Revenue to local communities and counties needs to be adequate and reliable. Property taxes provide that. Generally, communities like local control as much as possible. Property taxes provide that.
But property taxes are not liked for sometimes irrational reasons …
So, if we don’t want property taxes, what are the alternatives? I used three different AI services to compile the views from dozens of different sources. Here are what all three found. The pros and cons of alternatives to property taxes.
Please note the need to raise equal amounts of revenue does not go away.
You be the judge.
1. Local Sales Taxes
• Description: A tax on retail purchases, often 1–3% added to state rates, capturing spending from residents, commuters, and tourists.
• Examples:
• Texas and Louisiana cities rely on them for 30–50% of revenue.
• California allows up to 2% local add-ons (e.g., Los Angeles at 9.5% total).
• Alabama and Colorado municipalities use them heavily post-recession.
• Pros: Broad base; “exports” burden to non-residents; grows with consumption.
• Cons: Regressive (disproportionately affects lower-income); volatile during downturns; high rates (10%+) needed for full replacement could drive shopping online/cross-border.
• Viability for Replacement: Could offset 20–40% of property taxes in urban areas; full swaps require rates like 13–15%, as proposed (and failed) in North Dakota.
2. Local Income or Payroll Taxes
• Description: A flat or progressive tax (0.5–3%) on wages, salaries, or business income, often administered via withholding.
• Examples:
• Pennsylvania: Philadelphia’s 3.8% wage tax funds ∼50% of the city budget.
• Ohio: Over 600 municipalities use income taxes (1–2.5%).
• Maryland: County-level piggyback taxes up to 3.2%, progressive by design.
• New York City: 3–4% on residents, plus commuter taxes in some forms.
• Pros: Ties to ability-to-pay; stable in growing economies; taxes service users (e.g., commuters).
• Cons: Can repel businesses/high-earners; administrative costs; non-residents may evade.
• Viability: Strong in metro areas; could replace 30–60% with low rates, per urban finance studies.
3. User Fees and Service Charges
• Description: Direct billing for specific services (e.g., utilities, permits, recreation) or impact fees on new development.
• Examples:
• Widespread: Trash collection fees in 70% of US cities; water/sewer enterprise funds.
• Florida: Boosts park fees and stormwater utilities.
• Development impact fees in fast-growing states like Texas/Arizona.
• Pros: Fair (pay-for-use); incentivizes efficiency; low political resistance.
• Cons: Limited to fungible services (not schools/police); regressive without subsidies.
• Viability: Supplements 10–25%; “enterprise zoning” models fund infrastructure via fees alone.
4. Land Value Taxation (LVT) or Split-Rate Taxes
• Description: Tax land value only (not improvements/buildings), encouraging dense development.
• Examples:
• Pennsylvania: 20+ cities (e.g., Harrisburg) use split rates—higher on land.
• Pittsburgh historically; now Allentown uses pure LVT.
• International: Denmark/Australia for broader application.
• Pros: Discourages speculation; promotes affordable housing; economically efficient.
• Cons: Requires accurate land assessments; transitional shocks for landowners.
• Viability: Partial replacement; could reduce overall tax burden by 20–30% while boosting growth.
5. Increased State Aid or Revenue Sharing
• Description: Shift funding to state-level progressive taxes (income/sales/lottery), redistributing to locals.
• Examples:
• Michigan: Post-Proposition 2½, state aid covers more school costs.
• Vermont: State funds 90%+ of education via income taxes.
• Proposals in Illinois/New Jersey to cap property taxes and backfill with state surpluses.
• Pros: Eases local disparities; more progressive.
• Cons: Reduces local autonomy; vulnerable to state budget cuts (e.g., Great Recession).
• Viability: Offsets 20–50% in equitable states; full for education in places like Hawaii.
6. Other Targeted or Innovative Taxes
• Tourism/Excise Taxes: Hotel occupancy (5–15%), rental car fees—e.g., Orlando funds conventions.
• Transfer/Conveyance Taxes: On real estate sales (1–2%)—New York/New Jersey examples.
• Vacancy or Mansion Taxes: Penalties on empty properties (e.g., Vancouver’s model) or luxury homes.
• Business License/Franchise Fees: On utilities or gross receipts.
• Pros: Narrow but reliable; targets externalities.
• Cons: Base too small for full replacement.
Economists generally support property taxes because they:
- Provide stable local revenue (property values change less than incomes or sales).
- Are hard to avoid (the property is fixed in place).
- Reflect local benefits (people who live in or use an area help pay for its schools, roads, and police).
Economists widely regard property taxes as one of the most efficient taxes available to governments, particularly at the local level, because they cause minimal distortion to economic behavior. Unlike income or sales taxes, which discourage work or consumption, property taxes target an immobile asset—land and buildings—that can’t be hidden or easily relocated. As Nobel laureate William Vickrey noted, shifting to site-value taxes (focusing on land) “would substantially improve the economic efficiency of the jurisdiction” by removing penalties on improvements.
The general consensus among economists is that property taxes, particularly on land, are among the least economically damaging or most efficient forms of taxation for raising local government revenue. However, there is a key distinction economists often make: the tax on land versus the tax on structures/improvements
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