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.
鈥淭he [Nebraska] Constitution鈥檚 crystal clear: Our job is to educate our children,鈥� Pillen said on his radio call-in show last month, according to the . 鈥淭he state of Nebraska is supposed to鈥攏ot property taxpayers.鈥�
Nebraska is hardly the first state to ponder reducing homeowners鈥� tax bills, which are as home values surge, but .
It鈥檚 not even the only state with a property tax elimination plan currently on the table.
In North Dakota, a former state lawmaker is that seeks to eliminate property taxes, .
An anti-tax advocacy group in Michigan is that , according to the Michigan Municipal League, a nonprofit membership association for the state鈥檚 local governments.
And in Texas, Republican Gov. Greg Abbott last year . Lt. Gov. Dan Patrick in April in time to consider it during next year鈥檚 legislative session.
The impulse to reform property taxes stretches .
Homeowners want smaller bills. Education advocates, meanwhile, have long criticized the K-12 system鈥檚 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 or valuations that end up .
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.
鈥淎merica鈥檚 been taxing property for the entirety of its history,鈥� said David Schleicher, a professor of property and urban law at Yale University who researches property taxes and other municipal finance issues. 鈥淚t would be a wild change.鈥�
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鈥檚 K-12 public school spending comes from local property taxes, according to .
The share of public school revenue from property taxes is much higher in some states鈥攊ncluding Illinois (47 percent), Maine (46 percent), Nebraska (48 percent), and New York (50 percent)鈥攖han others.
Similarly, some districts rely on local revenue far more than others鈥攖ypically, 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鈥檛 gotten far. More than three-quarters of North Dakota voters in 2012 . A similar legislative proposal in Pennsylvania
States more often aim to offer property tax relief by , , or .
Pillen wants to take those efforts several steps further. He鈥檚 aiming to replicate aspects of the state鈥檚 new approach to community college funding, . 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 . And 60 percent of that property tax revenue goes to schools, the .
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鈥� 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 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鈥檛 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 . It鈥檚 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鈥檚 even .
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 in sales taxes than high-income families, as they do with property taxes.
鈥淚t鈥檚 really bad that we鈥檙e super reliant on, if you can afford to live in our district, you can afford to go to our schools,鈥� said Rita Jefferson, a local policy analyst for the Institute on Taxation and Economic Policy. But, 鈥渋f you鈥檙e going to pay for it using really regressive taxes, are you actually making anybody any better off?鈥�
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 they believe Pillen鈥檚 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鈥� 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.
鈥淚 would also be willing to bet school districts worry, does this mean there are more controls coming down from the state level?鈥� Jefferson said.
School districts would likely have to make their case for funding every two years before the legislature鈥檚 appropriations committee, according to Pillen鈥檚 preliminary comments about his proposal. Some expenses might be exempt from that requirement, , but he hasn鈥檛 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鈥� ability to pay for expenses to which they鈥檝e already committed.
Districts with outstanding bond obligations would have to return to their underwriters and convince them they鈥檒l still be able to cover their debts even under the new finance regime.
Jefferson also thinks the state鈥檚 credit rating might take a hit if the new policy increases uncertainty around revenue.
鈥淚 don鈥檛 know if the state has a really good idea about how to deal with that,鈥� Jefferson said.
Pillen has yet to release his full proposal. His office didn鈥檛 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鈥� 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.
鈥淪chool costs rise over time, which means your revenue source has to rise,鈥� said Andrew Reschovsky, professor emeritus of public affairs and applied economics at the University of Wisconsin-Madison. 鈥淪ometimes costs rise faster than the available revenue, or the growth of whatever your tax base is.鈥�
That鈥檚 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鈥� children, attend.
鈥淚 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,鈥� Reschovsky said. 鈥淭hat goes away if it鈥檚 funded by the state because the state funds a whole bunch of things.鈥�
States could take other approaches to address inequities
Eliminating property taxes isn鈥檛 the only way to provide relief to homeowners, Reschovsky. He and several colleagues have conducted extensive research on little-known policies known as 鈥渃ircuit breakers,鈥� which cap property tax burdens for certain groups of homeowners, like the elderly, people with disabilities, and low-income families, or supplement renters鈥� 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鈥檚 gross domestic product went to K-12 schools in 2021, according to an . That鈥檚 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.
鈥淚f you say we really want to help low- and modest-income Nebraska residents with their property taxes, that鈥檚 a perfectly, in my mind, reasonable thing for legislators to want to do,鈥� Reschovsky said. 鈥淏ut by lowering rates or eliminating them altogether, it鈥檚 totally untargeted.鈥�
Regardless of the merits of proposals to eliminate the property tax, experts agree that they鈥檙e novel, and their effects are likely inscrutable until they produce real-world data that can be analyzed.
鈥淭he academics of America are surely rooting for Nebraska to pass this, just because of the experiments you鈥檇 get,鈥� Schleicher said.
