What would a world without property taxes look like?
In every state, revenue from property taxes is one of the biggest sources of K-12 school funding.
But that could change soon as efforts ramp up in a handful of states to abandon property taxes altogether, or at least as a funding source for schools.
In Nebraska, Republican Gov. Jim Pillen wants to dramatically reduce or even eliminate property taxes without slashing school budgets. Instead, he wants the state to cover the lost local funding by increasing sales tax collections.
Pillen in recent weeks has been barnstorming the state in an effort to garner support for a significant change to property taxes. But he has yet to release a written proposal that spells out details such as whether all property taxes will be eliminated or just those that cover school operating budgets; to what extent increased sales taxes would make up the difference; and how quickly property taxes will be reduced.
He plans to push the issue during a special session of the legislature in the coming weeks.
“The [Nebraska] Constitution’s crystal clear: Our job is to educate our children,” Pillen said on his radio call-in show last month, according to the Nebraska Examiner. “The state of Nebraska is supposed to—not property taxpayers.”
Nebraska is hardly the first state to ponder reducing homeowners’ tax bills, which are rising nationwide as home values surge, but particularly in Mountain West states like Colorado, Idaho, Montana, and Wyoming.
It’s not even the only state with a property tax elimination plan currently on the table.
In North Dakota, a former state lawmaker is pushing for a ballot initiative that seeks to eliminate property taxes, potentially costing local governments $1.3 billion in annual revenue.
An anti-tax advocacy group in Michigan is pushing to secure a spot on the November ballot for a similar proposal that could collectively cost school districts $10 billion, according to the Michigan Municipal League, a nonprofit membership association for the state’s local governments.
And in Texas, Republican Gov. Greg Abbott last year endorsed the concept of eliminating property taxes. Lt. Gov. Dan Patrick in April asked lawmakers to study the issue in time to consider it during next year’s legislative session.
The impulse to reform property taxes stretches across the political spectrum.
Homeowners want smaller bills. Education advocates, meanwhile, have long criticized the K-12 system’s reliance on property taxes, which disproportionately burden residents of low-income areas, exacerbate socioeconomic gaps between white and Black families, and are often derived from faulty or outdated valuations that end up contested in court.
But zeroing out property tax collections altogether would be a dramatic step without precedent, finance experts say. Short-term ramifications, like wresting control over raising revenue away from local school districts, would almost certainly be controversial. And some of the far-reaching consequences are virtually impossible to predict.
“America’s been taxing property for the entirety of its history,” said David Schleicher, a professor of property and urban law at Yale University who researches property taxes and other municipal finance issues. “It would be a wild change.”
Property tax systems are centuries old and widely criticized
The concept of property taxes dates back to ancient Mesopotamia, when the Ur dynasty collected goods from locals to pay for building projects. The famous legend of Lady Godiva, an 11th-century noblewoman, centers on a property tax dispute.
Today, more than one-third of America’s K-12 public school spending comes from local property taxes, according to federal data.
The share of public school revenue from property taxes is much higher in some states—including Illinois (47 percent), Maine (46 percent), Nebraska (48 percent), and New York (50 percent)—than others.
Similarly, some districts rely on local revenue far more than others—typically, those that can draw on substantial property wealth to supplement their budgets. Districts in low-wealth areas, meanwhile, depend on state aid to bolster their budgets. Districts whose boundaries include military bases or Native American reservations receive grants from the federal government that make up for their inability to collect local taxes on those tax-exempt properties.
The idea of abandoning property taxes has come up before in a handful of states but hasn’t gotten far. More than three-quarters of North Dakota voters in 2012 rejected a proposal to eliminate property taxes. A similar legislative proposal in Pennsylvania fell short by the thinnest of margins in 2016.
States more often aim to offer property tax relief by capping collections, expanding exemptions, or doling out tax credits.
Pillen wants to take those efforts several steps further. He’s aiming to replicate aspects of the state’s new approach to community college funding, approved last year. Community college districts in the state can no longer levy taxes, though they do continue to set their own tuition levels, and they have the option to tap into local resources if state funding falls short.
Close to two-fifths of all state and local revenue in Nebraska comes from local property taxes, according to an analysis by the Tax Foundation. And 60 percent of that property tax revenue goes to schools, the Nebraska Examiner found.
New and higher sales taxes aim to fill property tax hole
The first question Nebraska school district leaders are likely to ask if local governments’ annual haul of more than $5 billion in property taxes goes away is: How will the state make up the difference?
Pillen says the solution is to remove some existing sales tax exemptions.
State lawmakers have approved more than 100 exemptions over the last half-century, covering component parts of equipment for agriculture and business, products like diapers and twine, and services like laundry and haircuts.
If those exemptions weren’t in place, the state would be collecting $6.5 billion more in sales taxes each year, more than offsetting the elimination of all property taxes, according to state estimates. It’s currently unclear how many exemptions state lawmakers will be willing to remove.
Pillen is also proposing to increase sales tax rates for purchases of alcohol, cigarettes, and vaping products.
He’s even entertained the possibility of legalizing—and taxing—sports betting in the state.
But replacing property taxes with steeper sales taxes could end up replacing one inequitable system with another, tax experts say. Low-income families tend to pay a much higher percentage of their income in sales taxes than high-income families, as they do with property taxes.
“It’s really bad that we’re super reliant on, if you can afford to live in our district, you can afford to go to our schools,” said Rita Jefferson, a local policy analyst for the Institute on Taxation and Economic Policy. But, “if you’re going to pay for it using really regressive taxes, are you actually making anybody any better off?”
If property taxes end altogether, school districts would have to shift to new mechanisms for investing in building improvements. Districts typically pay for long-term projects by seeking voter approval to issue bonds and pay them back with interest over several years by adding to property tax bills.
Several state lawmakers and advocacy groups told the Nebraska Examiner they believe Pillen’s plan would leave facilities and bonds under district control. But Pillen told reporters that all K-12 funding would be part of the plan.
If Pillen gets his way, districts would no longer have the authority to seek residents’ support for tax increases or higher spending that would support building projects. Instead, Jefferson said, the state would need to establish a new statewide authority for school facilities spending.
On the cost side of the ledger, Pillen has said he would prioritize ending unfunded mandates and focusing school spending on classroom instruction.
“I would also be willing to bet school districts worry, does this mean there are more controls coming down from the state level?” Jefferson said.
School districts would likely have to make their case for funding every two years before the legislature’s appropriations committee, according to Pillen’s preliminary comments about his proposal. Some expenses might be exempt from that requirement, Pillen has said, but he hasn’t specified which ones.
All of those concerns focus on what schools will do in the future. But the elimination of property taxes could also affect districts’ ability to pay for expenses to which they’ve already committed.
Districts with outstanding bond obligations would have to return to their underwriters and convince them they’ll still be able to cover their debts even under the new finance regime.
Jefferson also thinks the state’s credit rating might take a hit if the new policy increases uncertainty around revenue.
“I don’t know if the state has a really good idea about how to deal with that,” Jefferson said.
Pillen has yet to release his full proposal. His office didn’t reply to a request for comment.
How school finance would change if property taxes were gone
Local control has long been a fixture of the K-12 landscape. Some critics argue that relying on that model widens gaps between families with means and those without. But district leaders value their ability to decide where to direct resources.
They also appreciate that property tax revenues tend to be relatively stable from one year to the next. State funding, by contrast, can vary greatly depending on the strength of the economy and politicians’ priorities.
That would be even more true if school funding came exclusively from sales and income taxes. Sales tax collections plummeted, for instance, in the early days of the pandemic. Without the property tax base, districts would have immediately suffered.
“School costs rise over time, which means your revenue source has to rise,” said Andrew Reschovsky, professor emeritus of public affairs and applied economics at the University of Wisconsin-Madison. “Sometimes costs rise faster than the available revenue, or the growth of whatever your tax base is.”
That’s particularly true in Nebraska, Reschovsky said, because the state is gradually lowering income taxes, turning off the spigot for more than $1 billion in annual state revenue.
Property taxes also serve as a direct link between residents of a community and the schools their children, or their neighbors’ children, attend.
“I might vote for higher property taxes because I want my kid to have a good education, and I think they should give calculus in 10th grade,” Reschovsky said. “That goes away if it’s funded by the state because the state funds a whole bunch of things.”
States could take other approaches to address inequities
Eliminating property taxes isn’t the only way to provide relief to homeowners, Reschovsky. He and several colleagues have conducted extensive research on little-known policies known as “circuit breakers,” which cap property tax burdens for certain groups of homeowners, like the elderly, people with disabilities, and low-income families, or supplement renters’ income with a yearly tax credit worth a quarter of their annual rent.
States can also pass laws that require more regular property value assessments or otherwise improve the processes that determine home values, theoretically ensuring that properties are taxed more fairly and according to their current value.
The state could also opt to invest more in K-12 schools, allowing them to reduce their reliance on property taxes. Slightly more than 3 percent of the state’s gross domestic product went to K-12 schools in 2021, according to an Education Law Center analysis. That’s just below the national average of 3.3 percent, and far below states like New Jersey, Vermont, and Wyoming, which devoted roughly 5 percent of their GDP to K-12 education during the same year.
“If you say we really want to help low- and modest-income Nebraska residents with their property taxes, that’s a perfectly, in my mind, reasonable thing for legislators to want to do,” Reschovsky said. “But by lowering rates or eliminating them altogether, it’s totally untargeted.”
Regardless of the merits of proposals to eliminate the property tax, experts agree that they’re novel, and their effects are likely inscrutable until they produce real-world data that can be analyzed.
“The academics of America are surely rooting for Nebraska to pass this, just because of the experiments you’d get,” Schleicher said.
