Why Property Taxes Are Not As Bad As You Think

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The cost of home ownership is not what it used to be. Housing prices are up since the pandemic, and these high prices, coupled with high interest rates, are preventing many Americans from buying a home. But home buyers are not the only people impacted by higher housing prices. Property taxes are also increasing nationwide as local governments reassess home values. Taxpayers in dozens of states are demanding relief, but they should be careful what they wish for. In a new study, the Tax Foundation’s Jared Walczak shows that while property taxes have problems, the alternatives are worse.

Taxpayers from Florida to North Dakota are upset about rising property taxes, and their anger is not unwarranted. As the Tax Foundation points out, inflation-adjusted property values have risen by more than 25% since 2020 (see figure below). Higher property values mean higher property tax bills, even if the tax rate does not change. And since property taxes are rising faster than household incomes in many places, homeowners are feeling squeezed.

Unsurprisingly, policymakers are being pressured to provide relief. In Florida, Governor Ron DeSantis is encouraging state legislators to cut property taxes, and he may call a special session to make it happen. Ohio’s legislators are feeling similar pressure, and petitions are circulating to put abolishing real estate taxes on the ballot in November 2026.

Property taxes are clearly unpopular but abolishing them is not the answer. Local taxes support many things people count on, such as courts, road maintenance, fire protection, police officers, and schools. According to the Tax Foundation’s report, property taxes currently generate 70% of all local tax revenue. Even if you think local governments spend money foolishly, some of the revenue from property taxes will have to be replaced to maintain these services.

Income taxes and sales taxes are possible replacements, but they have significant drawbacks. Taxes on labor income discourage work, and there is a mountain of evidence that shows higher income taxes reduce growth. States that raise income taxes also lose workers and businesses to lower-tax states. Florida and Texas, two states with no income tax, have experienced significant population growth over the last decade, and many of their new residents came from high-tax states such as California and New York.

Replacing property tax revenue with income taxes would require the high rates that hurt growth and chase people away. Ohio provides a good example. Over the last several years Ohio lawmakers reduced the state’s income tax rate to accelerate economic growth. In 2026 it will fall to a flat 2.75%. Local governments and school districts are allowed to tax income on top of that rate, but on average they only add about 1.5%. However, if counties were authorized to levy their own income taxes to replace property tax revenue, these rates would average 8.35% according to the Tax Foundation. This would take the combined average state-local income tax rate in Ohio from 4.25% to 12.6%, which is nearly as high as California’s top marginal income tax rate that only applies to income over $1 million.

In some counties with small economies, such as Monroe County near the West Virginia border, the income tax rate would exceed 20% (see figure below). Even in counties with a lot of economic activity the income tax rate would surpass 10%: In Hamilton County, where Cincinnati is located, it would be 10.63% and in Franklin County, home of Columbus, the rate would be 13.3%. If Ohio unilaterally replaced its property tax with a higher income tax, businesses and high-income workers would flee, and economic growth would slow to a crawl.

Instead of an income tax, some states may try to swap their property taxes for higher sales taxes. Since Florida does not have income taxes, it would have to go this route. Again, this is incredibly difficult, especially in counties with few retail and commercial establishments. Currently, Florida’s average combined state and local sales tax rate is 7.02%. This average state-local rate would have to more than double to 15.34% to completely replace the state’s property tax revenue. In some places it would need to be much higher.

Consider tiny Glades County with a population around 13,000 people. Most of its non-residential land is used for agriculture and its retail outlets cannot be taxed because they are largely on tribal lands. As a result, replacing its property tax revenue with a sales tax would require a rate of 32.5%. Such a high rate would encourage folks to shop in nearby counties with lower rates, further eroding Glades’s tax base.

On the other end of the spectrum is Jefferson County located in Florida’s panhandle. Its location along I-10 makes it a hub for truck stops and travel centers that generate plenty of sales tax revenue. To replace its current property tax revenue, it would only need a sales tax rate of 9.8%.

Replacing property tax revenue with sales tax revenue would be easier for local governments that already have a lot of retail establishments within their borders. It would also encourage local officials to woo retail businesses to their towns to strengthen their tax base. The likely result would be a subsidy battle between neighboring counties and cities that further erodes the sales tax base.

Another potential replacement for local property taxes is a state tax, such as a sales or income tax, to collect revenue and then redistribute it to local governments. This creates its own problems. First, should the state government replace revenues at existing levels, thereby rewarding jurisdictions that currently impose large tax burdens by subsidizing their revenue with contributions from across the state? Or should it create a new revenue-sharing formula that more evenly distributes revenue but ignores local preferences regarding the quality and availability of government goods and services? For example, one community may prefer higher taxes to support a higher-quality police force while another prefers lower taxes even if that means a lower-quality police force. If funding is distributed evenly on a per person basis, neither community would get the police force it wants.

There is one more important thing policymakers need to consider: The relationship between property taxes and housing markets. The main reason property tax burdens are increasing nationwide is because housing values are increasing nationwide. And the main reason housing values are increasing nationwide is that we do not build enough housing in the places people want to live.

The country currently lacks four to seven million homes, largely because various land-use regulations artificially limit the supply of housing. Eliminating or capping property taxes would not fix this supply problem. In fact, it would exacerbate it.

In 1978 the people of California passed Proposition 13, officially named the People’s Initiative to Limit Property Taxation. Colloquially known as Prop 13, this addition to the state’s constitution required property taxes to be based on the 1976 assessed value of the home, limited the tax rate to 1% of the assessed value, and limited the annual increase of the tax to the lesser of inflation or 2% per year. Properties can only be reassessed when they are sold or redeveloped.

Over time, houses that are sold have larger tax burdens since they are reassessed at higher values, while tax increases for houses that stay off the market are limited to 2%. Research shows that the tax increase that accompanies a sale or redevelopment discourages mobility and housing production. One study finds that modifying Prop 13 could increase housing production by 15% to 32% by encouraging property owners to convert non-residential structures to housing and to convert single-family homes to multi-family housing.

Building new housing to meet demand slows the growth of housing prices, and in turn limits property tax increases. Prop 13 severed the relationship between home values and property taxes in the Golden State, which has reduced housing development and increased prices. States that follow California, or go even further and abolish property taxes, will create more problems than they solve.

This does not mean taxpayers must passively accept every tax increase. There are several reforms communities can implement to keep property taxes under control. For starters, taxpayers should insist that local officials clearly notify them about the size of any potential tax increase, including the current and proposed millage rate and tax amount. A Truth in Taxation law, like the one in Utah, is one way to codify this practice. States should also require local governments to get voter approval for any property tax increase. And to ensure widespread participation, these votes should take place during general elections in November, not in spring or summer elections that typically have less turnout.

Nobody likes to pay taxes, but we do expect local governments to do certain things that require revenue. Of the options available, property taxes are the least bad. They are easy for local governments to administer, they do not discourage work, and they create an incentive for communities to allow more housing in response to rising property values. Replacing property taxes with some other tax may sound good, but in practice it would be a disaster.