What alternative revenue sources do states use after cutting property taxes for schools?
Executive summary
When states reduce property taxes for schools, they commonly turn to a mix of alternatives: higher reliance on sales and income taxes where available, increased fees and charges, tapping severance or resource revenues, drawing from rainy-day funds, and cutting or reallocating spending [1] [2] [3]. National analyses note states’ recent revenue volatility and that many already compensate with sales, personal income, severance, and special fees — but approaches and tradeoffs vary widely by state fiscal structure [1] [4] [5].
1. Rings of revenue: sales and income taxes often fill the gap
Many states rely principally on personal income and general sales taxes for day‑to‑day government funding, so reducing property tax support for schools frequently shifts pressure onto those bases — either by raising rates or broadening bases — because those streams already furnish the largest shares of most states’ tax revenue [1] [5]. Policy analysts caution that raising sales taxes can be regressive and that personal income tax changes produce different distributional outcomes, so choices reflect both revenue needs and political tradeoffs [3] [1].
2. Natural-resource and severance receipts: a one‑state advantage
A handful of states — notably Alaska, New Mexico, and North Dakota — derive large shares of revenue from severance taxes and other resource-based receipts, and those receipts have historically let them substitute for property or income levies in education funding [1]. But those revenues are volatile and tied to commodity prices, making them unreliable long‑term stabilizers; national coverage notes states’ increased revenue volatility since the pandemic and warns of fiscal fragility when relying on such sources [1] [6].
3. Fees, licenses, and targeted levies: the stealth increases
Where broad tax hikes are politically difficult, states frequently expand fees, user charges, or business-related levies to preserve school funding — a tactic cited in state fiscal reviews and practitioner guides as a common alternative [3] [2]. These measures can be quicker to implement but often shift costs onto particular groups (businesses, motorists, homeowners using services) and can erode affordability or economic competitiveness if used excessively [3].
4. Rainy‑day funds, one‑time draws, and budget cuts — short‑term fixes
Analysts documenting state fiscal action in 2025 emphasize that lawmakers often deployed rainy‑day funds, temporary revenue measures, and spending cuts to close budget gaps after tax cuts [2] [4]. Those choices can protect schools in the short run but consume reserves and may require deeper structural changes later; Pew and Council of State Governments reporting shows many states identified billions in cuts and one‑time solutions during recent sessions [2] [4].
5. Federal grants and intergovernmental shifts: an unstable backstop
Federal funding is a major input to state budgets; some states offset state tax cuts by relying more on federal grants (including Medicaid and other programs), but national observers warn proposed federal changes and reductions can quickly undermine that strategy [7] [8]. States that receive relatively high per‑capita federal dollars can use that buffer more easily — an advantage not shared by every state [9] [10].
6. Equity and political tradeoffs: who pays next?
Policy groups stress that revenue options differ in who bears the burden: sales taxes and certain fees hit low‑ and moderate‑income households harder, while targeted taxes on capital or corporate income fall differently across income groups [3] [1]. Commentators point out there is “no free lunch” — eliminating or cutting one source without replacing it typically means reducing services, raising other taxes, or both [9].
7. Practical toolkit: incremental and combined approaches
Research and practitioner guidance suggest most states do not rely on a single replacement; instead, they combine measures — modest rate changes, fee increases, rainy‑day draws and targeted cuts — to spread political and economic impacts [3] [2]. That mix aims to balance revenue needs with equity and long‑run fiscal sustainability, though recent reporting indicates many states still face sluggish revenue growth and rising pressures from prior tax cuts [6] [4].
Limitations and gaps in available reporting: the provided sources outline broad categories and national trends but do not give a comprehensive catalog of every state’s specific post‑property‑tax replacement choices nor fine‑grained distributional estimates for each option; those state‑level details are not found in current reporting excerpts (not found in current reporting).