How do states replace school revenue lost when property taxes are reduced or eliminated?
Executive summary
States that reduce or eliminate property taxes typically replace lost K–12 funding by shifting revenue to the state level (hold‑harmless or “backfill” payments), by raising other taxes (sales or income), or by reallocating existing state dollars — moves that can require large sums (examples: Texas used $12.3 billion in compression funds; estimates say sales taxes would need to more than double nationally to fully replace property taxes) [1] [2]. Critics warn those strategies either concentrate costs on lower‑income households or undermine local services and equity; proponents argue state backfills preserve school budgets while delivering homeowner relief [3] [4] [5].
1. How states actually make schools whole: backfills, compression and hold‑harmless payments
When property‑tax revenue for schools is cut, states most often promise to “backfill” the gap from the state general fund rather than have districts absorb the loss. Texas’s recent approach used a feature called “compression,” with the state earmarking billions so districts could lower local rates without losing school funding — the state allocated roughly $12.3 billion for that effort [1]. Other jurisdictions use explicit hold‑harmless provisions: Texas policymakers described state general revenue replacing taxation lost at the district level so schools keep prior funding levels [6].
2. Raising other taxes — sales tax hikes and statewide levies
Many replacement plans pivot to consumption or other statewide taxes. Proposals and analyses show the scale: one national estimate finds replacing property taxes via sales taxes would require raising the combined state‑local sales rate from about 7.02% to roughly 15.34% — more than doubling typical rates and risking reduced taxable sales as rates climb [2]. Legislative proposals also mix instruments: an Ohio proposal would swap local school property levies for a single statewide property tax plus a 1.75 percentage‑point sales‑tax increase, raising the total state sales tax to 7.5% [7].
3. Creative accounting and redirecting existing revenue
Some states try to avoid headline tax increases by keeping more existing state revenue or redirecting refunds. Colorado’s Proposition HH (and similar schemes) would allow the state to retain more revenue it otherwise would have refunded so those dollars can be used to replace lost local property tax dollars — in 2025‑26 that meant tens to hundreds of millions going to the state education fund to backfill local losses [8] [1]. The Pew analysis shows Georgia’s 2024 amendment allowed localities that don’t opt out to implement a 1% local sales tax increase to offset lost property tax revenue [9].
4. Distributional effects: who pays after property tax cuts?
Multiple sources warn that shifting from property taxes to sales or other consumption taxes changes the incidence of taxation: sales taxes are regressive, making lower‑ and moderate‑income households pay a larger share of their income than wealthier residents if consumption taxes are raised to replace property revenue [4] [10]. Analysts at the Center on Budget and Policy Priorities emphasize that untargeted property tax cuts can shortchange schools and lock in geographic inequalities because local governments with weak tax bases lose the ability to “catch up” [3].
5. Scale matters — billions needed and services at risk
Proposals to eliminate property taxes often involve sums large enough to threaten other services. Analyses of state initiatives warn of multi‑billion‑dollar gaps: Ohio’s property‑tax replacement would force massive increases in other taxes to cover roughly $13 billion in school funding tied to property taxes, and Michigan proposals put the lost total near $20.3 billion statewide [10] [11]. Where states have cut property taxes without full replacement, localities faced pressures to raise fees, increase other local rates, or cut services [4] [5].
6. Political and practical tradeoffs — local control vs. statewide uniformity
Replacing local property revenues with state funding centralizes control and can equalize some disparities across districts but also strips localities of fiscal autonomy. Proponents frame state backfills as protecting school budgets while delivering homeowner relief; opponents see the moves as weakening local governments, constraining future local revenue choices, and potentially masking long‑term fiscal gaps [4] [3] [5].
7. What the reporting leaves unsaid and open questions
Available sources document mechanisms (backfills, sales‑tax increases, statewide levies and revenue redirects) and warn about distributional effects and scale. Sources do not mention specific long‑term simulations comparing mixed replacement strategies across many states or post‑implementation studies measuring whether backfills sustain school quality over a decade — those outcomes are “not found in current reporting” in the provided material (available sources do not mention long‑term cross‑state outcome studies).
Bottom line: eliminating or shrinking property taxes for schools is fiscally doable but expensive and politically consequential. States either must commit large, ongoing state dollars to backfill districts, sharply raise other taxes (with regressive effects if they lean on sales), or accept cuts to schools and local services — tradeoffs that every source in this sample stresses in different ways [1] [2] [3].