October 7, 2025 • 23 mins
Property tax repeal would put roughly 70 percent of local tax revenue on the line—forcing states and localities to find something else. Can sales or income taxes really replace it without major rate spikes, burden shifts, and anti-growth incentives?
Kyle Hulehan is joined by Jared Walczak, Vice President of State Projects at Tax Foundation, to unpack the math behind replacement plans, the trade-offs voters should know about, and why reform may beat repeal.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Kyle Hulehan (00:00):
Hello and welcome to the Deduction Attacks
Foundation podcast.
I'm your host, Kyle Hulehan, andtoday we are joined by Jared
Walczak, vice President of StateProjects here at the Tax
Foundation.
Now, today we're gonna talkabout the property taxes and.
To frame this sort of wholediscussion, I wanna set us up
here with, what if I told youthat eliminating the property
(00:21):
taxes, which is something that,everyone would love to do could
actually make communities worseoff?
That's sort of the thesis fortoday's podcast and what we're
trying to dive into and, andunderstand about this.
Um, so Jared, as we're we'relooking at this, obviously
people hate the property tax,you know, why could repealing
(00:44):
the property attacks actuallymake people worse off?
Jared Walczak (00:47):
thanks for having me.
And you're right, of course,that the property tax is an
unpopular tax.
Uh, economists tend to like it.
Uh, most people, most taxpayersdo not.
Partly that's because they feelit.
Right.
You know, if you look.
At what you owe in propertytaxes, you actually know what
that amount is.
Do you get a bill?
You, you know, you pay it maybea couple of times a year, once a
year, twice a year.
(01:08):
Uh, you don't know what you paidin sales taxes last year.
A lot of people don't even knowwhat they paid in income to
taxes last year.
This is a big lump sum of money.
People really dislike it.
And then people havephilosophical objections as
well.
And I take those seriously,although I don't necessarily
share some of them, butcertainly this is an unpopular
tax, but it's also a reallyimportant tax.
(01:29):
It's 70% of local tax revenuenationwide.
In some states it's as high as95%.
So if you're going to eliminatethe property tax, you need a
replacement.
Multiple replacements, and thereality is that anything we
choose to replace the propertytax with is likely to be worse
and worse along multiplevectors.
(01:51):
It's worse economically in thesense that any replacement tax
is going to create more economicdistortions.
It's going to hurt economicgrowth compared to the property
tax, which is relativelyefficient economically.
It's worse for communitiesbecause many of the
replacements, uh, just don'twork very well in their
communities.
If, you know, we'll go into someof this, I'm sure, but if we're
(02:13):
replacing this with local taxauthority, sometimes there
really isn't another local taxthat could suffice if we're
replacing it with state taxauthority and we're distributing
that revenue from the state.
All kinds of challenges with howthe state chooses to allocate
that revenue and what that doesand what incentives it creates
at the local level.
(02:33):
There's a reason why every statehas property taxes at the local
level and why no state has everrepealed property taxes.
I know that's very much beingdiscussed right now.
It's a discussion that we needto take seriously, but there are
good reasons why it hasn'thappened yet.
Kyle Hulehan (02:48):
So to dive a little further into that, given
how much the governments rely onproperty taxes, what actually
breaks when we try to replacethem?
Jared Walczak (02:56):
A lot of things potentially break.
I mean, obviously if we don'treplace the revenue, everything
breaks.
I mean, local governments.
Fund a significant share oflocal roads.
They often have obligations forlocal schools, or at least a
major portion of that.
Uh, police, fire, uh, localutilities in some cases.
Uh, all the things that you relyon at your local level from
(03:18):
parks to waste disposal, localtaxes fund a substantial share
of this.
So we need that revenue.
We can always have the debateabout is local government funded
at the right level?
Could they be more efficient?
But there's no question thatthey need a substantial amount
of revenue, and the property taxis the way that they're getting
a lot of that right now.
So it has to be replaced, atleast substantially replaced.
(03:40):
And what breaks essentially isthe ability to generate it from
some other source.
If we.
Provided local sales taxauthority in lieu of local
property tax authority.
That may work in an area withhigh retail concentration, where
there's lots of shops, lots ofstores, um, it doesn't really
work in a bedroom community.
(04:00):
It doesn't really work in anagricultural area.
There's just really not a salestax rate that you can set.
That's even remotely reasonable,that would generate enough
revenue.
And if you have a highlyunreasonable sales tax rate,
well people are probably gonnajust drive across the border to
a county that has a slightlymore reasonable one, or maybe to
a state that has a morereasonable one.
You're going to see that sort ofcasual evasion of the sales tax.
(04:23):
Uh, same goes for local incometaxes, and if you put it on the
state, then not only are yougoing to have really high taxes
in some other category, reallyhigh income taxes or really high
sales taxes, but.
As I'd like to get into with youthroughout this, uh, you're
gonna see some real distortionsand some real perverse
incentives that are createdaround distributing and
(04:46):
allocating that revenue to localgovernments.
Kyle Hulehan (04:49):
And, and real quick just to follow up on this,
for our audience, have you seen,or is there anything in your
mind that we've done here at theTax Foundation or worked on that
kind of backs up the idea thatbehavior will change based on
certain tax rules, like thethings that you mentioned right
there?
Jared Walczak (05:04):
Well, there's a broad literature on the way that
people respond to tax changes,and you can respond in a lot of
ways.
So if you have massive sales taxdifferentials with, uh, a county
border or a state border, youare certainly going to see
people crossing state lines topurchase things in a lower tax.
Uh, businesses can do less ofthis because they're going to
(05:25):
have to pay the use taxregardless at the local rate.
Although you may see them simplyshift their actual operations in
response to incredibly highsales taxes on their business
inputs, their intermediatepurchases rather than their
final sales.
Uh, you know, with income taxes,you will see people move
somewhere else.
You take examples like, say,Washington, Oregon, across that
(05:47):
border, Oregon has no sales tax.
Washington has no income tax.
There's a lot of populationright on that band of living in
Washington and purchasing thingsin Oregon because they're taking
advantage of those taxdifferentials.
We also, just on a more generalbasis, see people moving to
lower tax jurisdictions, settingup their businesses in those
(06:09):
places, and they respondparticularly on income taxes,
far less on property taxes.
So if, for instance, the incometax had to raise.
Substantially to offset aproperty tax reduction or
elimination.
You'd see some behavioraleffects there where you'd
actually have migration andyou'd have changes in business
locations and business activityin response to that.
Kyle Hulehan (06:32):
Yeah, so you do a really great job of discussing
this in your paper, whicheveryone needs to go on tax
foundation.org and check outyour work there., So why do we
see, uh, with some of thesealternatives, they, they don't
seem practical.
You know, you give this awesomeexample in the paper about, um,
Florida statewide sales taxneeding to jump from 7% to 15%.
(06:54):
You know, why does it such amassive jump?
You, could you break that downfor us?
Jared Walczak (06:59):
The property tax is a really significant source
of revenue.
I mean, in Florida it raise isabout$56 billion a year.
It's projected to raise about 60billion in the next year or so.
You need to replace that revenueand that is more.
Then the state currently raisesfrom its sales tax.
So the state has a 6% sales tax.
You add in the local taxes thatalready exist and it gets to a
(07:21):
hair over 7% on average, and youneed to add, uh, another 8%.
top of that to be able to offsetthe property tax collections
that are currently in place.
So you have two choices here.
You could put in about a 15%state sales tax and then
allocate revenue back tolocalities.
(07:42):
Or you could tell thelocalities, Hey, you can raise
your sales taxes in your localjurisdiction to whatever rate
you need to replace the propertytax revenue.
That latter option really,really doesn't work.
Uh, we mapped out, this is inthe paper what the replacement
sales tax rate would be, all incurrent rates, plus the new
rates in every county inFlorida.
(08:03):
And you can find one tiny littlecounty that basically has almost
no population, but has a bigtruck stop.
In it.
Lots of, uh, you know, lots ofpeople coming through and
spending money.
They would only need like a 9.8%rate.
That's doable.
I mean, there's plenty ofjurisdictions in the South that
have rates that are around 9.8%.
another jurisdiction that needsa 35% rate.
(08:23):
That's just not doable.
No one can have a 35% sales taxrate, and of course there's a
lot in between.
There are a lot of otherjurisdictions that would have
high sales tax rates becausethey're bedroom communities, or
they're rural or they just don'thave that retail concentration.
Everyone would get some salestax, but in many cases there's
(08:44):
just not enough locally toreplace the property tax.
Kyle Hulehan (08:47):
in the paper you discuss, uh, an example with
Ohio on income taxes.
Could you break that down forus?
I think that's a good examplefor our listeners
Jared Walczak (08:54):
Yeah, so in Ohio, again, you have a choice.
You can have a much higherstatewide income tax, or you
could have local income taxes.
And Ohio already has localincome tax authority.
They're one of the few statesthat significantly relies on
local income taxes.
So.
If you were to have a statewidetax, Ohio is phasing down
(09:18):
towards a flat 2.75% income tax,which will be really low at the
state level.
They still have the locals.
If you were to replace the salestax, you would need to bring
that to a 12.6% flat tax.
would be paying 12.6% on all oftheir income.
That's pretty close to the toprate in California on income
(09:40):
over$1 million.
And this would be in Ohio.
Uh, I just don't think that'sviable.
And it would be even morechallenging if you were to do
this with local tax authority.
There you would see ratesranging from 9.75% to about 27%,
and some of those highest ratesare actually right along the
Ohio River on the border withWest Virginia, along the West
(10:01):
Virginia panhandle.
So you could just drive acrossthe border to West Virginia.
You could live there.
Um, even if your job was inOhio, you could live in West
Virginia.
And I'm sure you would see someof that.
I'm sure just generally you'dsee people leaving the state
because it's just not viable tohave taxes on income at these
levels.
Uh, there's reasons why we.
(10:21):
Typically have multiple taxes ina jurisdiction.
Um, and doubling down on incometaxes like this just doesn't
seem like a realistic solution.
Kyle Hulehan (10:30):
So then what new risks emerge when states take
over some of that local funding?
Especially for, for fairness,growth, and, and community
control.
Jared Walczak (10:40):
Yeah, there are a lot of problems when the state
assumes this authority becausethey need to, in some way decide
how to.
Return this money to the localgovernments.
they could just take the finalyear of tax collections in any
jurisdiction and use that as thebaseline and provide that
revenue to them in perpetuity,probably with some adjustment.
What that does, of course, isreward the jurisdictions that
(11:03):
had the highest tax rates in thepast because you have some
areas, often more affluent areasthat have chosen to have
relatively high property taxrates, but they also get the
services that are associatedwith being a more highly funded
jurisdiction you shift this tostate authority.
Those places continue to get allof the revenue.
having higher taxes, but they'renot paying more.
(11:25):
Now.
Everyone has that cost.
Everyone is bearing the cost ofsubsidizing them.
That's probably not going to bevery attractive to all of the
jurisdictions that historicallyhad lower taxes.
The flip side, of course, is ifyou choose some other way to
allocate this, if you choosesome other formula based on need
or population or somethingthat's not about what.
(11:46):
used to be raised.
Now you have these dramatic gapswhere a jurisdiction that used
to get a certain amount might begetting dramatically less.
Another place might be gettingdramatically more because of
this new funding formula.
Uh, that's going to create somecrises too.
Uh, you know, if suddenly you'regetting 30% less revenue.
What are you going to do withthat?
(12:06):
That's a real issue.
Um, and then the question is,what do we do going forward?
We can't use property values asa determinant of the allocation
in future years because who isgoing to be assessing properties
without a property tax?
So we have to use somethingelse.
We could do an inflationadjustment.
We could do inflation inpopulation.
(12:27):
There's a variety of things thatwe can do, but all of them are
potentially deeply flawed.
Essentially we're in some wayslocking in the system as it
existed when we eliminate theproperty tax.
A jurisdiction that growsrapidly gets not just new
population, but new investmentand requires new services to be
provided to them.
(12:48):
Might not get the increasesassociated with that when the
state is providing this byformula that they would, if they
were generating new property taxrevenue from all that new
activity.
So now.
The dollars get spread thin.
The more you grow, the fasteryou grow, the fewer dollars per
capita you're getting, thatactually encourages you to
shrink.
(13:08):
Instead of promoting economicdynamism, instead of saying,
growth allows us to either havemore revenue or to lower
property tax rates and make theplace more competitive.
Now you're saying growth meansthat each dollar.
cover as many people that likethat every person is getting
less than they used to.
(13:29):
That encourages you to shrinkrather than to grow.
That's the exact opposite ofwhat you would want to see.
Kyle Hulehan (13:34):
Well, it sounds like what you're saying is this
will increase complexity quite abit.
What do you think maybe peopleare, are misunderstanding about
the, the value of the propertytax?
Jared Walczak (13:47):
Despite its unpopularity, the property tax
is a pretty good tax.
It's closer than most taxes topassing what we call the
benefits test, where you arepaying more in proportion to
receiving greater value, uh, inlocal services.
If you have a more expensiveproperty, the value of the roads
and the schools and everythingelse actually is worth more to
(14:07):
you.
They also have a feedbackeffect.
Better schools mean yourproperty's worth more, uh, so
it's not a perfect tax.
it's pretty good and it's veryeconomically efficient compared
to other taxes because there arefewer responses, economic
responses to the property tax.
The land's not going anywhere,so you can't pick up and move it
in the same way that you can, aperson or a job or a capital
(14:29):
investment.
So.
It's good in that it doesn'tdistort behavior as much.
Again, not perfect, but we're inthe realm of taxes.
Nothing is perfect.
we shift to is going to createmore economic drag.
It's going to reduce economicgrowth and output.
It's also going to require thesereally hard choices about where
(14:50):
the revenue comes from, how highwe want another tax to go, and
how much shifting.
We're willing to allow ifeveryone is paying more in
income taxes or more in salestaxes, and then it's transferred
through the property tax, thatmeans radically different
distributions.
It's not like you as an individindividual, pay more in income
(15:11):
tax, pay less in property taxthan it's a wash.
You may be paying more in incometax while your jurisdiction
because you know either.
had lower property taxes tobegin with, or the new formula
leads to a lower allocation.
You're paying way more in incometaxes than you're getting in
property tax replacementrevenue.
Um, you know more than you werepaying in property tax
previously.
(15:31):
Someone else might have theopposite.
They may love this, but ofpeople are going to find they're
paying more.
Some people would pay less.
A lot of jurisdictions are goingto find that they're cash
strapped, that they're notgetting the revenue.
They thought while others mightbe awash with cash, even though
they're shrinking in population,which is not where presumably we
want to, you know, have thisadditional, you know, revenue
(15:53):
just fundamentally, it's reallyhard to plan around.
There's a lot of complexity toit.
Any choice the state makes,potentially changes behavior in
very undesirable ways.
Things that just don't make alot of sense.
Kyle Hulehan (16:05):
So why do you feel like some of these campaigns to
repeal the property tax maybedon't?
Uh.
Live up to their expectationsor, or what voters should want.
Maybe they're not detailedenough or they don't provide
enough clarity.
Jared Walczak (16:22):
So again, property tax repeal is popular.
If you simply lead with that,wouldn't it be great if we
eliminated your property taxes?
I think a lot of people aregoing to sign up for that.
They're gonna say, yeah, thatsounds great, and what a lot of
the proposals are missing.
A serious discussion ofreplacement revenue.
fact, many of the ballotmeasures that have been proposed
(16:42):
even have that.
They simply say the property taxwill be repealed, and then it's
incumbent upon the legislatureonce it's gone to figure out
what the replacement revenue is.
And I think that's backwards.
I don't think you can have aserious discussion about this
without talking about what thereplacements are going to be and
whether they're better or worse,and I really don't think that
(17:03):
it's acceptable to have asituation where this revenue
stream is just eliminated.
And then after the fact, thelegislature has to rush in and
find something else.
Again, there's a reason that noone's done this.
It's really, really hard and wecan have a discussion and a
debate around whether there is abetter alternative.
(17:23):
I don't believe there is.
I think the economic evidence ispretty clear.
I think the alternatives.
Speak for themselves when youreally look at them, and that's
what this paper is meant to do.
We take six states where there'sbeen a serious discussion about
property tax elimination, and weshow all these different ideas
about how you might replace therevenue and what happens with
that.
How the distributions change.
(17:43):
How the tax rates change.
And I think people can look atthat and say, maybe that's not
what we wanted, but they're notbeing given that opportunity.
Some of the ballot measures thatare out there, and I worry about
a situation where voters say,yeah, absolutely.
Get rid of my property taxes.
And then the legislature goesinto session and has to come up
with a replacement forpotentially billions and
billions of dollars of revenueovernight.
(18:05):
Do we think that's going to workwell?
Do we think people are going tobe happy with the results?
And then what does happen whenyou are one of those loser
jurisdictions that's down 30 or40 or 50% in your revenue?
What do you do now?
Uh, what does that look like?
And do we have another crisis?
The legislature has to respondto the following year.
Kyle Hulehan (18:24):
there's A through line here with, uh, politics and
sort of the popular.
What's a popular idea and what'sgood policy?
We've had president Trumppropose all the no tax ons, and
those things are verycomplicated and complex and, but
they sound really nice and, andit sounds nice.
It sounds like, oh cool, we'regonna eliminate the property
tax.
This would be great.
But actually it's.
(18:45):
Really harmful for us, and itdoesn't benefit us in the way
we'd like.
It's a nice tagline, but it, itdoesn't actually do much for us.
Um, and, and so right now I, I'dwanna switch real quick into, I
made this little lightning roundbecause there are things I've
heard my friends say, and I justkind of wanted to do like a myth
or fact with you real quick.
(19:06):
Um, and so we'll lightningaround this.
I'll give you a quick second torespond.
So, is this.
Is this true or false?
Is it myth or fact?
Uh, sales taxes are morepro-growth, so just switch.
Jared Walczak (19:17):
Well, in fact, they're not.
Um, sales taxes are morepro-growth than income taxes,
but less pro-growth thanproperty taxes.
So doubling down on the salestax to the exclusion of the
property tax is actually lesspro-growth.
And part of that's just the waywe design sales taxes in this
country where they're taxing alot of.
multiple times over.
If we had a better sales tax,the difference wouldn't be quite
(19:38):
as much, but no, uh, the answeris no.
Um, false.
This would actually make the taxcode less competitive if we
shifted away from propertytaxes, even to sales taxes.
But it's even worse if weshifted into income taxes.
Kyle Hulehan (19:52):
So myth or fact, renters don't pay property taxes
taxes.
Jared Walczak (19:56):
Essentially myth.
Uh, they don't obviously write acheck.
Uh, renters are not remittingproperty taxes to the local
jurisdiction.
The landlord is, but you know,there's a large literature on
this and there are somedisagreements on the exact
amount that the renters bear,but everyone agrees that a very
substantial portion of theproperty tax shows up.
(20:18):
In your rent payment, and youcan even see this when property
taxes go up, that rent pricesincrease faster.
Um, it can take a couple ofyears.
Again, it's not always perfectlyone-to-one, but over time, most,
if not all of the cost of theproperty tax is born by the
renter themselves.
(20:38):
Sometimes there's theseproposals that just provide
relief to homeowners and thatreally leaves renters out.
And some states even make itworse by taxing commercial
property at higher effectiverates and often classing, rental
units as commercial property,which means that of the lower
income individuals who arerenting are bearing higher
(20:59):
property taxes than the ownersof homes, um, but certainly
everyone's paying property taxesif we eliminated the property
tax, that provides relief foreveryone there.
But it also, of course, means avast array of new taxes that
everyone will be paying as well.
Kyle Hulehan (21:16):
So as we're wrapping up here, Jared, uh, why
is the property tax despitebeing so unpopular, as we've
talked about the most stable,fair and growth friendly option
that we have?
Jared Walczak (21:25):
The property tax, as we've discussed, is on
largely fixed immovable assets.
You cannot move your.
Land.
Um, you can choose where tobuild structures.
You can choose some of thesethings, but the fact that it's a
fairly fixed asset means thatthere will be fewer behavioral
responses to it.
Also, the fact that, as we'vediscussed, it better passes the
benefit test means that.
(21:47):
You're getting more for yourmoney when you're paying more,
uh, in a way that's not alwaystrue of the sales tax or the
income tax, and therefore you'remore willing, you may not like
it.
I mean, none, none of us reallylikes paying taxes.
But when you look at thealternatives, you may find that
your willingness to pay that ashigher, even if you do complain
about it, um, you know,certainly we see that with
(22:07):
businesses.
We see it with a lot ofindividuals where they locate.
This is what, you know,economists call revealed
preference.
Um, you know, because you haveyour revealed preference of you
actually do as opposed to yourstated preference of what you
dislike.
You can say, I don't likeproperty taxes.
I don't want to pay them.
Your revealed preference issometimes you're not going to
the lowest property taxjurisdiction in the same way
(22:30):
that you might go to a lower taxregime for income taxes because
of what the property tax isdoing.
And then finally.
There is a local responsivenessto this tax that you don't have
with others.
When you don't like that yourproperty taxes have risen.
You can go to city council, youcan go to your county board of
supervisors or commissioners orwhatever you have, and you can
(22:50):
complain about this and you mayhave a real impact on them.
If the state takes over thisauthority with a higher income
tax or a higher sales tax andthey allocate this, it's going
to be way harder.
For you to petition on this andeven if you would be willing to
accept lower government servicesor if even if your local
government really cares aboutefficiencies and they want to be
(23:11):
better with their money, theycan't control what comes to them
or what taxes are imposed on youto do this.
So that local responsivenesspiece is important and is
fundamentally missing if we moveaway from the property tax.
Kyle Hulehan (23:24):
All right, well, before we sign off, if you have
any burning questions on tax,you can send them our way or
drop a comment on YouTube.
You can email us atpodcast@taxfoundation.org.
You can slide into our dms atDeduction Pod on Twitter.
Thank you so much for listening,and thank you, Jared, for being
here today.
Jared Walczak (23:41):
Thank you.
Hello and welcome to the Deduction Attacks
Foundation podcast.
I'm your host, Kyle Hulehan, andtoday we are joined by Jared
Walczak, vice President of StateProjects here at the Tax
Foundation.
Now, today we're gonna talkabout the property taxes and.
To frame this sort of wholediscussion, I wanna set us up
here with, what if I told youthat eliminating the property
(00:21):
taxes, which is something that,everyone would love to do could
actually make communities worseoff?
That's sort of the thesis fortoday's podcast and what we're
trying to dive into and, andunderstand about this.
Um, so Jared, as we're we'relooking at this, obviously
people hate the property tax,you know, why could repealing
(00:44):
the property attacks actuallymake people worse off?
Jared Walczak (00:47):
thanks for having me.
And you're right, of course,that the property tax is an
unpopular tax.
Uh, economists tend to like it.
Uh, most people, most taxpayersdo not.
Partly that's because they feelit.
Right.
You know, if you look.
At what you owe in propertytaxes, you actually know what
that amount is.
Do you get a bill?
You, you know, you pay it maybea couple of times a year, once a
year, twice a year.
(01:08):
Uh, you don't know what you paidin sales taxes last year.
A lot of people don't even knowwhat they paid in income to
taxes last year.
This is a big lump sum of money.
People really dislike it.
And then people havephilosophical objections as
well.
And I take those seriously,although I don't necessarily
share some of them, butcertainly this is an unpopular
tax, but it's also a reallyimportant tax.
(01:29):
It's 70% of local tax revenuenationwide.
In some states it's as high as95%.
So if you're going to eliminatethe property tax, you need a
replacement.
Multiple replacements, and thereality is that anything we
choose to replace the propertytax with is likely to be worse
and worse along multiplevectors.
(01:51):
It's worse economically in thesense that any replacement tax
is going to create more economicdistortions.
It's going to hurt economicgrowth compared to the property
tax, which is relativelyefficient economically.
It's worse for communitiesbecause many of the
replacements, uh, just don'twork very well in their
communities.
If, you know, we'll go into someof this, I'm sure, but if we're
(02:13):
replacing this with local taxauthority, sometimes there
really isn't another local taxthat could suffice if we're
replacing it with state taxauthority and we're distributing
that revenue from the state.
All kinds of challenges with howthe state chooses to allocate
that revenue and what that doesand what incentives it creates
at the local level.
(02:33):
There's a reason why every statehas property taxes at the local
level and why no state has everrepealed property taxes.
I know that's very much beingdiscussed right now.
It's a discussion that we needto take seriously, but there are
good reasons why it hasn'thappened yet.
Kyle Hulehan (02:48):
So to dive a little further into that, given
how much the governments rely onproperty taxes, what actually
breaks when we try to replacethem?
Jared Walczak (02:56):
A lot of things potentially break.
I mean, obviously if we don'treplace the revenue, everything
breaks.
I mean, local governments.
Fund a significant share oflocal roads.
They often have obligations forlocal schools, or at least a
major portion of that.
Uh, police, fire, uh, localutilities in some cases.
Uh, all the things that you relyon at your local level from
(03:18):
parks to waste disposal, localtaxes fund a substantial share
of this.
So we need that revenue.
We can always have the debateabout is local government funded
at the right level?
Could they be more efficient?
But there's no question thatthey need a substantial amount
of revenue, and the property taxis the way that they're getting
a lot of that right now.
So it has to be replaced, atleast substantially replaced.
(03:40):
And what breaks essentially isthe ability to generate it from
some other source.
If we.
Provided local sales taxauthority in lieu of local
property tax authority.
That may work in an area withhigh retail concentration, where
there's lots of shops, lots ofstores, um, it doesn't really
work in a bedroom community.
(04:00):
It doesn't really work in anagricultural area.
There's just really not a salestax rate that you can set.
That's even remotely reasonable,that would generate enough
revenue.
And if you have a highlyunreasonable sales tax rate,
well people are probably gonnajust drive across the border to
a county that has a slightlymore reasonable one, or maybe to
a state that has a morereasonable one.
You're going to see that sort ofcasual evasion of the sales tax.
(04:23):
Uh, same goes for local incometaxes, and if you put it on the
state, then not only are yougoing to have really high taxes
in some other category, reallyhigh income taxes or really high
sales taxes, but.
As I'd like to get into with youthroughout this, uh, you're
gonna see some real distortionsand some real perverse
incentives that are createdaround distributing and
(04:46):
allocating that revenue to localgovernments.
Kyle Hulehan (04:49):
And, and real quick just to follow up on this,
for our audience, have you seen,or is there anything in your
mind that we've done here at theTax Foundation or worked on that
kind of backs up the idea thatbehavior will change based on
certain tax rules, like thethings that you mentioned right
there?
Jared Walczak (05:04):
Well, there's a broad literature on the way that
people respond to tax changes,and you can respond in a lot of
ways.
So if you have massive sales taxdifferentials with, uh, a county
border or a state border, youare certainly going to see
people crossing state lines topurchase things in a lower tax.
Uh, businesses can do less ofthis because they're going to
(05:25):
have to pay the use taxregardless at the local rate.
Although you may see them simplyshift their actual operations in
response to incredibly highsales taxes on their business
inputs, their intermediatepurchases rather than their
final sales.
Uh, you know, with income taxes,you will see people move
somewhere else.
You take examples like, say,Washington, Oregon, across that
(05:47):
border, Oregon has no sales tax.
Washington has no income tax.
There's a lot of populationright on that band of living in
Washington and purchasing thingsin Oregon because they're taking
advantage of those taxdifferentials.
We also, just on a more generalbasis, see people moving to
lower tax jurisdictions, settingup their businesses in those
(06:09):
places, and they respondparticularly on income taxes,
far less on property taxes.
So if, for instance, the incometax had to raise.
Substantially to offset aproperty tax reduction or
elimination.
You'd see some behavioraleffects there where you'd
actually have migration andyou'd have changes in business
locations and business activityin response to that.
Kyle Hulehan (06:32):
Yeah, so you do a really great job of discussing
this in your paper, whicheveryone needs to go on tax
foundation.org and check outyour work there., So why do we
see, uh, with some of thesealternatives, they, they don't
seem practical.
You know, you give this awesomeexample in the paper about, um,
Florida statewide sales taxneeding to jump from 7% to 15%.
(06:54):
You know, why does it such amassive jump?
You, could you break that downfor us?
Jared Walczak (06:59):
The property tax is a really significant source
of revenue.
I mean, in Florida it raise isabout$56 billion a year.
It's projected to raise about 60billion in the next year or so.
You need to replace that revenueand that is more.
Then the state currently raisesfrom its sales tax.
So the state has a 6% sales tax.
You add in the local taxes thatalready exist and it gets to a
(07:21):
hair over 7% on average, and youneed to add, uh, another 8%.
top of that to be able to offsetthe property tax collections
that are currently in place.
So you have two choices here.
You could put in about a 15%state sales tax and then
allocate revenue back tolocalities.
(07:42):
Or you could tell thelocalities, Hey, you can raise
your sales taxes in your localjurisdiction to whatever rate
you need to replace the propertytax revenue.
That latter option really,really doesn't work.
Uh, we mapped out, this is inthe paper what the replacement
sales tax rate would be, all incurrent rates, plus the new
rates in every county inFlorida.
(08:03):
And you can find one tiny littlecounty that basically has almost
no population, but has a bigtruck stop.
In it.
Lots of, uh, you know, lots ofpeople coming through and
spending money.
They would only need like a 9.8%rate.
That's doable.
I mean, there's plenty ofjurisdictions in the South that
have rates that are around 9.8%.
another jurisdiction that needsa 35% rate.
(08:23):
That's just not doable.
No one can have a 35% sales taxrate, and of course there's a
lot in between.
There are a lot of otherjurisdictions that would have
high sales tax rates becausethey're bedroom communities, or
they're rural or they just don'thave that retail concentration.
Everyone would get some salestax, but in many cases there's
(08:44):
just not enough locally toreplace the property tax.
Kyle Hulehan (08:47):
in the paper you discuss, uh, an example with
Ohio on income taxes.
Could you break that down forus?
I think that's a good examplefor our listeners
Jared Walczak (08:54):
Yeah, so in Ohio, again, you have a choice.
You can have a much higherstatewide income tax, or you
could have local income taxes.
And Ohio already has localincome tax authority.
They're one of the few statesthat significantly relies on
local income taxes.
So.
If you were to have a statewidetax, Ohio is phasing down
(09:18):
towards a flat 2.75% income tax,which will be really low at the
state level.
They still have the locals.
If you were to replace the salestax, you would need to bring
that to a 12.6% flat tax.
would be paying 12.6% on all oftheir income.
That's pretty close to the toprate in California on income
(09:40):
over$1 million.
And this would be in Ohio.
Uh, I just don't think that'sviable.
And it would be even morechallenging if you were to do
this with local tax authority.
There you would see ratesranging from 9.75% to about 27%,
and some of those highest ratesare actually right along the
Ohio River on the border withWest Virginia, along the West
(10:01):
Virginia panhandle.
So you could just drive acrossthe border to West Virginia.
You could live there.
Um, even if your job was inOhio, you could live in West
Virginia.
And I'm sure you would see someof that.
I'm sure just generally you'dsee people leaving the state
because it's just not viable tohave taxes on income at these
levels.
Uh, there's reasons why we.
(10:21):
Typically have multiple taxes ina jurisdiction.
Um, and doubling down on incometaxes like this just doesn't
seem like a realistic solution.
Kyle Hulehan (10:30):
So then what new risks emerge when states take
over some of that local funding?
Especially for, for fairness,growth, and, and community
control.
Jared Walczak (10:40):
Yeah, there are a lot of problems when the state
assumes this authority becausethey need to, in some way decide
how to.
Return this money to the localgovernments.
they could just take the finalyear of tax collections in any
jurisdiction and use that as thebaseline and provide that
revenue to them in perpetuity,probably with some adjustment.
What that does, of course, isreward the jurisdictions that
(11:03):
had the highest tax rates in thepast because you have some
areas, often more affluent areasthat have chosen to have
relatively high property taxrates, but they also get the
services that are associatedwith being a more highly funded
jurisdiction you shift this tostate authority.
Those places continue to get allof the revenue.
having higher taxes, but they'renot paying more.
(11:25):
Now.
Everyone has that cost.
Everyone is bearing the cost ofsubsidizing them.
That's probably not going to bevery attractive to all of the
jurisdictions that historicallyhad lower taxes.
The flip side, of course, is ifyou choose some other way to
allocate this, if you choosesome other formula based on need
or population or somethingthat's not about what.
(11:46):
used to be raised.
Now you have these dramatic gapswhere a jurisdiction that used
to get a certain amount might begetting dramatically less.
Another place might be gettingdramatically more because of
this new funding formula.
Uh, that's going to create somecrises too.
Uh, you know, if suddenly you'regetting 30% less revenue.
What are you going to do withthat?
(12:06):
That's a real issue.
Um, and then the question is,what do we do going forward?
We can't use property values asa determinant of the allocation
in future years because who isgoing to be assessing properties
without a property tax?
So we have to use somethingelse.
We could do an inflationadjustment.
We could do inflation inpopulation.
(12:27):
There's a variety of things thatwe can do, but all of them are
potentially deeply flawed.
Essentially we're in some wayslocking in the system as it
existed when we eliminate theproperty tax.
A jurisdiction that growsrapidly gets not just new
population, but new investmentand requires new services to be
provided to them.
(12:48):
Might not get the increasesassociated with that when the
state is providing this byformula that they would, if they
were generating new property taxrevenue from all that new
activity.
So now.
The dollars get spread thin.
The more you grow, the fasteryou grow, the fewer dollars per
capita you're getting, thatactually encourages you to
shrink.
(13:08):
Instead of promoting economicdynamism, instead of saying,
growth allows us to either havemore revenue or to lower
property tax rates and make theplace more competitive.
Now you're saying growth meansthat each dollar.
cover as many people that likethat every person is getting
less than they used to.
(13:29):
That encourages you to shrinkrather than to grow.
That's the exact opposite ofwhat you would want to see.
Kyle Hulehan (13:34):
Well, it sounds like what you're saying is this
will increase complexity quite abit.
What do you think maybe peopleare, are misunderstanding about
the, the value of the propertytax?
Jared Walczak (13:47):
Despite its unpopularity, the property tax
is a pretty good tax.
It's closer than most taxes topassing what we call the
benefits test, where you arepaying more in proportion to
receiving greater value, uh, inlocal services.
If you have a more expensiveproperty, the value of the roads
and the schools and everythingelse actually is worth more to
(14:07):
you.
They also have a feedbackeffect.
Better schools mean yourproperty's worth more, uh, so
it's not a perfect tax.
it's pretty good and it's veryeconomically efficient compared
to other taxes because there arefewer responses, economic
responses to the property tax.
The land's not going anywhere,so you can't pick up and move it
in the same way that you can, aperson or a job or a capital
(14:29):
investment.
So.
It's good in that it doesn'tdistort behavior as much.
Again, not perfect, but we're inthe realm of taxes.
Nothing is perfect.
we shift to is going to createmore economic drag.
It's going to reduce economicgrowth and output.
It's also going to require thesereally hard choices about where
(14:50):
the revenue comes from, how highwe want another tax to go, and
how much shifting.
We're willing to allow ifeveryone is paying more in
income taxes or more in salestaxes, and then it's transferred
through the property tax, thatmeans radically different
distributions.
It's not like you as an individindividual, pay more in income
(15:11):
tax, pay less in property taxthan it's a wash.
You may be paying more in incometax while your jurisdiction
because you know either.
had lower property taxes tobegin with, or the new formula
leads to a lower allocation.
You're paying way more in incometaxes than you're getting in
property tax replacementrevenue.
Um, you know more than you werepaying in property tax
previously.
(15:31):
Someone else might have theopposite.
They may love this, but ofpeople are going to find they're
paying more.
Some people would pay less.
A lot of jurisdictions are goingto find that they're cash
strapped, that they're notgetting the revenue.
They thought while others mightbe awash with cash, even though
they're shrinking in population,which is not where presumably we
want to, you know, have thisadditional, you know, revenue
(15:53):
just fundamentally, it's reallyhard to plan around.
There's a lot of complexity toit.
Any choice the state makes,potentially changes behavior in
very undesirable ways.
Things that just don't make alot of sense.
Kyle Hulehan (16:05):
So why do you feel like some of these campaigns to
repeal the property tax maybedon't?
Uh.
Live up to their expectationsor, or what voters should want.
Maybe they're not detailedenough or they don't provide
enough clarity.
Jared Walczak (16:22):
So again, property tax repeal is popular.
If you simply lead with that,wouldn't it be great if we
eliminated your property taxes?
I think a lot of people aregoing to sign up for that.
They're gonna say, yeah, thatsounds great, and what a lot of
the proposals are missing.
A serious discussion ofreplacement revenue.
fact, many of the ballotmeasures that have been proposed
(16:42):
even have that.
They simply say the property taxwill be repealed, and then it's
incumbent upon the legislatureonce it's gone to figure out
what the replacement revenue is.
And I think that's backwards.
I don't think you can have aserious discussion about this
without talking about what thereplacements are going to be and
whether they're better or worse,and I really don't think that
(17:03):
it's acceptable to have asituation where this revenue
stream is just eliminated.
And then after the fact, thelegislature has to rush in and
find something else.
Again, there's a reason that noone's done this.
It's really, really hard and wecan have a discussion and a
debate around whether there is abetter alternative.
(17:23):
I don't believe there is.
I think the economic evidence ispretty clear.
I think the alternatives.
Speak for themselves when youreally look at them, and that's
what this paper is meant to do.
We take six states where there'sbeen a serious discussion about
property tax elimination, and weshow all these different ideas
about how you might replace therevenue and what happens with
that.
How the distributions change.
(17:43):
How the tax rates change.
And I think people can look atthat and say, maybe that's not
what we wanted, but they're notbeing given that opportunity.
Some of the ballot measures thatare out there, and I worry about
a situation where voters say,yeah, absolutely.
Get rid of my property taxes.
And then the legislature goesinto session and has to come up
with a replacement forpotentially billions and
billions of dollars of revenueovernight.
(18:05):
Do we think that's going to workwell?
Do we think people are going tobe happy with the results?
And then what does happen whenyou are one of those loser
jurisdictions that's down 30 or40 or 50% in your revenue?
What do you do now?
Uh, what does that look like?
And do we have another crisis?
The legislature has to respondto the following year.
Kyle Hulehan (18:24):
there's A through line here with, uh, politics and
sort of the popular.
What's a popular idea and what'sgood policy?
We've had president Trumppropose all the no tax ons, and
those things are verycomplicated and complex and, but
they sound really nice and, andit sounds nice.
It sounds like, oh cool, we'regonna eliminate the property
tax.
This would be great.
But actually it's.
(18:45):
Really harmful for us, and itdoesn't benefit us in the way
we'd like.
It's a nice tagline, but it, itdoesn't actually do much for us.
Um, and, and so right now I, I'dwanna switch real quick into, I
made this little lightning roundbecause there are things I've
heard my friends say, and I justkind of wanted to do like a myth
or fact with you real quick.
(19:06):
Um, and so we'll lightningaround this.
I'll give you a quick second torespond.
So, is this.
Is this true or false?
Is it myth or fact?
Uh, sales taxes are morepro-growth, so just switch.
Jared Walczak (19:17):
Well, in fact, they're not.
Um, sales taxes are morepro-growth than income taxes,
but less pro-growth thanproperty taxes.
So doubling down on the salestax to the exclusion of the
property tax is actually lesspro-growth.
And part of that's just the waywe design sales taxes in this
country where they're taxing alot of.
multiple times over.
If we had a better sales tax,the difference wouldn't be quite
(19:38):
as much, but no, uh, the answeris no.
Um, false.
This would actually make the taxcode less competitive if we
shifted away from propertytaxes, even to sales taxes.
But it's even worse if weshifted into income taxes.
Kyle Hulehan (19:52):
So myth or fact, renters don't pay property taxes
taxes.
Jared Walczak (19:56):
Essentially myth.
Uh, they don't obviously write acheck.
Uh, renters are not remittingproperty taxes to the local
jurisdiction.
The landlord is, but you know,there's a large literature on
this and there are somedisagreements on the exact
amount that the renters bear,but everyone agrees that a very
substantial portion of theproperty tax shows up.
(20:18):
In your rent payment, and youcan even see this when property
taxes go up, that rent pricesincrease faster.
Um, it can take a couple ofyears.
Again, it's not always perfectlyone-to-one, but over time, most,
if not all of the cost of theproperty tax is born by the
renter themselves.
(20:38):
Sometimes there's theseproposals that just provide
relief to homeowners and thatreally leaves renters out.
And some states even make itworse by taxing commercial
property at higher effectiverates and often classing, rental
units as commercial property,which means that of the lower
income individuals who arerenting are bearing higher
(20:59):
property taxes than the ownersof homes, um, but certainly
everyone's paying property taxesif we eliminated the property
tax, that provides relief foreveryone there.
But it also, of course, means avast array of new taxes that
everyone will be paying as well.
Kyle Hulehan (21:16):
So as we're wrapping up here, Jared, uh, why
is the property tax despitebeing so unpopular, as we've
talked about the most stable,fair and growth friendly option
that we have?
Jared Walczak (21:25):
The property tax, as we've discussed, is on
largely fixed immovable assets.
You cannot move your.
Land.
Um, you can choose where tobuild structures.
You can choose some of thesethings, but the fact that it's a
fairly fixed asset means thatthere will be fewer behavioral
responses to it.
Also, the fact that, as we'vediscussed, it better passes the
benefit test means that.
(21:47):
You're getting more for yourmoney when you're paying more,
uh, in a way that's not alwaystrue of the sales tax or the
income tax, and therefore you'remore willing, you may not like
it.
I mean, none, none of us reallylikes paying taxes.
But when you look at thealternatives, you may find that
your willingness to pay that ashigher, even if you do complain
about it, um, you know,certainly we see that with
(22:07):
businesses.
We see it with a lot ofindividuals where they locate.
This is what, you know,economists call revealed
preference.
Um, you know, because you haveyour revealed preference of you
actually do as opposed to yourstated preference of what you
dislike.
You can say, I don't likeproperty taxes.
I don't want to pay them.
Your revealed preference issometimes you're not going to
the lowest property taxjurisdiction in the same way
(22:30):
that you might go to a lower taxregime for income taxes because
of what the property tax isdoing.
And then finally.
There is a local responsivenessto this tax that you don't have
with others.
When you don't like that yourproperty taxes have risen.
You can go to city council, youcan go to your county board of
supervisors or commissioners orwhatever you have, and you can
(22:50):
complain about this and you mayhave a real impact on them.
If the state takes over thisauthority with a higher income
tax or a higher sales tax andthey allocate this, it's going
to be way harder.
For you to petition on this andeven if you would be willing to
accept lower government servicesor if even if your local
government really cares aboutefficiencies and they want to be
(23:11):
better with their money, theycan't control what comes to them
or what taxes are imposed on youto do this.
So that local responsivenesspiece is important and is
fundamentally missing if we moveaway from the property tax.
Kyle Hulehan (23:24):
All right, well, before we sign off, if you have
any burning questions on tax,you can send them our way or
drop a comment on YouTube.
You can email us atpodcast@taxfoundation.org.
You can slide into our dms atDeduction Pod on Twitter.
Thank you so much for listening,and thank you, Jared, for being
here today.
Jared Walczak (23:41):
Thank you.
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