a 3 percent cap for primary residences. Louisianans also expanded their existing qualification for a frozen assessment to homeowners earning up to $150,000 per year.

Such assessment caps may save certain taxpayers money in the short term. However, by disconnecting a property’s assessed value from its actual value, these measures are also distortionary. They incentivize homeowners not to move, since the assessment would reset on whatever new house they buy. They also shift the cost of local government from older to younger homeowners, who must pay higher taxes on identical property values.

A potential remedy is a flat deduction for all homeowners. Florida did just that as well, raising its current $50,000 homestead exemption to $150,000 in 2027 and $250,000 beginning in 2028. Louisiana granted a narrower exemption to seniors and widows of disabled veterans, while Georgia expanded a carve-out for certain kinds of land.

The problem is that this sort of relief is inherently uneven, too. Homeowners in Florida may pay less in property taxes, but renters — who indirectly pay the property tax on their units through higher rents — may need to pay more to cover the shortfall. That could take the form of higher overall millage rates (another quiet burden shift) or costly new charges.

Only one state this month, North Carolina, shielded taxpayers in the ideal fashion. Voters mandated a “levy limit” on how much local governments can increase overall property taxes. That could mirror limits in other states that function mostly through automatic rate adjustments: When property values rise too quickly, the tax rate comes down. No funny math required. Even better are laws that limit the source of high property taxes: local spending.

Conservatives should aim for simplicity in property tax codes just as they do with income taxes. Broaden the base by including as much taxable value as possible, accurately assessed. When a cut is warranted, reduce the headline rate that everyone pays equally.

Breaking with this approach means that property taxes are just another redistribution scheme — a tool for government to penalize and reward different constituencies, creating distortions in the housing market and broader economy. Next election, local tax-cutters should choose their targets more wisely.